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PVH Corp. (NYSE:PVH)

Q3 2011 Earnings Call

December 1, 2011 4:45 PM ET

Executives

Manny Chirico – Chairman and CEO

Mike Shaffer – Chief Financial Officer

Allen Sirkin – President and COO

Ken Duane – Head, Wholesale Businesses

Dana Perlman – Treasurer and Head, Investor Relationships

Analysts

Robert Drbul – Barclays Capital

Adrianne Shapira – Goldman Sachs

David Glick – Buckingham Research Group

Jeff Klinefelter – Piper Jaffray

Robert Ohmes – Bank of America

Maria Casper – Wells Fargo

Howard Tubin – RBC Capital Markets

Kate McShane – Citi

David Weiner – Deutsche Bank

Joseph Parkhill – Morgan Stanley

Operator

Please standby. We are about to begin. This webcast and conference call is being recorded on behalf of PVH Corp. and consist of copyrighted material. It may not be recorded, reproduced, retransmitted, rebroadcast, downloaded or otherwise used without PVH’s expressed written permission. Your participation in the question-and-answer session constitutes your consent to having any comments or statements you make appear on any transcript or broadcast of this call.

The information made available on this webcast and conference call contains certain forward-looking statements that reflect PVH’s view of future events and financial performance as of December 1, 2011. Any such statements are subject to risks and uncertainties indicated from time to time in the company’s SEC filings, including those identified in the company’s Safe Harbor statement that is part of the earnings press release that is the subject of this webcast and conference call.

These include the company’s right to change its strategies, objectives, expectations and intentions. It’s need to use significant cash flow to service its debt obligations, its vulnerability to weather, economic conditions, fuel prices, fashion trends, loss of retail accounts, disease epidemics or and terrorism, availability of raw materials and other factors, its reliance on the sales of its licensees and retail customers and its exposure to the behavior of its associates, business partners and licensers. Therefore the company’s future results of operations could differ materially from historical results or current expectations as more fully discussed in its SEC filings.

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

The information made available also includes certain non-GAAP financial measures as defined under SEC rules. A reconciliation of these measures is included in the company’s earnings release which can be found on the company’s website www.pvh.com and in the company’s current report on Form 8-K furnished to the SEC in advance of this webcast and call.

At this time, I would like to turn the conference over to Chairman and CEO, Manny Chirico. Please go ahead.

Manny Chirico

Thank you, Robert. Joining me on the call this afternoon is Mike Shaffer, our Chief Financial Officer; Allen Sirkin, our President and Chief Operating Officer; Ken Duane, the Head of all our Wholesale Businesses; and Dana Perlman, our Treasurer and Head of Investor Relationships.

We’re very pleased with our results for the quarter. We beat the top end of our third quarter earnings guidance by $0.08. And given the momentum in our business we also took up the fourth quarter by raising our full year guidance by $0.13.

Okay. Let me start with our Calvin Klein business as I get into each of the individual components. Our Calvin Klein business continued its strong growth momentum. Total revenues in the third quarter for our combined Calvin Klein businesses were up 11% and operating profits increased 13%.

The Calvin Klein Wholesale and Retail businesses that we operate directly posted a 13% sales increase in the quarter. The strong performance was driven by our Men’s Wholesale Sportswear business, as well as very strong performance in our own retail stores. Our Calvin Klein Retail business posted a 12% comp store increase in the quarter.

In our Licensing segment, royalties were up 8%. The business posted strong revenue growth across all geographic regions specifically North America was up about a little bit more than 7%, Europe was up 8%, Asia sales were up about 18% and Latin America/South America were up just a little bit over 20%.

Moving on to some of our big categories and businesses, I’ll start with underwear. The Calvin Klein underwear business was ahead about 11% in the quarter with all regions, Europe, Asia and the Americas posting strong sales gains. This growth was driven by the continued growth of the international retail square footage and the extremely strong performance of CK One.

CK One’s retail results are strong in all markets. In men’s CK One continues to exceed our plans and has helped us to grow our number one share position within U.S. department stores. CK One currently represents over 10% of our annual underwear business.

In women’s, our Naked Glamour introduction is off to a strong start in all international markets. The supporting marketing campaign has been very well received, new product initiatives along side breakthrough marketing campaigns has been a hallmark of the Calvin Klein underwear business. This strategy has enabled us to grow our market position globally as the number one intimate apparel duel-gender brand.

Moving onto jeans. Our global jeans and related businesses were down 2% for the quarter. Relatively soft sales in the U.S. and Europe were offset by strong business throughout Asia and South America. For the fourth quarter, we expect the jeans business to grow in the mid single-digit range, driven by new products, particularly our Power Stretch program, which will be a significant initiative for the spring season.

Fragrance, our Coty Fragrance business had a strong quarter. Just as a reminder, we were up against the Calvin Klein beauty launch in last year’s third quarter and despite that, we posted a 5% increase in revenues. Business was very good across the board with our Euphoria and CK One fragrance continuing their strong growth.

Our new fragrance, CK One Shock launched in the third quarter and we are seeing very strong sales performance in November. As we look out, we’re expecting fourth quarter Fragrance revenues to be up over 10%.

Moving to Women’s Apparel in North America, the business was very strong, apparel and footwear. Our royalty revenues with our licensees G-III and [Jim Laurel] were up over 15% in the quarter. On the apparel side, the strong growth is being fueled by strong selling of women’s sportswear and outerwear. In footwear, revenues are running ahead about 20%. In addition, our new Handbag and Accessories business is off to a very strong start. G-III has seen excellent sell-throughs at both Lord & Taylor and Macy’s.

