PVH Corp (PVH) 2015 Q2 法說會逐字稿

Good morning, everyone, and welcome to the PVH Corp.

second-quarter 2015 earnings conference call.

This webcast and conference call is being recorded on behalf of PVH and consists of copyright material that may not be recorded, rebroadcast, or otherwise used about PVH's written permission.

Your participation in the question-and-answer session constitutes your consent to having anything you say appear on any transcript or replay of this call.

The information being made available includes forward-looking statements to reflect PVH's view as of August 26, 2015, of future events and financial performance.

These statements are subject to risks and uncertainties indicated in the Company's SEC filings and the safe harbor statement included in the press release that is the subject of this call.

These risks and uncertainties include PVH's right to change its strategies, objectives, expectations, and intentions, and its need to use significant cash flow to service its debt obligations.

Therefore, the Company's future results of operations could differ materially from historical results or current expectations.

PVH does not undertake any obligation to update publicly any forward-looking statement including, without limitation, any estimate regarding revenue or earnings.

Generally, the financial information and guidance provided is on a non-GAAP basis as defined under SEC rules.

Reconciliations to GAAP are included in the reference earnings release, which can be found on www.pvh.com and in the Company's current report on Form 8-K furnished to the SEC in connection with the release.

At this time I am pleased to turn the conference over to Manny Chirico, President and CEO of PVH.

Thank you and good morning, everyone.

I would like to introduce also on the call Mike Shaffer, our Chief Financial Officer and Chief Operating Officer; Dana Perlman, our Head of Investor Relationships and our Treasurer; as well as Ken Duane, who runs all of our wholesale businesses throughout North America.

Overall, we were quite pleased with our results for the second quarter, which exceeded the top end of our earnings guidance by $0.07.

In the second quarter, on a constant currency basis, revenues increased 2% and EPS grew 11%.

In the first half of 2015 there were significant sales shifts into the first quarter and out of the second quarter that makes comparisons to the prior year somewhat confusing.

So from a brand and business perspective I plan to review the first-half results in order to give you a better sense of the underlying sales trends.

Rest assured that Mike Shaffer, in his comments, will quantify and break down all of our second-quarter financial results.

Overall for the first six months of 2015, on a constant currency basis, revenue increased 3% and EPS grew 16%.

This outperformance was driven by strong underlying results in our international Calvin Klein and Tommy Hilfiger businesses.

At the same time we did see softness in our US Calvin and Tommy retail businesses, where a strong US dollar negatively impacted international tourist traffic and spend in some of our larger stores located in tourist destination locations like Orlando, Las Vegas, Miami, and the New York metropolitan area.

At the same time, our retail stores located in US permanent population locations continued to post low to mid single-digit same-store sales increases, which we were very encouraged by.

Moving into each of the brands, Calvin Klein.

Looking at the first half on a constant currency basis, our CK revenues increased 4% over the prior year's first half, driven by strong performance of our international businesses.

From a retail comp sales perspective, international comps increased 6% while North American comps increased 2% in the quarter and the half, despite being negatively impacted by the international tourist traffic and spending.

The Calvin Klein brand continues to gain traction and it is increasingly becoming more visible, both digitally and at point of sale.

Our fall marketing campaigns are out now with in-store signage and media and marketing launching as we speak.

We have major initiatives for fall holiday.

For jeans, our Meet Me campaign is about sexting and hooking up, where we are digitally connecting with our consumer which is right up the Calvin Klein DNA.

For women's underwear, our campaign The Original Sexy features Kendall Jenner.

Both campaigns are creating a lot of buzz around the market and we are connecting with our consumers to drive our commercial business.

Globally, the underwear business continues to gain share in each market.

Interestingly, our women's underwear sales trends for the first half are outpacing our men's sales trends worldwide.

Men's, with our key spring launches of Intense Power and Air Fx, have been very well received with great sellthroughs.

And for fall we just launched our magnetic waistband product with positively early indicators from sales.

In North America we have seen our 2015 men's market share grow by over 200 basis points, with growth across all of our major retail partners.

Moving to women's, our modern cotton logo product continues to be the big story for women, especially those under the age of 30.

Along with our tailored bra offering by region, in which we have significantly grown over the last 12 months, with our push-ups styles leading the business in Asia, our Perfectly Fit style leading the business in Europe, and our new Invisibles bra in North America driving sales gain.

In North America, we have seen our 2015 women's market share grow by over 100 basis points with growth across all of our major retail partners.

Moving to jeans, we continue to make very good progress around the jeans turnaround in North America and Europe.

Women's jeans are still performing better than men's, but our women's business is significantly gaining traction.

Over the last 12 months we have installed in North America over 180 men's shops and over 100 women's shops, which are performing well above last year's levels.

In men's we're looking at sales increases in those shops in excess of 30% and in women's the sales are in excess of 25% in those shops.

We have also expanded our distribution to include Urban Outfitters globally and Topshop in Europe.

These two retailers target a younger consumer than our traditional department store consumer.

We've delivered some initial capsules for [625] and have seen significant sellthroughs with great performance at Urban and we have seen significant reorders and expansion of doors as we move into the holiday season.

We are very excited about this business as it opens our brand up to a much younger consumer.

In Europe, we have seen a significant improvement in same-store sales, as well as where we have installed new shops or have refitted our existing base.

Particularly in London and Rome, our sales performance was running well ahead of our comps which are in the double-digit area.

Our Calvin Klein Asia jeans business continues to be very healthy, with solid performance throughout the first half, which is best documented by our comp store performance in that region.

We have also seen very strong performance in many of the other Calvin Klein product categories.

For the first half of 2015 our Calvin Klein loyalty revenue has increased by over 11%.

