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Phillips Van Heusen Corp. (NYSE:PVH)

Q2 2007 Earnings Call

August 23, 2007, 11:00 AM ET

Executives

Emanuel Chirico - Chairman and CEO

Michael Shaffer - EVP of Finance and CFO

Allen E. Sirkin - President and COO

Analysts

Jeffrey Klinefelter - Piper Jaffray

Jennifer Black - Jennifer Black & Associates

Robert Drbul - Lehman Brothers

Jeffery B. Edelman - UBS Investment Research

Margaret Mager - Goldman Sachs

Robert Ohmes - Banc of America Securities

Brad Stephens - Morgan Keegan

Carla Casella - J.P. Morgan

David J. Glick - Buckingham Research Group

Omar Saad - Credit Suisse

Melissa Otto - WR Hambrecht

Dennis Rosenberg - DSR Consulting

Presentation

Operator

Good day everyone, and welcome to today's Phillips-Van Heusen Corporation's Second Quarter 2007 Earnings Release Conference Call. Today's call is being recorded. This webcast and conference call is being recorded on behalf of PVH and consists of copyrighted materials. It may not be recorded, reproduced, retransmitted, rebroadcast, downloaded, or otherwise used without PVH's express 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, which reflect PVH's view of future events and financial performance as of August 22nd 2007. Any such forward-looking statements are subject to risks and uncertainties indicated from time to time in the company's SEC filings. Therefore, the company's future results of operations could differ materially from historical results or current expectations as more fully discussed in our SEC filings. The company does not undertake any obligations to update publicly any forward-looking statements, including without limitation, any estimate regarding revenues and 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 reports 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 Emanuel Chirico. Please go ahead.

Emanuel Chirico - Chairman and Chief Executive Officer

Thank you very much. Good morning everyone. Joining me on the call this morning is Allen Sirkin, our President and Chief Operating Officer; Mike Shaffer, our Chief Financial Officer; and Pam Hootkin, our Treasurer and Director of Investor Relations.

We are quite pleased with the results that we posted for the second quarter. Each of our businesses continued to perform very strongly, all posted increases for the second quarter, and let me go through a review right now and I'll start with the Calvin Klein licensing business.

Overall, that business posted 20% increase in royalty revenues for the quarter and a corresponding 30% increase in operating earnings for the quarter. That business continues to be driven by our fragrance licensee Coty and continued strong momentum with CKIN2U, the new launch that went out beginning in March of this year. That performance continues to be very strong for us around the globe both in men's and women's.

Our euphoria fragrance continues to grow even up against very strong numbers for the prior year. That franchise continues to be a strong performer for us, and we are positioning ourselves as we... for the back-to-school season with the significant launch of Calvin Klein Man, which is a new fragrance and Master Brand that's going to be totally focused on the men's fragrance side. So a lot of excitement going on with Coty and fragrance, tremendous about with marketing spend going on in their business.

Overall, the fragrance business for us in the first half of the year was up over 30% from a revenue point of view, and we're expecting that business to continue to grow, not at that rate in the second half. But again a lot of momentum in that business, doing very good with our... although... our two other large categories jeans and underwear also have had a very strong first half of the year.

Those of you that follow Warnaco know they posted very strong numbers for the first half of the year, particularly internationally, particularly with the jeans business but the underwear business also posted well over 20% increases for the overall underwear business, a lot of excitement there.

We just had our recent launch Calvin Klein's Steel underwear, a major marketing campaign going on there. I believe that advertising is breakthrough. Djimon Hounsou is our spokesmodel. The printer is just hitting magazines as we speak. The outdoor campaign is also just hitting. You'll see it much more intensified as we go into the heart of back-to-school selling in September, so a lot of excitement going on, on the underwear side of the business.

On the jeans side of the business, it's really being driven internationally, particularly in Asia although Europe is also very strong. Our U.S. business in jeans is healthy and I think as Warnaco spoke to the market and talked about their sales increases, they had overall between the two categories jeans and underwear, they posted over 20% sales increase.

They're planning... as you know there is a number of timing issues going on there. They're planning the second half of about 8% very healthy business, very relatively mature businesses but continue to grow in the United States and internationally as where the other growth is coming there.

Some of the our licensees, it's a very similar story. As you go licensee to licensee, our women's dresses and suits, G-III our licensee there continues to perform very strongly for us. That business has been good. Orders and bookings are good.