Our CK Bridge in Asia continues to grow dramatically, posting a 40% increase in revenues for the quarter. The growth is being driven by China, Korea and Hong Kong markets, where we’re experienced significant door expansion and double-digit comp store increases.

I’m going to move to the Tommy Hilfiger business. From a brand marketing perspective, we just launched the third chapter in our very successful Meet the Hilfiger’s campaign, as we continue to invest in the brand worldwide.

For the fourth quarter, our global marketing spend will be about $5 million higher than last year. Our global holiday campaign will have significant exposure in major markets throughout the United States and Europe. The fourth quarter marketing plan calls for a significant television and cinema presence in all major markets throughout Europe and the United States.

Overall, all of the Tommy businesses had a very strong quarter and significantly exceeded our expectations. Total revenues in the quarter were up 17% and operating earnings increased 27%. We exceeded our revenue guidance by $30 million. The brands performance in both Europe and North America was particularly strong.

Let me start with European wholesale business. Before holiday season we have seen sales growth of about 15% over the prior year. On a product category basis we have seen double-digit growth in men’s and women’s sportswear, denim and footwear.

We are seeing strong growth across Europe for the holiday season. Business in our largest market Germany is running ahead 15%. Our second largest market Spain is reporting healthy growth of about 5% in a very tough market with our key partner there of Puarte Anglais. Our key growth markets of Italy, France, Russia and the U.K. are all growing at over 15%.

In the third -- moving on to the European business, in the third quarter comp sales were about 5% with the exception of Italy and Belgium all major markets posted positive comp sales. We saw particularly strong sales performance in France, throughout the Scandinavian region and throughout Eastern Europe.

Moving to North America retail. We posted strong comps in the third quarter of about 15%. We are seeing strength in all regions of the country with particularly strong performance in geographic areas that catered international tourists. The Tommy retail results are very consistent with the strong sales performance we are seeing in our Calvin Klein Retail business.

In our U.S. Wholesale business we saw good performance at Macy’s in both men’s and women’s sportswear. Sales are running significantly ahead of last year and sales-through at retail are above planned. Our average unit retails in the quarter are running up about 7% over the prior year.

Moving to our Heritage businesses, revenues were down 2% in the quarter, driven by a 7% decline in sportswear sales, which was partially offset by a 4% increase in dress furnishings. Our Heritage Retail business posted flat comps for the quarter.

Operating earnings for the quarter were down significantly, driving this decrease was a decline in gross margin rates from the impact of higher product costs relatively flat sportswear selling prices and the challenging competitive environment, which was driven more promotional sales from client.

For the fourth quarter we’re planning for these trends to continue and have been -- have taken aggressive actions to move inventory and ensure that year end inventories are very cleared. Our fourth quarter guidance fully contemplates all of these actions.

Moving on and talking about our trends in the early fourth quarter in November. We’re off to a very strong start in November. We saw business accelerate over our strong third quarter performance in particular the business trends in Calvin and Tommy continued to outperform our plans.

In our U.S. Retail business comp store for our Calvin Klein and our Tommy Hilfiger businesses for November ran ahead over 15%, against the mid single-digit comp store plan. Comp store at our Heritage businesses are running up in the low single-digit against a flat plan.

Moving to our U.S. Wholesale business, both Calvin Klein and Tommy continue to perform ahead of sales plans. We have not seen any significant customer resistance to increased or retail selling prices. In Dress Furnishing we have also seen excellent success passing along the higher selling prices and retail prices are up about 8% to 9% in our Dress Furnishings business. As I said, we continue to see a difficult market for our Heritage businesses on the main floor.

Moving to Europe, in Europe our Wholesale business which represents about 70% of our business continues its strong momentum. Our spring 2012 order book closed the up about 13% against last year’s bookings, we have also booked pre-fall, which is a relatively small season but is a good indicator for how fall may turn out and bookings there are running ahead 15%.

At retail in November as the business – as the weather turned cold we saw a significant acceleration in Europe. Our comps in Europe for the month of November are ahead -- above 15% against a 4% comp store plan. We saw a dramatic improvement in Italy which was running minus 12 and is now comping in November plus 12.

In Belgium where we were down 10% we saw our business go to plus 11%. In Germany our largest market where our comps were up low single digits we see our business go to double-digit increases and that trend has been consistent across the board, seeing very strong selling throughout Europe. It’s good to see the brand is being well received by the consumer and as weather turns that cold weather apparel really kicked in.

Finally, I think we’ve been prudent about our estimates for the fourth quarter. We feel we’ve put together projections that we can meet and if trends continue, we could beat as we go forward. We believe that the momentum we see in our Calvin Klein and Tommy Hilfiger businesses will continue to drive our growth and should allow us to continue to outperform our current projections.

And, with that, I’ll turn it over to Mike to quantify some of the details.

Mike Shaffer

Thanks, Manny. The comments I’m about to make are based on non-GAAP results and are reconciled in our press release. Our revenues for the third quarter were $1.654 billion. Revenues for the quarter were greater than our previous guidance, a 9% greater than the prior year. Driving the higher revenues were strong performances in our Tommy Hilfiger and Calvin Klein businesses.