This strong performance is driven by our women's apparel, our women's footwear, and our accessory businesses in those areas.

These categories are posting mid-teens sales increases in all the major retailers throughout North America.

This business is predominantly run by [Gemlar] and our partner G3, and they are seeing great sellthroughs at this time on those product categories.

Moving to Tommy Hilfiger, the business there for the first half of 2015 revenues on a constant currency basis increased 3% over the prior year.

The increase was driven by solid performance in our international businesses, which grew 4% in the first half of 2015, including a 6% comp store increase throughout Europe.

At wholesale, our Tommy European business continues to outperform the competition.

As an indicator, our 2015 full-year European order books, excluding Russia, are running up 5% for the year.

The strongest markets continue to be Germany, the UK, France, and the Middle East.

In North America, revenues increased 1%, resulting from retail square footage growth partially offset by a 2% decrease in retail comp store sales.

Our Tommy business continues to perform well despite the pressure on the retail business in the US market, primarily driven by the lack of international tourists in our tourist destination locations.

As we have previously mentioned, this fall we have Rafael Nadal as our brand ambassador, and, boy, did he make a big splash in Bryant Park on Tuesday for the kickoff of our fall underwear and fragrance campaign.

We believe that Rafael's association with us will be a positive for our overall men's business, but certainly will lift our underwear business globally.

Our fall order books reflect this uptick in our underwear business and Rafael will continue as our brand ambassador for spring 2015, where the focus will be on tailored clothing and our initial order results in that category continue to be very strong.

Moving to our Heritage business, first-half revenues for the Heritage businesses were relatively flat while operating income increased about 3%.

This increase was driven by our Heritage sportswear businesses which continue to perform well, both at wholesale and retail.

We have also seen strong performance in our Warner's core intimate business, particularly in the mid-tier channel of distribution where we have seen our year-to-date market share grow by over 100 basis points.

Our dress shirt business continued to perform -- underperform in the first half of the year; however, we believe that business will significantly improve in the second half of the year.

New fall product deliveries, especially our Van Heusen flex collar, have seen strong early sellthroughs in August and give us confidence in our second-half sales increases for dress shirts.

Let me take a moment and talk about our early third quarter back-to-school sales trends.

Our international Calvin Klein and Tommy Hilfiger business continues to post strong sales.

By region, we are seeing very strong performance for Europe and China for both brands.

In Korea and Brazil, where we have a large Calvin Klein business, sales trends continue to be challenging as we are being negatively impacted by the macroeconomic environment for each of those countries.

Overall, international same-store sales are up mid single digits at Tommy Hilfiger and are up low single digits at our Calvin Klein business.

Moving to our wholesale business in Europe, our order book for spring 2016, excluding our Russia business, is projected to be up 4% to 5% at Tommy and is up about 15% at Calvin Klein as our marketing initiatives are starting to pay dividends along with our new product deliveries.

In North America, we are dealing with a later back-to-school selling season due to a week later Labor Day holiday, which is making it more difficult to read the business.

Our retail same-store sales are running negative low single digit at Calvin Klein and negative mid single digit at Tommy Hilfiger.

Those two businesses are running on plan, given the later back-to-school season, and are continuing to be impacted by our international tourist traffic and spending.

Before I turn it over to Mike, I just want to focus on some of the key initiatives we outlined at the beginning of the year.

As we move over the next three years, our objectives will be capturing the long-term revenue and profit opportunities for our Calvin Klein and Tommy Hilfiger brands.

There are really four key initiatives that we hope to accomplish over the next three years that you should be monitoring as we go forward.

The first is to continue to invest in product, presentation, and the marketing of the Calvin Klein and Tommy Hilfiger brands.

Second, we continue to invest in our global operating platforms to support our growth strategies, including key investments in our digital commerce systems and platforms.

Third, significantly improving operating results of the Calvin Klein European business over the next three years.

Although we have seen strong performance there, we believe we have a long way to go to reach the comparable levels of profitability that exist in our Tommy Hilfiger business in the European market and this is a big opportunity for us as we move forward.

And, fourth is to continue to invest in the expansion of the presence of both brands in Asia and Latin America, including more direct control over the Calvin Klein and Tommy Hilfiger licensing businesses, where we can maximize our core competency to increase sales and improve the overall profitability of both brands.

With that, I would like to turn it over to Mike to quantify some of the second-quarter results.

Thanks, Manny.

The comments I'm about to make are based on non-GAAP results and are reconciled in the press release.

On a constant currency basis, revenues for the second quarter were up 2% versus the prior year and ahead of our guidance.

Driving our revenue increase was our Calvin Klein business, which delivered a 3% constant currency increase over the prior year.

Our Calvin Klein international business was up 7% in constant currency, driven by strong wholesale shipments and international retail comps of 3%.

Our Calvin Klein strategies are taking hold and we are seeing improved performance, particularly in gross margin and in our international businesses.

Tommy Hilfiger revenues were up 5% in constant currency, also ahead of our guidance, with strong revenues in our international business, which had revenues up 6% in constant currency and Europe comps up 9%.

Our Tommy Hilfiger and Calvin Klein US retail stores located in international tourist destinations continue to be under pressure from a lack of traffic and spending, but these declines were more than offset by performance in other areas of these brands.

Our Heritage business revenues were down 6%, also ahead of guidance, and heavily influenced by the earlier-than-planned wholesale shipments which benefited quarter one, as well as the launch of IZOD at Kohl's in last year's second quarter.

Earnings per share for the second quarter was $1.37, a $0.31 negative impact related to foreign currency and expected weakness in our Russian business.

Excluding this negative impact, EPS would have increased 11% over the prior year.

Our Q2 EPS was $0.07 ahead of the top end of our guidance.