Our men's suits business with Peerabis [ph] continues to be very strong as well, and what's really happening.... as well Calvin Klein, a true international brand, has got a significant amount of growth going on internationally. A lot of the emerging markets, we are seeing tremendous growth within relatively small businesses that we think more so for 2008 and beyond will be tremendous growth vehicles for us. China, India, Russia, the Middle East, those areas of the world, our business is just on fire there, and we are having very strong performance.

From a marketing point of view, I talked about this field campaign and what's going on with the new launch in that underwear category, but there is a significant amount of marketing and intensification at Calvin Klein. We spent over $250 million marketing that brand.

We've got a major event going on in September with Macy's... that is going to be launching Calvin Klein Week in the third week of September. It's a 10-day event. It will be a national event with Macy's and it's going to get some tremendous media coverage. And it's going to have great coverage at the Herald Square Store. The whole store will be... it will look like a Calvin Klein store and the Union Square Store on the West Coast. So we're very exited about what's going on there with our great partner Macy's.

Moving on to our legacy business, our combined retail and wholesale businesses overall posted 20% sales increase and a 25% increase in operating income for that business. I'll start with retail.

Our retail businesses posted a 5% comp store increase. We also experienced very strong selling... sell-throughs and higher margins at retail. That business is ahead of plan. We planned the business at about plus 3% and we ran as I said plus 5. Margins are ahead about 50 basis points in that business as well. So we're really feeling good about how that business is performing especially when you consider what's going on in general retail environment. We have over 700 stores all over the United States and as although we see pockets of strength and weakness overall, the business is very strong.

The first three weeks of August, our business has continued about at that same rate. We are running about plus 5% to plus 6%. So we feel good about the business. Inventories are in great shape at retail and if the consumer hangs in there, we feel good about the upside that we might experience in that business in the second half of the year.

Our wholesale business dress shirts, it's just been very strong quarter for dress shirts. Our management team has continued to operate that business very solidly. Our average unit retails for dress shirts are well ahead of where they were this time last year. That's enabled us to post higher overall margins for that business and an overall increased profitability for that business.

At neckwear, our Superba acquisition is exceeding our expectations. The integration is complete. The business is running ahead of plan, and we believe there will be earnings upside to our initial estimates. Initially, we thought the business would earn this year $0.03 to $0.05... be accretive $0.03 or $0.05 this year. It looks like it's going to be at least somewhere in the neighborhood of $0.07 to $0.08 accretive this year, most of that upside coming in the second half of the year.

On the sportswear side of the business, our Calvin Klein men's sportswear continues to perform. We are running well ahead of last year and plan for the year. At department stores, Calvin Klein continues to be one of the best performing men's collections sportswear businesses on the floor.

We are in excellent position from an inventory point of view and we are well positioned as we go into the back-to-school selling season on the floor... and from a marketing position and on the floor and from a presentation position on the floor with that brand. So we feel good about how we're going into the second half with Calvin Klein, substantial amount of momentum in that business.

On the modern... on our more moderate men's sportswear businesses, IZOD, Van Heusen and ARROW, all of the businesses were on plan for the quarter. Inventories are in excellent position as we come out of July and get set up through back-to-school selling season. We think we are in as good a position as with the things that we can control as we set ourselves up for the second half of the year. The department store channel has been under pressures from a sales point of view in the last couple of months. So we are going to... that's where we play in that environment with these brands particularly Kohl's, Penney's, Macy's Belk's. So we believe as those businesses go, we are in very good position to capitalize on whatever happens in that cannel distribution and to move well.

The IZOD women's sportswear launch for us just began. We started shipping goods at the very end of the second quarter. We've intensified those shipments as we have gone into August. We feel really good about how that business is setting up for us. We believe we will be in a strong position for the back-to-school period. Inventories are in good position, taking on a new business and starting it up. We don't see any logistical glitches. So now it's going to be all about sell-throughs and how we perform. The brand has got a lot of momentum. There is going to be a significant amount of marketing going on. So feel we are in a very good position with that launch, and we will report to you in more details with our third quarter press release on how we are doing there.