Our Tommy Hilfiger business delivered revenues approximately $827 million, 17% greater than last year. Driving this increase was a strong wholesale performance internationally, as well as strong retail comps of 15% in North America and 5% in Europe. Also contributing to the Tommy Hilfiger revenue increase was a benefit of approximately $25 million from a weaker U.S. dollar in the quarter versus the prior year.

Our Calvin Klein businesses had a strong quarter as well as revenue increases of 11%, fueled by wholesale growth, strong retail comps of 12% and royalty revenue growth of 8%.

Overall, Heritage business revenues were down 2%, within the Heritage business, our Dress Furnishings business posted a 4% revenue increase, while our retail revenues were flat to the prior year. Our Wholesale Sportswear business had a difficult quarter with revenue down 7%.

Operating income for the third quarter was $227 million, a 5% improvement or $12 million increase over the prior year. Driving the increase was our Tommy Hilfiger and Calvin Klein businesses which had earnings increase of 27% and 13%, respectively. And this was driven in large but by the revenue increases I previously discussed.

Also favorably impacting operating income in the Tommy Hilfiger business were operating expense synergies. Our Heritage business earnings for the quarter were down 33% versus the prior year and this is a result of the revenue decrease, as well as significantly lower gross margin rates in sportswear and retail. The current promotional environment has made it difficult to pass price increases on for our moderate brands.

Inventories for the third quarter were 21% greater than the prior year. Our inventory increase reflects higher product costs and a higher level of core product inventories, primarily in our Dress Furnishings business. All inventories are on plan and very clean, as we have been aggressive in dealing with our Heritage divisions.

Moving to our guidance for the year, our revenues are planned at $5.825 to $5.854 billion, an increase of about 26% over last year. Tommy Hilfiger revenues have planned at $2.99 to $3 billion and compares to $1.95 billion for the nine month period last year. Our Calvin Klein revenues have planned up between 13% and 14%, and Heritage revenues have planned to grow about 1% to 2%.

We’re planning our gross margins down about 120 to 130 basis points as a result of product cost increases. Our expenses have planned to be down 80 to 90 basis points, reflecting an expense reduction in SG&A leverage. Operating margins are planned at 11.4% to 11.5% of sales.

We have raised our earnings per share guidance to $5.23 to $5.25, a 23% increase over the prior year. This increase reflects the $0.08 actual beat over the high end of our quarter three guidance and an increase in quarter four of $0.03 to $0.05.

Our tax rate for the full year is estimated to be 29% to 29.5%. We’ve revised our tax guidance to reflect a higher level of international earnings, which attached at a lower rate than our U.S. earnings.

For the fourth quarter we’re planning revenues of $1.467 to $1.487 billion, an increase of 5% to 6% over the prior year. Driving this increase is our Tommy Hilfiger business which has planned in a 7% to 9% increase over the prior year, as well as our Calvin Klein business which is planned to increase 8% to 10%. Our Heritage brands are expected to be relatively flat in the fourth quarter as compared to the prior year.

Overall, we’re planning our gross margins down approximately 200 basis points in the fourth quarter as a result of product cost increases. Our expenses are planned to be down approximately 100 basis points, reflecting expense reductions and SG&A leverage. Operating margins have planned down at approximately 100 basis points in the fourth quarter.

We’re projecting fourth quarter earnings per share to be $1.03 to $1.05. That’s an increase of 11% to 13% over the prior year. And finally, even with the Tommy Hilfiger India acquisition we are projecting debt repayments of approximately $165 million during the remainder of 2011, which will bring our total repayments to Tommy Hilfiger acquisition to approximately $700 million.

And, with that, we’ll open it up to questions.

Question-and-Answer Session

Operator

(Operator Instructions) We will go first to Robert Drbul of Barclays Capital.

Robert Drbul – Barclays Capital

Hi. Good evening.

Manny Chirico

Hey, Bob.

Robert Drbul – Barclays Capital

A couple questions. First, on the European business, the pickup, do you think its all weather or could you just maybe shed a little bit more insight in terms of that acceleration that you’ve seen since the quarter end and into November?

Manny Chirico

Okay. Well, I think, clearly, weather played a role in the acceleration. I think it was pent-up demand for cold weather apparel and once it turned, the consumer turned it on. Bob, for me to try and give you insight into what’s going on in Europe with all the volatility that’s going on there is hard. I can just tell you what’s going on in our business and the trends we’ve seen and we’ve seen a real acceleration against the trends in the third quarter, which weren’t particularly bad but just weren’t as strong as we were trending. So, I think from that perspective, that’s the best I could do.

Clearly, Northern Europe continues to be stronger overall both in our Wholesale business and Southern Europe no surprise and since our business tends to be skewed more towards Central and Northern Europe, I think we -- it’s part of the reason we’re not hit as heavily in some of those markets.

Robert Drbul – Barclays Capital

Got it. And Manny, can you talk a little bit about sort of the MSRP increases versus AUR increases at our brand and sort of how that’s been trending for you? And how much of a hit is the Heritage pricing challenges that you had thus far and how much, is there much more risk in it or do you think you have it all contained…

Manny Chirico

I think we have it all and I think we’ve been pretty conservative on the fourth quarter projections, how it’s come together, so I think we’ve contemplated it all. I think it’s been a real, on the Heritage side, we just haven’t had the ability and you’ll -- and you could see that in the third quarter, our gross margins for the Heritage overall are down over 400 basis points and that’s the pressure it’s putting on with flat -- with relatively flat selling prices up 1% and core’s up 15%, that’s the kind of pressure we’re seeing. And obviously, it’s more severe in sportswear, since dress shirts is actually doing well. So that business is under pressure.