The $0.07 beat was comprised of $0.10 related to business outperformance, which was predominantly in Calvin Klein, and an interest expense benefit of $0.02, partially offset by $0.05 of headwinds related to taxes and add backs.

For the full year 2015 we raised our guidance and are now projecting earnings per share at $6.90 to $7, which includes an additional $0.05 hit for foreign currency versus our previous guidance.

If we exclude the negative impact related to foreign currency and weakness in our Russian business of $1.30, our earnings-per-share growth is projected to be 12% to 14% over the prior year.

We also raised our revenue guidance.

We are now projecting revenues to grow approximately 4% on a constant currency basis.

Overall operating margins are expected to increase about 10 to 20 basis points, excluding the negative impact of about 60 basis points due to foreign currency.

Driving the growth when excluding foreign currency is continued improvement in the Calvin Klein business, which is projecting revenues to grow 8% on a constant currency basis.

We are also planning Calvin Klein operating margins to increase 80 to 90 basis points, excluding a negative impact of approximately 40 basis points of FX.

Tommy Hilfiger revenues are planned to increase 4% on a constant currency basis, with operating margins planned down 60 to 70 basis points, excluding a negative impact of approximately 80 basis points of FX.

Tommy Hilfiger international operating margins are planned up, with North America operating margins planned down after excluding FX.

This is due to pressure on US stores located in international tourist locations.

Our Heritage businesses plan to have a revenue decrease of 3%, due mostly to our exiting the IZOD retail business in 2015.

Operating margins in our Heritage business are planned to increase about 70 to 80 basis points.

The impact of foreign currency in our Heritage business is relatively immaterial.

Interest expense for the year is planned to be about $120 million and compares to the prior-year amount of $139 million due to our average lower debt balances.

Also favorably impacting interest for 2015 is the debt refinancing we did in last year's first quarter.

We currently expect to generate approximately $450 million of free cash flow in 2015.

This will be used to pay down debt of about $350 million and allow for opportunistic stock repurchases and our license buybacks.

Our tax rate for the year is planned at about 21.5%.

Our revenue for the third quarter is planned up 3% on a constant currency basis.

By business we are estimating that third-quarter revenues, on a constant currency basis, to increase 7% for Calvin, 4% for Tommy Hilfiger, and to decrease 5% for Heritage Brands.

Heritage Brands' revenues are being negatively impacted by the closing of our IZOD retail division.

Third-quarter earnings per share is planned at $2.45 to $2.50 and includes approximately $0.40 of estimated negative impact for foreign currency and the decline in our Russian business.

Excluding this negative impact, EPS is projected to increase 11% to 13% over the prior year.

Interest expense for the quarter is planned at $30 million and taxes about 18% in the third quarter.

With that we will open it up to questions.

(Operator Instructions) Bob Drbul, Nomura.

Good morning.

Just had a couple of questions for you.

The first one, I guess China is top-of-mind.

I was wondering if you can elaborate a little bit more in terms of what you are seeing in China.

And I guess with some of the macro trends present, does that speed up or change the potential for the licensed buyback opportunities that's there?

I guess let me start with part one of that question, which was the business in China.

Our business in China, both for Calvin that we operate directly, our comps have been running between mid single digit to high single digit for the first six months of the year.

And that trend has more or less continued into early -- through August so far.

The challenge in trying to operate that business is trying to get beyond a lot of the noise that is going on from the stock market point of view and where we see the business moving and going.

So you can't help but look at that business and be a little bit more conservative about how we project that business out, both for the balance of this year and then moving into 2016 and beyond.

It just gives us pause.

We have seen how the luxury market has been hit from the sales point of view.

We haven't experienced anything like that.

I think our brands, both Calvin and Tommy, are very well-positioned in that market as premium brands, affordable luxury, so I think that works to our advantage.

And we have strong brands that are really executing from that point of view.

On point two on Tommy on potentially acquiring the 55% of the Tommy Hilfiger licensed business that we don't own throughout China, which is very healthy and very profitable, I don't think -- I try not to make those macro issues really impact that decision.

Strategically, it makes all the sense in the world for us to own that business.

I think from a valuation point of view, although that market has taken hits, if you look at P/Es, valuations they are still relatively high.

So we will be diligent as we look at that, but, clearly, one of our goals would be to own that business sooner rather than later.

It just makes too much sense from a brand point of view and I think financially it should be a nice transaction [curve].

Great.

Thanks, Manny.

I guess the second question that I have is on some of the commentary you made around the back-to-school period.

Can you just discuss a little bit more around the trends that you are seeing my guess is at your own retail stores and is at your wholesale partners, and sort of how much of a pickup you expect to see with the later Labor Day and how that's incorporated in the third quarter estimates that you've provided this morning?

Sure.

I think, just to talk about how we plan the business, from the beginning of the year we have always planned August negative, low single-digit negative comps, because of the shift that we see.

And we are planning September more aggressively and higher positive, mid to high single digit.

When you put both months together I think you get a much more natural feel for the business running -- continuing to run up low single-digit positive comps in our owned businesses and at retail, and generally speaking.

I think geographically I think it is much more of a Northeast/Southeast phenomenon with the whole back-to-school being somewhat later.

I think as you move across the country some of those schools come back earlier.

And since most of our retailers and ourselves have a concentration of business in those regions, it is having a significant impact on trying to read business.

I think when we get to September 15 or whatever, we will have a real clear understanding of how this back-to-school period is trending, but I think, generally speaking, everyone has planned it to be somewhat later as we have gone forward.

Great.

Thank you very much, Manny.

David Glick, Buckingham Research.

Thank you.

Manny, congrats on the progress.

My first question was on Calvin Klein.

Obviously you are seeing some acceleration in your business.