From a marketing point of view as I think anyone who knows us knows over the last couple of years, we have continued to invest heavily in marketing of our brands, making those investments and that momentum just continues. Particularly as we go into the second half of this year, last year at this time, we were just beginning a significant ramp-up, really geared more for the fourth quarter last year, and a heavy up in the fourth quarter this year. We are really intensifying that marketing campaign through the entire six month period. All three of our heritage brands, Van Heusen, IZOD and ARROW are launching major campaigns. All three brands will launch multidimensional media marketing campaigns beginning really in September with intensification. That will include print, television, cinemas, outdoor and the Internet. So we really feel like we're making investments in our brand in order to capitalize on the business opportunities.

For IZOD and Van Heusen, the lifestyle advertising campaigns that we've been doing and have been very successful for us will just be continued and refocused. We're sharpening our focus with our consumer.

For our ARROW brand, first for us, it will be the first time since we've owned it and probably for the first time in 15 years that ARROW will be back on television and marketing campaign for the second half of the year. It will begin in September. We are tying our campaign together with Ellis Island. We're very... working very closely with them on Save Ellis Island/We are Ellis Island. We think it's a great connection for the brands with a great American monument tied to a great American brand. We are very excited about it. There is a new Internet site launched about it a week ago. It's getting a lot of... it's tremendous amount of traffic on it. But the real campaign really takes off in September, and I'd just ask you to look for it. We think we are very proud of it and very excited about it, and we think it's going to really intensify a brand like ARROW that is so very well known by the consumer just intensifying the focus from a marketing point of view, we think will pay dividends for us at retail from the transaction... sales transaction point of view for the back-to-school period and more important holiday selling season.

With that, I am going to turn it over to Mike Shaffer to quantify some of those results

Michael Shaffer - Executive Vice President of Finance and Chief Financial Officer

Thanks Manny. As Manny said, we're very pleased with our second quarter results. Our total revenues grew 20% in the second quarter to $552 million. Fuelling this increase was strong performance from our Calvin Klein licensing business, which added 27% increase in revenues. Our Calvin Klein fragrances as well as jeans and underwear businesses were particularly strong.

Revenues from our combined wholesale and retail businesses were 20% ahead of the prior year driven by the newly-acquired neckwear division. Strong retail comps adjusted for the calendar shift were 5% as well as revenue increases we experienced in our sportswear and dress shirt divisions.

Our EBIT margin grew 130 points in the second quarter to 12.3%. Our EBIT margin improvement was driven by a 70 basis point improvement in gross margin as a result of the strong growth in Calvin Klein licensing revenues, which carries a 100% gross margin as well as strong product sell-throughs in the combined wholesale and retail businesses.

Also contributing to our overall EBIT... improved EBIT margin was additional expense leverage as a result of the revenue increases experienced across all of our businesses. Earnings per share for the quarter increased 28% to $0.68 per share. That was $0.06 ahead of the consensus estimate and $0.07 ahead of our pervious guidance.

From a balance sheet perspective, cash flow continued to be strong. We ended the quarter with $366 million in cash, approximately flat for the prior year, and that's after closing for the acquisition of Superba in January 2007.

Our inventories at the end of the second quarter are very clean on plan and in line with projected third quarter revenue increases. As we look forward, we are projecting our third quarter earnings at $1.02 to $1.03 per share, which represents a 15% to 16% improvement over the prior year with corresponding revenues of approximately $705 million or an increase of 24% over the prior year.

Our fourth quarter earnings are projected to be $0.53 to $0.54 or an increase of 13% to 15% over the prior year with revenues expected to grow 7%. For the year, given our strong second quarter results, we are raising our 2007 earnings per share estimate to a range of $3.15 to $3.17. This represents an increase of 20% to 21% over the prior year with corresponding revenues of $2.4 billion or a 17% increase over last year.

As a reminder and as detailed in our press release, our guidance for the balance of the year reflects the 53rd week in 2006 and the results in calendar shift in 2007. While the full year impact of the shift is minimal, the quarterly impact is material.

On the final point on our guidance, if the current trends of our business were to continue, we believe we would exceed our estimates for the second half of the year. And with that, we'll open it up to questions.

Question And Answer

Operator

Thank you. [Operator Instructions]. We'll take our first question from Jeff Klinefelter with Piper Jaffray.

Jeffrey Klinefelter - Piper Jaffray

Hi guys. Congratulations first of all to everyone on the team. Great first half of the year and great second quarter.

Emanuel Chirico - Chairman and Chief Executive Officer

Thanks Jeff.