On the Calvin and Tommy’s side and on the dress shirts side, we’ve really seen -- little resistance to the price increases. As we’ve asked for the goods especially on fashion products, we’ve been able to have the customer pay up for it. We’ve put more into the product and I think we’re well-positioned from an inventory point of view.

And I think if weather gets -- if weather here in the Northeast cooperates a little better and gets cooler, we could even see some more acceleration there. As you would imagine, sweaters have been under pressure everywhere and it’s a big portion of what holidays all about. So, overall, I’m very happy with Calvin and Tommy and dress shirts. I believe the consumers reacted to our price increases.

Robert Drbul – Barclays Capital

Great. And then just one last question for Mike, the tax rate is, the update on the tax rate, is that the way to think about it going forward as well?

Mike Shaffer

Yeah. Bob, as we’re -- the way I would think about it is as our international earnings grow, the European businesses taxed at a lower tax rate. To as that business grows out paces we will see continual declines in our tax rate. There’s nothing in our rate for this year that I would consider something that wouldn’t repeat next year. So as we move forward and the European business continues to grow at a faster rate, I do think we can see some improvement in our tax rate.

Robert Drbul – Barclays Capital

Great. Thank you very much.

Operator

And we will go next to Adrianne Shapira of Goldman Sachs.

Adrianne Shapira – Goldman Sachs

Thank you. Manny, your comments about the holiday weekend very encouraging, the strength that you’re seeing, could you just maybe walk us through, today we got obviously a lot of sales, the level of promotion and perhaps pull forward you think that happened on the weekend? How much – how aggressive were the promotions out there to drive that kind of strength over the Thanksgiving weekend?

Manny Chirico

I think in areas it was very promotional and needed to drive and clearly on the main floor in department stores across the United States there was a promotional bent and those businesses between the couponing and the promotions clearly volume was done, but it was done at a price.

But on the collections floor, although we were promotional and we were there to do business on a comparative basis year-over-year, our AURs were up in the high single digits. So we were very happy to wear that.

How that transacted. That premium consumer, as you work your way up the supply – the distribution channels clearly, we use Macy’s as a benchmark, their collection business is very strong as demonstrated in our businesses and I think the more moderate consumer has been under more pressure.

I think there’s more inventory sitting there as well via private label or some other brands and that competitive pressure that’s being applied is putting pressure particularly on the main floor. And then lucky to get some categories, sweaters and outerwear with the weather being as warm, I think that has potential to get promotion as we go forward. We don’t have a major exposure there but on the outerwear side, but sweaters is big for everyone.

So we are being cautious about the last part of your question, Adrianne, which was the pull forward. It’s hard to determine, I don’t have a crystal ball, how much people have come out, all I can say is in our owned retail stores, the last three or four days and on the weekend going in, we didn’t see any pull-back on Saturday and Sunday, and it’s a weekday sales but we haven’t seen any real pull-back in the first three days of December.

So it’s hard to judge, usually you expect to see some kind of low in the two weeks – the first two weeks of December, we’ll see how that all plays up and then accelerate again. But right now what we’re planning for that low, but if it doesn’t happen, clearly, we’d have a real opportunity to outperform.

Adrianne Shapira – Goldman Sachs

That’s very helpful, Manny. And then just kind of continuing on that line of thought, the premium versus moderate, you started the year as we thought about inflation and how that impacts your margins at 150 to 200, it sounds like now at the year end we’re now only down to 120 to 130 basis points for the year. Just help us think through that’s clearly a function of, was Heritage pretty much just in line with your expectations and the improvement was Calvin and Tommy? How that improvement kind of progressed through the year?

And then, as we look out to next year as you’ve been helpful in sort of getting us early on thinking about the pressure, help us think about where the opportunity is on perhaps going back some of this margin?

Manny Chirico

Sure. I think, okay, on 2011, I think for us, I think what you asked -- against our plan, Heritage underperformed on our ability to raise prices and that’s cost us on the gross margin line. And then and we’re anticipating that to continue through the fourth quarter.

What the Calvin and Tommy clearly outperformed on that line and our dress shirt business has clearly outperformed on that line. And the mix of business with the strength of the Calvin, Tommy and our dress shirt business growing as they are, they’ve become a bigger portion of our business, so that’s why you’re seeing a skewing on the gross margin line.

So we’re outperforming on the top end and dress shirts and underperforming in Heritage. It’s a relatively small piece of our business on a percentage side, it’s a big business but small in total -- as a percentage, so that’s the story for 2011.

As we look to 2012, overall for the fiscal year, we’re looking at flat cost increases, but it’s really a sale of two parts of the year. We would expect the pressure on costs to continue into spring, so spring-over-spring we’re anticipating costs increases, let’s use a number 10% and when we turn to fall, we’re expecting that to reverse itself and be down 8% to 10%, overall of course to be down -- to be flattish right now. Could we do better than that depending on what happens to fall, that has to play itself out and there’s a lot of still variables out there. But we feel comfortable right now to say that on an annual basis costs will be flat.

The one benefit we do have is we’re getting in our bigger businesses higher selling prices today, so that should benefit next year. In Europe where we’ve had an approach to deal with the cost increases as raising retail prices in step, we raised prices in fall, we raised them slightly again in holiday and we plan to raise them in spring.