Looking at your guidance, it does imply a ramp-up in the fourth quarter.

I just wondered if you could touch on what is driving that increase.

You talked about a strong order book, but what gives you the confidence that you can see that kind of acceleration?

And what does that mean for the business going forward?

Can we see an acceleration in the Calvin Klein growth rates to levels that you guys have talked about as your goals going forward?

Thanks.

Well, I think there's two things really going on -- three things.

I think the underlying business just continues to perform very strongly, so we are really seeing the kind of sales performance that we have seen at retail in jeans and underwear.

As you can imagine, when you are getting the kind of sales increases we've gotten, we've been chasing business all year.

We really get into a position where we can fulfill at what we would feel like an acceptable rate the consumer demand, particularly in underwear which is a replenishment business, really starts as we get into the holiday season, probably late September/early October.

So I think you are seeing a bit of that.

The real healthy trends in the underlying business.

We also had some pretty significant square footage growth in Calvin, and Tommy to a degree, due to the transfer in North America of our IZOD stores to the Calvin Klein underwear and accessories stores.

So square footage growth there that will really come in in the holiday selling season, which is very strong.

And then last thing is financially, even with all the strength, we are going to benefit in the fourth quarter, like everyone else, from an early Chinese New Year, which really impacts a lot of the Asia markets.

It's about two to three weeks earlier this year and you'll get two things happening: you'll get earlier actual retail sales in the stores we are operating, but also, because of the early Chinese New Year, wholesale shipments are falling into January out of February.

So there's a little bit of a timing shift there that we have to just deal with every year with Chinese New Year, but underlying business just continues to be very strong.

Looking into 2016, we are not getting it all the guidance discussion about it, but obviously there is momentum in the Calvin Klein business.

And we think that momentum will help us partially offset some of the headwinds we are seeing with continued pressure on FX, particularly on a transaction basis, going forward from inventory purchases in some of our foreign markets: Europe, Brazil, Mexico, and Canada.

We have talked about those issues, so that is in front of us for 2016.

That's a good segue into my next question in terms of your ability to offset that.

You've talked about managing SG&A, taking some price increases and potential AUC reductions.

I'm wondering if the devaluation we're seeing in the Chinese currency is enhancing your ability to increase the percentage of transactional FX that you may be facing next year.

You know, the Chinese currency impact has been relatively small.

It's about a 3% reduction, so that is what -- at this point.

What that might portend as the world -- as you extrapolate that and if there's more pressure on the Chinese currency, clearly that might make an opportunity for fall 2016 and beyond.

But right now at this point, with the pressure you are seeing on labor rates offset by some currency benefit, it is very marginal just on that particular front.

You hit the three buckets we really are trying to focus on.

As you can imagine, the challenge -- the biggest challenge we're looking at is how aggressive to raise prices, particularly in a world as you look out there that is facing extraordinary deflationary pressure in just general terms.

Across -- the ways most economists speak, the biggest concern is deflation not inflation.

So the challenge we are facing, although our cost increases say in Europe or Canada are increasing anywhere from 12% to 18% because a big piece of that being currency offset by some product savings, how much can you raise prices in one season?

And that continues to be an ongoing discussion with our retail partners.

We will give more color to that as we get into the end of the third quarter going into the fourth quarter.

But we talked about that there will be pressure in the neighborhood, just on a pure mathematical basis, in excess of $1 a share in 2016 and we are hoping to be able to offset -- partially offset some of that.

So that's where we are right now, David.

Great, thanks.

A last quick question on -- dress shirts not your largest business obviously, but it did have a pretty sizable negative impact on your fourth quarter last year.

You talked about the flex collar.

I'm just wondering how big an innovation that is and how broadly you can extend that product innovation across your wide array of brands and programs.

Is this the kind of thing that could be like athletic fit was for you or fitted?

How are you viewing this new product?

That's a great callout and our dress shirt business is a $500 million business and it's really -- we went after the product innovation.

You saw it at MAGIC, but if you going into stores now you'll see it principally with the venues in brand.

There's 1 million units on the floor, which is significant, of this new product and this new technology that we have a patent on to use.

We are seeing really a strong response to it.

I don't want to get too far ahead of ourselves, it's three weeks of selling.

As you would expect, it is at the three key retailers -- Kohl's, Penny's, and Macy's -- in a substantial way and it's getting a reaction.

And we are getting -- it is a little bit more expensive product and we are able to get a higher retail price on it.

So we are tracking the business.

We have the pipeline and the sourcing network in order to go really after the business in 2016 as it really starts to roll out, and we will focus on some of our other owned brands where we may employ that technology where it makes sense.

It is a real innovation for the dress shirt business and I think we're going to try to take advantage of it as the market leaders.

Great, thank you very much.

Good luck.

Joan Payson, Barclays.

Good morning.

Manny, could you talk a little bit --?

I think you've mentioned China, but more broadly for 2016, are there any other potential headwinds that you would foresee and how do those compare to this year?

Joan, the biggest headwind we face, cut through it all, is currencies.

Then I guess, fundamentally, currencies are usually -- there's a lot -- I don't want to play economist, but those are usually indicative of what's going on in the underlying economies.

So on a -- the biggest market for us is Europe.

It has gone through some macro issues, but we are actually seeing positive sales trends in Europe.

We believe that the economy is coming back and that consumer is re-engaging.

The challenge we are facing in Europe for 2016 will be cost increases that are double-digit cost increases and how much of that is reasonable in one or two seasons to pass on to the consumer.

That is the biggest challenge we are facing in Europe.

As you get into some of the other markets that you talked about, some of the emerging markets; Brazil.

Brazil, for us, has been a -- for Calvin Klein in particular, and Tommy just really getting started with a joint venture there, we've seen over the last five years dramatic growth in that market.