Jeffrey Klinefelter - Piper Jaffray

A few questions for you. First of all, Manny your comment on the dress shirt business about AURs being up significantly versus the last year, could you comment more specifically on that? What's driving that trend and is that something that will continue through the balance of the year and maybe a longer-term? How do you see the dress shirt business developing?

Emanuel Chirico - Chairman and Chief Executive Officer

Yes, on the AUR hiring [indiscernible] well pretty good, because a couple of factors going on. We're clearly managing the inventories very tightly, significantly less closeouts going on, significantly less clearance merchandise. And in addition just to remind you this time last year and throughout the first half of last year, we dealt with the Macy's Federated acquisition in transition. There was a lot of promotions going out as the merchandise was re-positioned on the floor and there was a lot of clearance going on and promotion going on during that time. So the dress shirt business overall is just much healthier from our out the door retail selling point of view and we've really benefited from that.

As we look going forward, we manage the dress shirt business exclusively... this excludes where we take our new businesses and new licenses. We plan our business to be low single-digit growth for us and given our strong source and capabilities as we are able to... as sales exceed that we're usually able to get back into the market pretty quickly in order to position ourselves with inventory to fill the pipeline, to take advantage of upside. So we are planning that business to continue to grow in the low single-digits. It's done better than that during the first half of the year. So we feel good about where that business is now, particularly from an inventory positioning point of view our sales and the market in general and I think... we feel this in similar way and if that's related with the neckwear category. That business has been very healthy for us and AURs are also up there and we feel that the business is the way we are working with this Superba management team. Some of the disciplines we brought in... we're really... we've cleaned up some of the sell-through of clearance issues that plagued at industry and that business is much clearer and we have cleared and we are getting the margin benefits and we will continue to get in particularly in the second half of the year.

Jeffrey Klinefelter - Piper Jaffray

Okay. Just a couple of other questions. Thank you for that, very helpful and in terms of the European or International business obviously Calvin Klein is trending very well across Europe and Asia through your licensee with Warnaco, your license with Warnaco. I think you have said you launched the men's IZOD in Europe. Was it this spring? Just if we get an update on that, how it's tracking and then also any other thoughts on other international expansion opportunities across your portfolio.

Emanuel Chirico - Chairman and Chief Executive Officer

Yes, you know Jeff we really focus on all our brands internationally. We choose to run that business on a licensing model. We think that's a model that serves us best and you touched on the IZOD business. That business is launching in the early stages, so I can't really report to you a lots but specifically what's going on there except that they have been well received and we feel very good about it. The IZOD brand as well known as it is in the United States and let's say in North and South America it really doesn't have the same brand positioning across Europe and Asia. So we are really launching in France and really that we're using IZOD laboratory to test in fewer it is. We are very happy with the execution and how things are going there from that point of view.

On the balance our ARROW business is very mature in Europe and Asia and by that I mean well established in Europe and Asia. That it's a great licensing business for us. The brand positioning outside the United States is substantially higher than it is in the United States. It's an aspirational brand in Europe and Asia as opposed to being a moderate velocity brand in the United States that we like that positioning for the brand particularly for the businesses we operate in the United States. That business is doing very well. We have some excellent partners and we are hoping to be able to talk you in the second half of the year about some opportunities about expanding the ARROW brand particularly along... throughout the continental Europe through licensing arrangements with some of our key partners. So that business is doing well in international for us particularly with Calvin Klein business. The Calvin Klein brand is a truly international brand. Its strength overseas is phenomenal and the growth we've been experiencing in the last three years have been very balanced between the North America and the rest of the world. But I think as we look out and see the growth we would expect the growth to be more robust outside the United States as we look to 2008 through 2010 particularly driven by the number of these... of the emerging markets that I spoke to at the beginning of the conference call. So we feel really good about the Calvin Klein brand and results speak for themselves.

Jeffrey Klinefelter - Piper Jaffray

Okay. And just to clarify some on ARROW. If you think your licensing revenue, you're currently generating on a run rate basis. Can you give us a sense for kind of the size of that either on wholesale or retail equivalent, how big that ARROW business is outside the U.S. today?

Emanuel Chirico - Chairman and Chief Executive Officer

Yes. While the overall ARROW business is about round numbers, about $900 million at retail, about a third of that volume.... about 35% of volumes done outside the United States and that business as we think has got particularly next year and beyond, has got some growth that really can come from it.