So we have an ability there to improve the gross margin rates as we go forward. So that’s a positive as I think we go forward. So we’re feeling pretty good about it. When you think about next year, we feel good about the year in total but I think it will be for everybody in the industry when you’re looking at earnings growth, it will be more second half weighted than first half weighted.

Adrianne Shapira – Goldman Sachs

Great. Helpful. And then last is just question for Mike on the inventory the up 21%. Anyway maybe you could parse out how much of that is driven by higher product costs versus how much on the Dress Furnishings, the investments that you’re making there? Can you give us a sense of how the comp is in terms of how clean the inventory is and how much is due to higher product costs? Thanks.

Mike Shaffer

Sure. We’ve been talking about cost increases of about 15%. So I would assume my inventories of cost are up about 14%, 15% and the dress shirt business, the basic business that we carry, we’ve increased those for the basic programs somewhere around 5% to 10%.

Adrianne Shapira – Goldman Sachs

Great. Best of luck.

Manny Chirico

Thank you.

Operator

We will go next to David Glick of Buckingham Research Group.

David Glick – Buckingham Research Group

Thank you. I just wanted to take that one step further, Manny, if I could, just in terms of how to think about next year. You guys have been executing extremely well in a really tough environment and you’re starting to get some relief at least on the cost line in the second half of next year.

So what you outlined for us? Do you think it’s still reasonable that given what you know today and some of the early signs and bookings in Europe maybe that could be better than you may have thought a few months ago? Is it still reasonable to think that the typical sort of mid teens plus earnings growth is possible given what you know today?

Manny Chirico

Yeah. I don’t think there’s anything going on in the business that would change. We’re not giving guidance today, but just as a conceptual framework for next year we’ve got a lot of work to do to get there. There’s nothing that we see today that should in any way change our thinking of our earnings growth for next year given the business, would be one exception that I -- just given the volatility in the market. I just have to say the chaos in the market and the macro-environment that goes on, absent something really chaotic happen, I don’t see any reason why we couldn’t continue to grow on the trajectory that we’ve talked about since the Tommy acquisition almost two years ago.

So I feel good about that and I think it’s, as I said to the last question, I think you just have to think about next year very similar to this year from a Tommy point of view. I think it will be back end waited from an earnings growth point of view just given some of those dynamics. I think we could manage some of that with our expenses and how we do others. And with the growth that we see in front of us but I think you have to consider that I think second half growth will be much stronger than first half growth.

David Glick – Buckingham Research Group

And under that scenario, just if I could shift to Mike, how much debt do you think you could pay down next year? And at what point is your balance sheet really in a position where you guys could think about making another accretive acquisition?

Manny Chirico

Again, David, from a debt perspective, we’ve talked about targeting $300 million per year in terms of paying down our debt. That’s been our perspective. And I don’t think anything has changed there and from a balance sheet point of view, I think we’ve talked about trying to get between 2 and 2.5 times leverage and I think we’ll given the -- if the fourth quarter plans out the way we expected we should be somewhere in that range by the end of fiscal year.

David Glick – Buckingham Research Group

Okay. Great. Thank you very much and good luck in the holiday quarter.

Manny Chirico

Thank you.

Operator

We will go next to Jeff Klinefelter of Piper Jaffray.

Jeff Klinefelter – Piper Jaffray

Yeah. Thank you, guys, and congratulations on a great performance. A few questions about your comps and historically where they’ve been tracking, I think you gave us the 5% comp out of Europe. What was Europe specifically in Q1 and Q2 of this year? I think you have been given us overall total international comp during those first couple of quarters?

Manny Chirico

Jeff, okay. I don’t have it in front of me, Jeff, but directionally it was double-digit comp store increase. And whatever the international comp was probably at 200 basis points to it, because Japan which is the other piece of it has been running relatively flat for the year, given all the -- with the exception of the first quarter which was the earthquake. So, Mike just handed me a piece of paper as we speak. So this is Europe, sorry Mike. So Europe was up in the first quarter mid teens, in the second quarter high teens and then obviously in the third quarter about 6%.

Jeff Klinefelter – Piper Jaffray

Okay. And then what is sort of incorporated into the fourth quarter? Did you mention that?

Manny Chirico

Yeah. I said -- I think I said specifically about a 4% comp store increase.

Jeff Klinefelter – Piper Jaffray

Okay. So you’re looking about a sequentially neutral kind of comp trend more or less in Europe in the fourth quarter?

Manny Chirico

That’s what the guidance is built on, the actual trend is 15% for the first five weeks.

Jeff Klinefelter – Piper Jaffray

Okay. Great. And then on your marketing, your global marketing clearly has been very effective this helping your campaign. Do you share any perspective on and what do you think are the most positively impacted categories within your offering, when you think about by gender and also by product category? I would imagine that a few of those have really appreciated as a result of the incremental spending and what would those be, are they similar globally to the -- internationally to the U.S.?

Manny Chirico

Let me, men’s, by far that the biggest growth we’ve seen is in men’s and women’s sportswear, internationally and domestically in our own stores. Internationally, as we’ve taken over the footwear business the last two or three years, we’ve seen very strong growth there. Look I think the campaign has helped everything, I think operationally the ability to bring that business in house has been what’s enhanced the growth there more than the marketing campaign. And I think to get the European footwear business is over €100 million, is a great performance but relative to how big the apparel business is, I think it’s just growing into it naturally should be $150 to $200 million business over time. So I think it was, I think those are the big categories that have grown.