But, clearly, as we are planning 2016, we are planning that business flat to down slightly and that is just different than what we've had to do over the last five years.

It is totally a reflection of what's going on in that macro environment, how that consumer is being impacted by everything politically and economically that's going on in that business.

So I think in some regards, given that we, as an international brand, are really a pioneer in Brazil developing a business, we are probably more impacted by that business as we go forward.

The China market continues to be a growth market for us.

We continue to expand there.

We continue to add square footage.

We continue to expand our brand offering throughout China, both Calvin and Tommy, as those businesses develop.

The challenge there is it's more of a "what's going to happen" question and how much growth is there.

Clearly, this is not the heydays of three years ago, where from 2007 to 2010 the business grew 15% top line.

We are planning the business to grow more mid single digit.

I think that's reasonable.

We are currently outperforming that, but there's just a lot of noise in the environment.

I guess the biggest thing we're dealing with is uncertainty and what that potentially does to the consumer, how that forces us to plan our business, and reacting to the macro environment.

But I think as a brand, as a company, we are as well positioned as anyone to really weather those headwinds.

Our portfolio of brands gives us diversification.

Our geographic diversification is second-to-none, which I think is a long-term success, although in this market the more North America you are the better you are, but I think on a long-term basis been the global powerhouse brand is the place to be.

So we're just dealing with a lot of those macro issues; that is the biggest headwind we are dealing with.

Okay, great.

Then you also mentioned the digital initiatives as being a big program over the next three years.

Could you just provide an update on how big those online businesses are at this point and what rate they are growing at?

Sure.

I guess what I would -- I'm not going to really quantify in total, but I would describe all of our online direct businesses as small.

Add it all up, $150 million in sales just taking everything into consideration.

It's growing dramatically, but again off of a small base, and we really target that as a growth area.

In the Calvin Klein area in particular, if you think about pre-Warnaco acquisition, we were a licensor and getting the model right internationally for an e-commerce platform, direct e-commerce platform, was very difficult as a licensee with so many different partners doing business and Warnaco being the biggest partner at the time.

Post-acquisition that focus has completely changed.

We now control probably -- in apparel we probably control 65% of the categories today and with our relation with G3 are able to really aggressively go after the women's area as well.

So that has been the area where the biggest investments have been made.

We now have active, highly-functioning, performing e-commerce direct-to-consumer platforms; China, throughout most of Asia, Europe, launching in Brazil, launching in Mexico.

North America obviously both brands, Tommy and Calvin, really are there.

And now we're making those connections with the consumer that needs to be made; not only from a commercial point of view, but today I would say, between Calvin and Tommy, 60% of our marketing budget are directed at digital marketing and connecting with the consumer there.

Converting them to our in-store platforms, our wholesale customers' in-store -- online platforms, or our own brick-and-mortar stores as well.

So it's really a 360 campaign.

It's requiring capital investment, there's no doubt about that, but that's just the price of growth and where we are and it's factored into all of our plans as we go forward.

It is a big opportunity and it is both an opportunity for us to sell direct to the consumer, but also sell through our key wholesale accounts our e-commerce platform, where we are really seeing growth.

If you look at our dot-com business with some of our partners, those businesses are up, depending on the player, anywhere from 30% to 50%.

So clearly our penetration continues to grow online.

Great, thank you.

Erinn Murphy, Piper Jaffray.

Great.

Thank you and congrats on the progress during the quarter.

Manny, I was hoping you could talk a little bit more about the denim business.

The category broadly has seemed to have a little bit of a resurgence and it seems that the results have been better pricing integrity in the category of late.

Maybe can you share a bit more about the Calvin Klein traction you are seeing, in particular the inflection in women's?

And then what are you seeing broadly right now in terms of AURs and just how you are planning the promotional side of that business?

Okay, so I think as -- let's talk about North America first.

I think, as we are clearly seeing, both growth in men's and women's.

We are seeing much better sellthroughs, more regular-price sellthroughs or prices that are first markdown.

Denim is a category that will be promoted no matter what your brand is, but I think what we are really seeing is it has been a cycle for the last -- going into this year, the last three or four years, where particularly on the women's side -- men's has been more stable, but women's in particular -- it has been a really a sharp decline in overall market share in denim.

And what that has really done is, as you move through seasons where inventory historically has been building up, it has required more promotions, more clearance, and a real takedown in AURs overall for the season.

For the last nine months in our jeans business, our AURs are up about 20% in men's and women's in North America.

I think that is a sign of the health in the overall denim market, but also a lot of the initiatives that we have in place that have moved the product up, improved the product.

I am optimistic about the category as it moves forward because it is an important category for every retailer, and it has historically been one of their most profitable categories.

So there is a real focus on continuing to focus on that area.

On the women's side in particular, there has been a lot of product innovation around stretch jeans, really trying to take advantage of that whole at leisure as it relates to a denim component of that.

So we are really starting to see the knit jeans really starting to become a bigger component of the business as well.

So for Calvin, we have always had a very healthy tops denim business, which seems counterintuitive.

It's really about reestablishing our bottoms business where we are significantly underdeveloped against the competitive set.

Where most of our competitors set like a Levi's and some of the other brands, denim bottoms would represent well in excess of 50% of their overall sell.

And for Calvin it's been hovering around 30%, moving it to 40%, so there's this huge bottoms opportunity that I think our fits now are much more well-defined.

The consumer is starting to re-find us, and I think it's like anything else; with denim, it's really a fit issue as well.

As that consumer starts to wear the product, starts to have a positive response to the product, they become a more loyal consumer.

I think we're price positioned right in the sweet spot of the market.

We are not sitting at some $200 denim prestige that represents 5% of the market.