Jeffrey Klinefelter - Piper Jaffray

Great. Last question any update on the startup cost for Timberland and Calvin Klein specialty.

Emanuel Chirico - Chairman and Chief Executive Officer

I think the press release stands on its own. We've talked about, there is about $7.5 million of startup cost for the balance of the year. That's really just investing where we are. The Timberland brand I guess, the update really is, the reception at retail and even with the really poor performance that's going on at Timberland apparel, I am not speaking about Timberland brand because I am not close enough to it but. Timberland apparel, what's going on there, has really performed poorly at retail for the last number of years and that's continued. But the receptivity that we've had at retail with our customer base, one for the brand and two, I think the belief of our expertise to deliver logistically on the brand to get the right product into the stores to be able to really deliver what we do with our other brands. There seems to be a lot of enthusiasm and beliefs that in the brand. So, we're feeling good about how we're positioned and we start up with Timberland in the third quarter of next year.

Jeffrey Klinefelter - Piper Jaffray

Great. Thank you, Manny.

Operator

Thank you. Our next question comes from Jennifer Black with Jennifer Black & Associates.

Jennifer Black - Jennifer Black & Associates

Let me add my congratulations. You said that comps were up 5% and I wondered how you see traffic now and do you have an outlook for holiday in your retail? Many of your retailers have complained of slow traffic and I just wondered how you guys felt about things?

Emanuel Chirico - Chairman and Chief Executive Officer

Well, look. It's... truck and traffic comps. We are running... how could you complain? We are running. In last quarter we ran at 5% comp rate first three weeks of the year, we're running at 5% to 6%. It's not as robust... it's clearly not as robust in the outlet malls as it was last year. But we're still putting on significant sales increases. So, we feel really good about our performance. I believe we are getting more market share because I don't believe traffic is up 5% if anything, if you talk and this is the real true mother-in-law survey. I don't have a quantitative data to share with you. But I believe traffic is down since it's on an overall basis and we are really doing it by taking market share away from the competition and keeping off, from a profitability point of view keeping our inventories clean.

Our projections I think tie into the year end we are planning the business on doubt [ph] for the second half at 3%. We think that's a very prudent given the environment, given what I hear going on out there but right now we are running ahead of that. So that makes us feel good about it. But, I usually say when I speak to people we get to September the world changes again, the outlet environment is driven off of vacations particularly the summer season. It's really vacation-driven business. When we get to September it's a true back-to-school selling season. It's like starting over again and then when we get to November it's all about Christmas and starts again. So we really need to... I think we can draw some conclusions about the trends of business but I don't think we should get overconfident about it.

But overall from our perspective we feel good about retail and how it's performing but clearly the consumer environment what's going... it can't be blind to what's going on out there, gas price, real-estate market I think psychologically is the pounding going on with the consumer because if you look at unemployment statistics and wages that seems very healthy and the consumers should be very healthy and it really comes down to psychologically how they are going to feel about back-to-school and the holiday season. So, we are cautiously optimistic.

Jennifer Black - Jennifer Black & Associates

Okay. Thank you very much and congrats again.

Emanuel Chirico - Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Bob Drbul with Lehman Brothers.

Robert Drbul - Lehman Brothers

Hi, good morning.

Emanuel Chirico - Chairman and Chief Executive Officer

Hey Bob.

Robert Drbul - Lehman Brothers

Manny, on the Superba performance, can you elaborate a little bit more in terms of where the upside came from and the expectations? It's a much stronger performance than your original anticipation. And I guess how should we think about it for 2008 as well?

Emanuel Chirico - Chairman and Chief Executive Officer

Well Bob I think we've been clear. We said after the first full year of this year as we look in 2008 we felt that the business would contribute somewhere in the range of $0.11to $0.12 of earnings accretion. We thought in the first year we talked about $0.03 to $0.05 basically based on, we thought there was going to be... there will be integration cost, there'll be transition issues, getting the business in and operating at the same level and we're just doing better, I mean as simple as that. I think the $0.11 to $0.12 is the right target for next year at this point but instead of $0.03 to $0.05 the integration has cost us less than we anticipated. We're over performing. We were able to accelerate bringing in some of the brands, our own brands this year as opposed to waiting until next year particularly with Calvin Klein, IZOD and our Eagle brand. So those businesses came in be it at certainly not as full margins but they were still contributing ahead of that.