In the United States, our Kids business continues to be very strong and I think it’s benefiting along with the gender category, to the men’s and women’s sportswear. So we’ve seen very strong growth across the board in Tommy, I can’t just -- I can’t put that all on the campaign, I think it’s also been great execution by our licensing partners and I think it’s been great execution by our operational team. But clearly the marketing has played a significant role.

Jeff Klinefelter – Piper Jaffray

Okay. Thank you. That’s helpful. One last point, next year we’re going to start lapping some of the cost increases, we’re going to lap some difficult Heritage margins. Assuming the global business, Tommy, Calvin Klein, et cetera continued to grow at these rates, it’s -- the potential for pretty meaningful margin expansion. Can you give us some perspective on what your investment philosophy would be in terms of continuing to step up marketing and any other investments you need to put in place? Is it realistic to think that could go up 100 plus basis points or will you invest into the cycle?

Manny Chirico

No. On the Heritage, let me take it in the pieces. On the Heritage side that is a business that we’ve historically has operated at margins that have been between 10%, 11% and this year on a consolidated basis we’ll be under 8%. So clearly we believe over a 24-month period we can – we will claw our way back to 10% to 11% operating margins, dress shirts, retail and wholesale sportswear and I think that’s an opportunity.

I think in order to do that it’s really not about making significant investments in those businesses. There’s nothing broke in those businesses. Those brands are national brands with strong consumer recognition and these are businesses that we run on a return on investment basis, on a cash flow basis. And we’re able to do that because they represent between 15% and 20% of the total portfolio. So I don’t believe significant investments required there to claw our way back to those operating margins and that strong cash flow.

I think on the Tommy and Calvin point of view we’ve clearly upper spend on those brands and anything that we choose to do will be discretionary in nature and will follow just strong performance in the business. So there’s no need for significant investments.

We are, I’ll just say, buying back some licenses, particularly on Tommy and some of those businesses will require some modest start-up costs, nothing dramatic. On an annual basis $0.04 to $0.05 a share, but just as we’re going through, we like to be transparent, so you understand it. As we look at some of these businesses and these growth opportunities that we think are significant, we are making some investments in those businesses, also as we go forward.

And as we get closer to giving guidance next year, we’ll lay that all out for you. But short answer that I’ve gone on for a bit is, nothing in the business will require dramatically different investment philosophy than what we’ve had for the last two fiscal years.

Jeff Klinefelter – Piper Jaffray

Great. Thank you very much.

Operator

We will go next to Robert Ohmes of Bank of America.

Robert Ohmes – Bank of America

Thanks. Hi, Manny. How are you?

Manny Chirico

I’m fine. How are you, Robby?

Robert Ohmes – Bank of America

I’m good. Thanks. Just two quick follow-up questions. One follow-up to Jeff’s question on Heritage. How are you guys thinking about planning that for next year? Is it to get that margin back up over time, do you think you have to shrink the business or what to bookings and backlogs and those discussions look like given what is going on in everybody’s moderate business apparently right now?

And then the second question is the, I was just curious on the European wholesale bookings? Can you give us a sense of how much of it is same door growth versus new door growth and how much of it is driven by product extensions and just maybe a little more color on the 13% spring, 15% pre-fall numbers that you gave us? Thanks.

Manny Chirico

Okay. Robby, let me start with, on the Heritage side, we’re getting out of some businesses that weren’t significant moneymakers particularly the Timberland business as you know. That’s about an $80 million business on an annualized basis. So that is – that will be gone by the end of the fourth quarter or the beginning of the first quarter. Besides that, I think we really would be thinking that the businesses when you put it all together will be relatively flat.

The -- we’re really taking aggressive actions in the fourth quarter to make sure we’re going to end clean and not have any inventory issues both in-house or at the our customers to really move through that inventory and get it down and marked down, priced appropriately and take what measures are necessary. And I think it’s really cleaning up, getting the supply and demand in balance.

But I think overall, where we usually would talk about 3% to -- 2% to 4% kind of topline growth in Heritage. I think next year take Timberland out of the equation on both sides. I think we would say we’ll be more flattish at best with dress shirts continuing to grow, Heritage Wholesales probably shrinking a little bit and our retail business is comping in the low single digits. So it gives you a sense there.

On the Tommy question in Europe, I think that maybe a better way to answer, I understand what you’re trying to get at, maybe the better way to answer is more on a country-by-country basis, where we are large. If you look at the spring, if you look at some of our big markets like Germany, Germany is growing about 10%.

That’s not significant door expansion but it is significant category expansion at some of our major customers where we are double exposing some of our product, where we’re able to get larger presentations because of our performance. So I wouldn’t necessarily call it pure comp as we’re getting more square footage, but it’s also not new door openings in Germany and that business in Germany is up, the bookings are up about high single-digit as we go forward.

A market like Spain, which is a tough market, even in that market the business will be up low single digits. The growth markets for us, which are the U.K., which is being planned up about 15% for spring. If you look at the Middle East, Russia, we’re planning that up over 20%. France is very strong. That business is up over 20%, as we would be adding doors and growing square footage in a country that has a potential over time to be at 80% of where Germany is.

Italy, which is a tough market, we’re still growing up market to spring in the high single digits. So when you put that all together that 13% growth is really coming from those markets and I think it will continue to be driven by the strength of the brand, new product categories that we’re adding both bringing back in some licensees and just some new product categories, intimate, underwear, body wear as we go forward. Footwear continuing accessory opportunity to grow and then those developing countries that we really believe will grow through Europe.