We are a designer denim jean that is going out the door $59 to $89 in North America.

That is a real sweet spot for all department stores and we are really starting to see it.

That's helpful, thank you.

And then, I guess just following up on some of the unique partnerships you guys have announced recently, both at Opening Ceremony for Calvin, but then also some of the distribution, like Urban Outfitters you mentioned and Topshop.

Can you just elaborate on maybe some of the other opportunities that from a retail perspective that these ones are showcasing, whether there's new accounts to be getting into or deeper business within these existing newer distribution opportunities?

I think the channel you just spoke about, that specialty denim specialty store denim business which really targets the teenage consumer through maybe a 30-year-old consumer, to do business there is very healthy and can be very profitable.

But even more important is what it means about the brand and your positioning with the consumer.

I think, obviously, every major department store both in Europe and North America, when you sit down with them what they continue to talk about is trying to continue to try to attract a younger consumer.

I don't think it's any surprise to anyone that department stores tend to skew somewhat older, and I think if your brand can be more relevant -- if the Calvin brand continues to be more relevant to a younger consumer, given our strong position in some of these specialty retailers, I think -- and our strong underwear component, which is usually the introduction to a consumer.

That is by far our youngest consumer.

If you have that connection between underwear and jeans, I think your brand now becomes more relevant to a younger consumer.

So the opportunity with some of the retailers you talked about, Urban Outfitters, with Topshop, particularly The Buckle as we move forward, some other players -- Opening Ceremony you mentioned -- it's as important as it is commercially.

It's also very important from a brand positioning point of view: how we connect with the younger consumer, how we connect digitally, how we sell online to that consumer.

So we are seeing really great growth there.

It just makes our brand relevant to that consumer and I think it makes us a cooler brand that will see stronger sellthroughs.

It's just, I think, another indication of, if we're in that channel of distribution, the product has to be right.

You don't get accepted into that channel of distribution unless your product is positioned appropriately.

Great, thank you.

That's helpful.

I will let someone else jump in.

Best of luck.

Michael Binetti, UBS.

Morning, guys.

Congrats on a great quarter.

Manny, could you just help us understand the big inflection in the Tommy same-store sales in the quarter, particularly the inflection to 9% in Europe as a particular standout.

Maybe a little help on whether you think, hey, that was simply good execution from the team in the quarter or if there were some changes that you made that we should think about as more of a medium-term tailwind.

I think it's hard to say, let me start with that.

We had a really good second-quarter selling season.

You could make a case of, well, as we moved into August your comps have decelerated from plus 9% to mid single digit, but I think some of that is the fact that it was such a successful first half of the year full-price selling that we had significantly less merchandise to promote and sell off during the traditionally high sales season throughout Europe.

We just weren't as aggressive in July and August from a promotional calendar, because we didn't need to be and I think we managed our gross profit.

So as we are turning into August and that's starting to wind down, we are seeing business continue to improve.

I think there's two things going on.

I really think our line is fantastic.

I think the consumer is connecting with it.

I think the product is right, but I also think that there's also something just going on in the overall environment in Europe.

I think there's two basic things.

I think the environment is improving and I think because of the currency situation that is going on I think a lot more Europeans are staying home.

And by staying home I mean I think they are vacationing this summer within continental Europe and the UK where their euros are buying more.

Where if they come to the United States, forgetting everything else, their hotel and food just from a currency point of view is up 20% to 25%.

So I think we are benefiting from that.

We are also, I think, benefiting from the fact that our Chinese consumer or the Asia consumer, instead of being in the United States is more so in Europe.

And as you -- I was in Paris and I was in Amsterdam this last month.

You could see the tourism boom that's going on there and helping their economy.

So long-winded way to say I think the underlying product and the brand strength continues to be second-to-none, particularly in Europe, for the Tommy Hilfiger brand.

And then I think the environment continues to improve and that consumer is back out opening up their wallets and spending money; and we're getting a larger share of that.

Okay.

Then on the Calvin business, particularly in North America wholesale, it's been hovering -- you helped us isolate a few data points that have caused some noise in there, like shifts, but it's been hovering plus or minus flat range for a while.

And with all the growth and inflicting demand from retailers you've been talking to us about it's not exactly intuitive why the reported results are still hovering around a flat range, I'm trying to think backwards through the moving parts that are in the baseline there and what's causing that number to remain flattish.

And more specifically, are there some things that you would point out to us that start to roll off over the next few quarters from that baseline that remove some headwinds that are going to make the growth rate of that North America business sound a lot more like what it sounds to me like you are trying to tell us the underlying run rate of the business is as you've started relaunching product?

Look, Michael, I think as you know, there's a lot of noise in the numbers because of currency and everything else.

That's point one.

I think point two is we have consistently been talking about cleaning up distribution, closing doors.

But also, even in some of our best accounts, we have opened square footage and we have expanded in top doors and we just didn't think a brand belonged in some of the bottom doors.

So there's been that ongoing issue.

I've also talked about the fact that we have been chasing business constantly, so you don't necessarily see it all on the top line, though there has been top-line growth.

What you are really seeing I think is in the operating margin in the business, despite the currency impact which is taking that away, but the operating margins of the business just continue to improve.

So I think the inflection point I touched on is really fourth quarter.

I think you'll start to see that more and hopefully, as we go into 2016, we see our order books really starting to improve significantly in North America.

Okay.

So it's at least somewhat related to removing distribution and the year-over-year headwind that that causes.

That will connect that to I think David's question earlier where it says this is how we get to the business (multiple speakers).

Yes, Mike and Dana just handed me a notice.

We report North America.

When you add -- Canada's currency is down 20%, so that's a 20% increase before -- and Mexico is down 18%.

When you factor that in, when we put it all in, it's just part of the drag that's on the business as we go forward from currency.