So the $0.03 to $0.05 is now $0.07 to $0.08 and it's really coming out of less integration cost and better initial gross margins than we anticipated. We thought there will be more transition issues as we adjusted some of the sourcing dynamics and moved the business somewhat. So it's coming... its just coming sooner and better similar to a lot of the other acquisitions that we have done as we've gone forward. So that's really where the improvement in financial performance has come from.

Robert Drbul - Lehman Brothers

Okay. And then on acquisitions Manny, are you seeing anything that is interesting to you these days in terms of the use of that cash that's sitting on your balance sheet?

Emanuel Chirico - Chairman and Chief Executive Officer

It's always interesting things Bob.

Robert Drbul - Lehman Brothers

All right.

Emanuel Chirico - Chairman and Chief Executive Officer

But there is... I got asked the question, I guess in Fiji [ph] as I have seen any change in valuation given what's going on in credit, it's too early to really have any reactions to that yet. I think over time that will be a positive for us. I think private equity money and the easy credit it was a nice thing for everybody but it really was a boom for private equity. So I think strategic buyers are in a better position to do acquisitions. We are clearly looking to do acquisitions. I think we have been... I think we couldn't be more upfront about it, and we continue to look for acquisitions that fit into our business strategy, great brands that we can either license key components or operate directly those components that we feel we have expertise. And so we will continue to look and I would be disappointed over the next 12 months, we didn't do something.

Robert Drbul - Lehman Brothers

Got it. And a question for Mike. When you look at the expectations for gross margin for the remainder of the year incorporated in your guidance, can you just talk a little bit about the assumptions you are making on markdown support for the department store channel and how you are planning that versus last year given their performance that we are seeing from many of the larger department stores?

Michael Shaffer - Executive Vice President of Finance and Chief Financial Officer

We have deals, we have agreements in place. And we expect to honor those agreements and there is really not a change from the prior year.

Robert Drbul - Lehman Brothers

Okay. Thank you very much.

Operator

Thank you. Our next question comes from Jeff Edelman with UBS.

Jeffery B. Edelman - UBS Investment Research

Thank you. Good morning and great quarter. Two questions, one, Manny as you look across all of your businesses and while we have heard a lot of concern about the consumer, you raised some reservation, are you seeing any noticeable shift in momentum in any parts of your business?

Emanuel Chirico - Chairman and Chief Executive Officer

Yes, when compared to last year, given... if you look at retail, you see I mean you guys see comp sales over the last three months and is not what it was this time... same period of time... this time last year. So when you are dealing in an environment where clearly the consumer has pulled back to some degree, you are going to be impacted by that. So if... I think Macy's strategy makes all the sense in the world that they are going through some transition issues and if they are going to post 1% comps we are dealing in that environment we need to get more market share but it's not being intensified.

In the mid channel Penney's and Kohl's seems to be performing at a much higher level. Our business reflects that in that channel. Those channels of distribution and our brands are performing very well. So one think I can't say is we look at the business, the business, each of our customers' businesses very closely. We know what they are doing on a store level and a department level and how we compare to that. Almost with, I can't think of a month where we haven't outperformed the store or the department given... with our brands in that start of our base that may be a little bit of an overstatement but on balance on trend is that we've been outperforming what that's going on at retail.

Try to give you insights into the consumer, when I look at our own stores I talk about it, I do think traffic is down but we are still posting plus 5% comps. That's up against last year, I think for the year we were plus 8%. So it's not as robust but comping against the very strong comp number last year but I think there is... it would be disingenuous to say that there isn't something going on with consumer. I think they are trying... this is my personal opinion. I think it gets a little strong to figure it all out and a lot of noise out there the market up, the volatility in stock market I think plays on people psychologically. I think the whole mortgage situation I think show that some impact. I think our Calvin Klein business is the business with probably the most insulated from that one because it's 50% of that is international and two because the brand is just the strong and it seems at the top end of that consumer hasn't lost much of its momentum. So it goes back to our business strategy, I think operating multiple brands and multiple channels of distribution at multiple price point is a strategy that we think makes a lot of sense.

Jeffery B. Edelman - UBS Investment Research

Great. Thanks and just one short one. Calvin Klein women's sportswear; you did not make a comment on that. Is the environment such that the women's business is just difficult to get a good read as to have successful they are now?