Robert Ohmes – Bank of America

That’s great. That’s really helpful. Thanks so much, Manny.

Manny Chirico

Thank you.

Operator

And we will go next to Evren Kopelman of Wells Fargo.

Maria Casper – Wells Fargo

Thank you. It’s [Maria Casper] in for Evren. A few quick questions. You guys noted that the U.S. wholesale business is above plan in November. Is that based on sale-through rates or actual wholesale revenues? And then also you expect Calvin Klein jeans to be up in the single digits in Q4 versus down two in Q3. How much visibility do you guys have into that and what drove the weakness in Q3?

Manny Chirico

Okay. I think, let me take the last part of it. I think, our licensee there Warnaco which does a great job both with underwear and jeans. I think they’ve thoroughly discussed the U.S. issue. A lot of it was time in sales in some of the special membership club business and there was timing there from that point of view. And I don’t think it’s a surprise to anybody U.S. in particular, denim is just the top category overall.

And a lot of the strength you see and I think, as you would expect, we’re seeing big increases in our men’s and women’s sportswear refined sportswear businesses. We’re seeing big increases in our tailored clothing businesses. So I think when you balance it together it all makes sense but the jeans business in the third quarter was impacted in the U.S. by timing of shipment and then just a soft market.

We’ve got – they’ve -- we’ve got very close relations to Warnaco. We understand their new product initiatives that they have going on. What they’re up against from last year’s fourth quarter and I think I’m comfortable saying that they’re comfortable with planning their overall jeans business at least up in the mid single-digit and I think they might have even been more aggressive on their quarterly call. So I’m pretty confident about how that business is being planned out.

Maria Casper – Wells Fargo

Okay. And then on the U.S. wholesale business running above planned and then, so is that actual sale-through or is that softer rates are actual wholesale revenues?

Manny Chirico

For the most part that sale- through, planned selling in and sale-through that particularly on the sportswear side. In dress shirts, which is really an EDI business, that’s a replenishment business and that business is running ahead both on our sales plan base and since you fill in product there as on an EDI basis, we’re also seeing increases on a wholesale basis as well.

Maria Casper – Wells Fargo

Okay. Thanks. That’s helpful.

Operator

And we will go next to Howard Tubin of RBC Capital Markets.

Howard Tubin – RBC Capital Markets

Thanks, guys. How are you thinking about inventory? What do you think it will come in at end of the year and how are you thinking about it for next year?

Manny Chirico

I think is, we’ve talked about the inventory and Mike laid it out pretty well. I think we’ve been really trying to manage the inventory, dealing with a lot of the sourcing dynamics around the world and concerned about the supply chain. And I think, as I said on the second quarter press release, we’ve moved up deliveries 30 days across the board and made the decision on the categories to carry more inventory on an average basis as we’ve gone forward, not necessarily buying more goods for the seasons, but bringing goods in earlier.

It’s helped us in a lot of ways in order to meet demand at retail that we had goods in, we could accelerate goods and then accelerate back shipments. So it’s been a positive for us as it’s going forward, but that wasn’t the driving force and that is about half of the increase that you’re seeing each quarter in the second quarter, the third quarter as we’ve gone forward. So I think that’s a piece of it.

For year end, I think we’re planning our inventory should be more in line with our sales increase. I think it will be up a couple of points higher than that because we’re going to continue to carry some more core dress shirt inventory as we go forward. But I think you’ll start to see it become more in line with our sales expectations as we go forward.

Howard Tubin – RBC Capital Markets

That’s great. Thanks.

Operator

And we will go next to Kate McShane of Citi.

Kate McShane – Citi

Hi. Thanks. Good afternoon. Manny, I think this is one of the first quarters where we haven’t seen that you are increasing your marketing dollars when giving guidance for the following quarter. And I just wanted to hear your take on, on why that may be the case and your view on overall marketing spend for the brand?

Manny Chirico

So, Kate, one key consistency I think, I don’t think we talked about it yet but I think in the press release it does talk about that we’ve increased the fourth quarter marketing spend $5 million and that we’re going to be year-over-year in the fourth quarter at least $5 million higher than we were last year. So that’s where we are and that’s up against the pretty substantial spend in Calvin and Tommy last year. So we feel good about that and we think it’s going to continue to drive the momentum in the business.

Kate McShane – Citi

Okay. Great. Sorry about that. I didn’t see that. Okay.

Manny Chirico

It’s okay.

Kate McShane – Citi

And then I know one of your customers sound like they’re going to go to EDLP and possibly in 2012 and I just wondered if the company had any view or visibility into what that might mean for your business?

Manny Chirico

Well, okay, I think is in general, I don’t think that situation has been totally clarified and clear. I think -- we’re talking about little shift -- we talked about J. C. Penney obviously. And I think is, we -- J. C. Penney is a key customer for us. J. C. Penney has always been a great partner for us. We believe we’re going to try to support J. C. Penney in every way possible with all of their initiatives and some of the discussions that they had.

But they’ve been very clear to us and we’ve talked to them pretty dramatically about what’s going on. They haven’t totally revealed their marketing plan. They haven’t totally laid out the strategy. We’ve got some indications about where they’re headed and we’re digesting that strategy, going to react to it and go forward with it. So we’re still in the early stages and I don’t think that’s been totally laid out yet, so soon as it is I think we’ll react to it and I think we’ll support them in every way possible.

Kate McShane – Citi

Okay. Great. Thank you. And my last question is just you had mentioned on buying back some of the Tommy Hilfiger licenses. I just wondered which ones they were and what is the longer term strategy with regards to buying back licenses?