Okay.

And if I could just ask one last quick follow-up, I think you mentioned last night on television it may be a six- to nine-month timeframe as far as looking at licenses; to help us think about it.

At this point -- I don't know if anybody has reminded that you said that, but at this point (multiple speakers).

Well, now they are.

You can't go on TV and expect us to forget, Manny.

So at this point can you help us think about what influences timeframe on that?

Is it -- look, typically in the past these licenses have been set so that everybody is happy with the terms when it gets executed and it's a negotiation, or is it more set by when licenses roll off at this point?

Thank you.

It's a good question.

I guess when you are on that show with Jim Cramer it does get a little crazy at times.

But again, not to put too definite a timeframe on things, nothing has really changed.

Buying back licenses, it's a delicate situation.

You have had a partner usually for a number of years that's built a business and clearly has created value for the brand and for themselves, so there needs to be a reasonable negotiation that goes on so that you secure a business and don't have a --.

You don't want to have a situation where you break a license or just terminate a license at the end and just take back a business.

I think there's too many examples of that where you wind up leaving money on the table and hurt the underlying business.

That's not our goal.

Our goal is to negotiate a fair, reasonable transaction with our partners and to do it in a way that doesn't economically hurt them, but more importantly, from our perspective really gives us a business that is ongoing with momentum in it as we go forward.

And that's the push and the pull that goes on there.

Clearly, the biggest driver of that is licensing term.

If somebody has got two to three years to go on a license and you've clearly given them an indication that the plan is to bring it back in, that's a very reasonable negotiation to go on.

If somebody has eight to 10 years or 20 years, depending on the situation it's a much more challenging discussion, similar to the kind of discussions we had with Warnaco when we wanted to buy their business back.

Besides the complication of being a public company, it was a very long-term license so there was much more value that had to be determined.

This is really about sitting down with partners with more or less, for the most part, short-term licenses, balances left.

Probably the only exception to that is China where really are trying to come up with a reasonable way and a smooth transition.

So I believe over the next -- over 2015 and 2016 we would be very disappointed if you haven't seen some progress in that area -- beginning process of bringing some of those businesses in.

When that starts I think it will become obvious what the next potential licensee take back would be.

Those would be very strategic and accretive transactions as we move forward.

All right, thanks.

Outstanding quarter, guys.

Thank you.

John Kernan, Cowen and Company.

Good morning, guys.

Thanks for squeezing me in.

Just wanted to ask a question.

Calvin Klein operating margin internationally has been fantastic in the first half of this year in the face of a lot of currency pressure.

Calvin Klein North America margins have been under significant pressure.

Just trying to understand what is driving the Calvin Klein international operating margin at this point.

Is it European margin recovery and where you stand right now for profitability in Europe?

I think when you bought the business from Warnaco it was not making any money.

So just a little color there would be helpful, thank you.

Look, in the Calvin Klein business, we operate in both Asia and in Europe.

On the international margins, the Asia business continues to perform.

The margins there are very healthy.

And on the European business, we have talked over a three-year period getting someplace closer to 10% operating margins.

We are on that trajectory, but those margins today are still -- they are positive, but relatively small at this point.

We've seen expansion in both, but the European margins are still relatively small and we're still at the beginnings of the turnaround.

Mike said it perfectly; the relative improvement has been taking a loss in Calvin Klein Europe over the last two years to a profit, but still below what anyone would think is acceptable.

And we really haven't been -- so the currency impacts that we have gotten hit with have hit the top line and the bottom lines are proportionately the same, so operating margin hasn't really contracted significantly at all there yet.

That starts really in the second half of the year where the product course component of FX as our hedges start to roll off, particularly in the fourth quarter and then into 2016.

That's where operating margins would be more impacted as we go forward from that point of view.

So I think that kind of lays it out.

Okay.

Then if I could just thematically ask one more question.

We've noticed a lot of the global lifestyle brands increasing distribution on Amazon, so just wondering what your strategy is with Amazon.

I know they are making a big push into fashion.

It seems like almost all your -- there is some Tommy and Calvin product on Amazon at this point.

Just wondering what your strategy is there.

Our Amazon business has grown geometrically.

Our Calvin Klein underwear business in particular is, by far, the largest selling underwear on the Amazon site, as you would expect, giving them that product category.

So they are a great partner.

We really manage that very closely from -- making sure it is brand enhancing.

We just don't want goods on the site; we want the brand experience on the site and they have been very good at getting us that.

So we have really attacked it regionally, both here in North America and in Europe, and we would expect that customer to be a significant growth area for us for both Calvin and Tommy over the next three years.

And trying to manage that distribution so it doesn't become in any way brand-negative.

All right, that's great.

Congrats on all the momentum.

Thank you.

Dana Telsey, Telsey Advisory Group.

Good morning, everyone, and congratulations on a terrific quarter.

As the underwear business certainly seems to be very strong and gaining market share in both men's and women's, is it expanded distribution?

Is it the celebrity advertising programs you have?

Is it margins improving also?

How do you see the go-forward for that underwear business?

Thank you.

Dana, I would say in North America in underwear, besides some of the specialty stores that we have added, it's basically the same customer base, but if you walk into the store the exposure has just grown.

There's been a continuing expansion of the square footage and that is directly aligned with new product innovations, new product has been delivered.

On the women's side of the business, we always had a very strong bottoms panty business.

The focus has really been to grow the bra business, which from a price point is 4 times the unit cost of panties, so the growth has really been to really try and grow that square footage.

If you go into Macy's Herald Square, you will see a women's shop that is 2,500 square feet.

You will see a men's shop that is 2,500 square feet.

We are clearly their largest brand there and I think with the best positioning on the floor.

On men's, yes, and on women's trying to move from the number two/three position to the number one position in that store from a sales volume point of view.

So that has really been the opportunity.

We are so dominant in men's I think men's will continue to grow nicely, but to be honest, the bigger market opportunity for us is women's.

Market is much bigger and our market share, although significant, is not nearly as dominant as it is in men's, so that opportunity is really in front of us to grow.

In Europe it has been a growth in customer, better retail presentation, better customer presentation, true cleaning up of the brand into department stores and key specialty stores.

Offsetting that has been getting out of the off-price channel and getting out of some terrible distribution that they were in -- that the brand was in.

So that has been a balancing act, but what we've really seen in the last six, nine months the growth that we've seen in the business has really been driven both by square footage growth, which we think can continue, and also growing the customer base, which we also think could continue throughout Europe.

In Asia, it's basically a retail business, whether that's our own stores or a department store concession business.

There we continue to open doors.

It continues to be the player in the market.

We continue to raise AURs throughout Asia, lifting the product up.

Black-label product has going from 3% of the business in Asia to today 10% with a goal to get to 20%, and that product is price positioned a good 30% to 40% higher than our base business.

So those are the initiatives that have really driven the presence of underwear and the market share gains by region.

Thank you.

Operator, we're going to make this our last question.

It is well after 10:00.

Omar Saad, Evercore.

Good morning, thanks.

Great job on the progress, guys.

Manny, quick question on the outlet channel.

There's been a lot of controversy around this channel.

I know it's affected by currency and tourism.

I don't know if you can parse that out and see what's going on underlying with local consumers, but your thoughts on that channel would be helpful.

I know it is still an important distribution for you guys.

Sure.

I think there's -- if you look at the number of centers in the outlet in volume, the number of centers significantly skews towards permanent population locations: good, solid store that this year continue to comp overall single-digit comp store increase.

Probably 2% to 4% kind of growth in that market; healthy, along with the American consumer I think being healthy, so channel continues to be, just from our perspective, very, very healthy.

What is going on is there are 15 key centers around the country in these tourist destination locations that are extraordinarily large.

Think of Harriman in New York in this location, think of Orlando down in Florida where the normal size of the store is 5 to 10 times as large as an average store in a permanent population location.

Those are the stores in the channel that are being impacted most dramatically.

And I think the brands that are being impacted most dramatically are the global brands: ourselves, Calvin and Tommy we talked about.

Guess; Ralph Lauren has talked about this.

Coach has talked about it to a degree.

So some of it -- if you are global player that really attracts a global consumer, in those centers like Orlando or Harriman your customer base in those centers for those brands -- 50% of the credit card sales are international tourists from South America, Europe, and Asia.

If tourism is down in the United States, which we know just in general terms it is, those are the centers that are being impacted and those 15 or so centers are the ones, because of the size of their business, are being dragged down accordingly because of that.

As we look out, we believe as we get into the fourth quarter of 2015 and clearly into the first quarter of 2015 we sought to anniversary that business and it should become less and less of an issue for us.

But clearly third quarter it's going to continue to be an issue.

Last year our comps for both Calvin and Tommy were high single-digit positive comps in North America, so we're up against some of our most challenging comps in the third quarter, driven by that international tourism.

So that is the best I can do for you.

There is really nothing at all wrong with that channel of distribution.

It's like saying there's a problem with Herald Square Macy's because tourism is down in Macy's.

It's still the largest department store in the world and probably the most profitable department store in the world, but it is being impacted by just tourism trends.

All right, that's really helpful, thanks.

One last question.

This kind of younger millennial consumer effort that you are making and you are seeing -- progress you are seeing in the Calvin Klein business, help us understand the relationship with Topshop, Urban Outfitters, other channels that really target that young consumer.

Have you guys always been there in that channel and that business is now accelerating as you push into more of the digital marketing and some of those younger campaigns, or are those retailers coming to you and asking you to develop more product for them?

As a brand, Calvin Klein, I would say 10 years ago when the brand was the number one designer jeans brand in North America, where it had a great position in the market where a product was being executed, we were in those kind of stores.

The last five years at Warnaco that business was zero and went away.

You need to be cool.

You need to be connected and the Calvin Klein product wasn't cool; it wasn't cutting edge.

There was other brands that were much hotter and we were living -- that business was living off the heritage of the brand and over dependent on off-price channel distribution.

I think what is indicative most importantly about the fact that we are in Urban Outfitters, we are in Topshop is the brand; the product is connecting with that younger consumer.

Combination of our marketing and how we have really gone after that market; combination of the product and what it is and that it's executing.

And we've seen really strong sellthroughs.

The product hitting, if you walk in -- just go into an Urban Outfitters, you are going to see a presentation of Calvin that you've never seen before.

It's going to be front and center.

I would tell you it's still relatively a very small business, but it's creating a lot of buzz and it's helping our department store business.

Then, finally, I think it's also very important -- look, our primary channel of distribution is department stores.

They want to continue to attract the younger consumer, so it is important to really -- we are one of those brands, particularly Calvin, that skews younger than the department store customer.

I think it's a combination of our underwear business and our jeans business that does that for our department store accounts.

At the same time, we don't want to alienate our department store -- our more mature department store accounts, so we really have differentiated product that services the needs of both of those consumers from a fit point of view and from an aesthetic point of view.

So I think that -- hopefully that makes it clear what that channel is -- why that channel is important.

Thanks for all the information.

Okay, well, that ends our call.

I'd like to thank everybody for joining.

We look forward to speaking to you in December for our third-quarter press release.

And I wish everybody a happy and safe Labor Day holiday weekend.

Enjoy the balance of the summer.

Have a good day.

That will conclude today's conference.

We thank everyone for their participation.