Manny Chirico

I think pretty consistent with what we’ve said before. We bought back India in the third quarter. In the second quarter, at the end of the second quarter, we closed the transaction on China and brought that license back and instead both of those are now joint ventures where we own 45% and 50% of the Indian business and 45% of the China business.

We also bought, as I mentioned, we bought back footwear at last year. We continue to look at potential opportunities. Nothing has been finalized but there are geographic markets that might make sense to continue the kind of joint venture strategy. One would be a portion of the South America, particularly as we go forward.

The tailored area is something that we’re very focused on given our dress shirt neckwear expertise that over time is something that we may want to really look at. And so those are the type of areas we think we’ll -- philosophically, geographic areas as we take them back in if they are areas where we not have -- currently have operations in, we like this model of being involved on a joint venture basis where we can get local expertise to really get us through the day, understand, set up the business and then buy the business at some -- balance of the business at some future date. It could be four to six years out, but we think that’s a way to avoid a lot of significant start-up costs, but also participate in the roll up in the growth as we go forward.

Kate McShane – Citi

Okay. Great. Thank you.

Operator

And we will go next to David Weiner of Deutsche Bank.

David Weiner – Deutsche Bank

Great. Thanks. Good afternoon. So just two quick questions, I guess the first on the euro, obviously it’s been very volatile this last week. So I guess my question, two-part is, have you made any changes into your planning assumptions for your euro rate? And then also, if you could just remind us what the sensitivity is to earnings? So as the euro moved, what is it -- how does it impact earnings?

And then second question, just maybe a quick update on your planning and how you’re coming along in planning for your business in China, Tommy business in China? Thanks.

Mike Shaffer

I’ll do the euro. We planned the euro for the fourth quarter at $1.30 -- about a $1.35, where we are through this -- through today, there’s very limited risk on the euro as we look to the full year. And the way to think about the exposure, what we talked about was a full year, each move in the euro about 1 -- each penny was worth about $0.02 of EPS, $2 million or so of EBIT.

David Weiner – Deutsche Bank

Right. Okay.

Mike Shaffer

So we’re having based on where we are today midway through December, there’s just very limited risk on this year. As we look forward, as we plan next year, we’ll obviously have to re-gauge where we are and how we plan that. And just a remind that we do gauge – we do hedge our purchases on all our product, European purchases. We go 12 months out. So we do a rolling 12 months, so we have already hedged through next December at this point.

David Weiner – Deutsche Bank

Got you. Okay. Thanks.

Manny Chirico

On China, China we believe is a significant growth opportunity for Tommy. To put it in perspective, the business today is about $45, $50 million business in China. It is and if you compare that to Calvin, Calvin is well over $200 million today, so there’s real opportunity for Tommy. The brand is well-known. The brand has got strong demand at the consumer level.

We are basically operating a model where we operate a number of stores through the joint venture directly, but the vast majority of distributors, franchisees, key players that know those -- that know the geography, open stores, buy from us on a wholesale basis, set it up. It’s a great model for us.

We think it’s one that we can move quickly with and to grow and to remind everyone we’re not 100% owners there of the operations. But we collect obviously a full royalty on the sales from the China business and we’re looking for that to grow in the neighborhood of about 20% a year.

That could be conservative if the business really takes off, but right now that’s how we’re planning as we go forward. It’s a premium price positioning in China just like the rest of the world. It’s not a luxury priced position, which I think is positions us very well with the consumer there and has the opportunity to be a big business.

David Weiner – Deutsche Bank

Great. Thank you.

Operator

And we will go next to Joseph Parkhill of Morgan Stanley.

Joseph Parkhill – Morgan Stanley

Hi. I just wanted to ask a quick question about your guidance for gross margin decline of 200 basis points in 4Q, that’s an improvement from this quarter. I was wondering if you could just give us some insight as to what’s driving the sequential improvement and how to think about that in the first half of next year.

Mike Shaffer

It’s basically mix. It’s just a significantly -- it’s a higher quarter for a higher margin business and the licensing business, which is more of a consistent gross margin flow. So, overall, it’s just a mix drive benefit.

Manny Chirico

So, yeah, basically we’re planning at the same level business by business and as Mike said, licensing just becomes a bigger percentage of the business. Third quarter is our biggest shipping quarter by far.

Joseph Parkhill – Morgan Stanley

Got it. Thank you. And then just quickly I know you said November sales accelerated. Throughout the quarter though, did you see any volatility particularly in Europe around the different news items coming out and the market volatility?

Manny Chirico

Yeah.

Joseph Parkhill – Morgan Stanley

Yeah.

Manny Chirico

We saw volatility, started with the U.S. debt ceiling talks in August, it say got crazier towards the beginning of September and then it’s hard to measure how much was weather and how much was volatility in the world. But they had one of the warmest September, October periods in Europe in a long, long time and that clearly played a dramatic impact on the business.

Joseph Parkhill – Morgan Stanley

Okay. Thank you.

Operator

And this does conclude today’s Q&A session. I will turn the call back to our moderators for any additional or closing remarks.

Manny Chirico

Okay. Thank you, everyone. We’d like to wish everyone a happy and health holiday season, and the best in the New Year and have a great day and we’ll talk to you on our first quarter -- fourth quarter call in 2012. Have a great day. Bye.

Operator

And this does conclude today’s conference call. We thank you for your participation and have a wonderful day.

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