Emanuel Chirico - Chairman and Chief Executive Officer

Well I guess the Calvin Klein women's business continues to have, lack of a better word, fits and starts, good months, bad months, the transitioning. I think Calvin's working very hard on it. It's a... the better sportswear category for the women's is probably one of the toughest categories that are out there and I think they are feeling some of that pain with the business. But they continue to open doors and they continue to position product and the reception of retail is very strong as sell-throughs haven't been what they would like. And I think they... that's the one license category that we're really not satisfied with the results that we've seen overall and it doesn't match up with what we've seen everywhere else. So I think Kellwood very much aware of that and on top of it we think they've done a really good job of positioning and making investments to what's been necessary and we need to see that business as it goes to the next 12 months that would perform. So that's an overview of it.

Jeffery B. Edelman - UBS Investment Research

Great, thank you.

Operator

Thank you. Our next question comes from Margaret Mager with Goldman Sachs.

Margaret Mager - Goldman Sachs

Hi Manny, it's Margaret. How are you?

Emanuel Chirico - Chairman and Chief Executive Officer

Hi Margaret, how are you?

Margaret Mager - Goldman Sachs

Good, good. So I wanted to ask you as far as the department store business, Van Heusen, IZOD, ARROW, you said you're meeting plan. Can you talk about how manage your business against the trends they are in? And the fact that as you said they are softening. So how do you ensure that you don't end up with an end of season markdown liability that, that's a big nut, if you could talk about that? And then on your Calvin Klein business, are you still pursuing the large Calvin Klein stores that idea, and full price stores? And in your licensing area, as far as the underwear growth that you highlighted growing 20% first half, 8%, second half. I don't think the underwear market is growing quite that fast. So, can you explain how that business and your other Calvin Klein businesses are outpacing their markets like what... why are they gaining market share? Is it distribution growth or is it building out product offerings? And how do you control your distribution to make sure your licensees aren't just now flooding the market for short-term gains? Thanks.

Emanuel Chirico - Chairman and Chief Executive Officer

Okay. We'll try and take those in pieces. First the... Margaret, how we control... in sportswear area, how we control those businesses. So make sure you are not surprised by a flood of inventory at the end of the season. We invest... we really do invest heavily in people, in systems. We have more sales analysts than we do salesmen. We monitor the business on a weekly basis. We move retail prices as if more aggressively I think than anyone in the market if we see a glut of inventory, we get it in, and we get it out. I think that's something that we have always done. We dealt with a difficult environment in the first quarter. It cost us a few million dollars, couple of million dollars we put it in, and we got the inventory out. That's how we deal with that. There is no guarantees how your product is going to perform, how it's going to sell through and if it's the right fashion. The one guarantee I can give you is that when we see it, we react quickly. We think the first markdown is the cheapest markdown and we move goods in and we try to keep bestsellers in and running. We do... we're good at from a logistic point of view, from a sourcing point of view to get back into goods and keep it flowing and keep the velocity going, and we move quickly on retail. We don't sit back and hope that the retail sales are going to improve.

If inventory... we had outdates for each of our key product categories and if we're not hitting those dates, we accelerate the markdown cadence. And hopefully the way it works is you might have to move on some goods but other goods may not have the future markdowns as quickly as you thought and that's how you manage your business. Last, up until this year, one of the big benefits of sportswearers had is that they've consistently beaten their markdown plans and they've been able to deliver better margins and profitability to bottom line. First half of the year, given the difficult retail environment, we were $2 million short from our gross margin planned for markdowns and we've dealt with that and got through... and got through from where we felt we would be in the first quarter. So that's how we do it. We stay on top of it. It's a discipline that's been in place long before I ran the company and it's something that I think we do well.

On the Calvin Klein distribution issue... well, first the Calvin Klein specialty stores there... I've described them. We are opening five stores this year. This is in the United States. Outside the United States between our licensing partners around the world, we operate almost 400 stores Europe, Asia, South America Calvin Klein jeans, underwear; Calvin Klein sportswear store and a handful of collection stores, probably about five around the world. They've been a significant piece of our growth engine and a big piece of the growth that we've talked about that we've experienced with Calvin Klein is... is the opening of their own retail stores especially internationally.

In the United States, we've been talking about now for the last nine months that we felt Calvin Klein deserved a regular retail strategy. We felt it's a strategy that could be... that had the potential to be a significant profit contributor but we were opening stores initially because we felt that they were great marketing vehicles for the brand. It replaced the showcase, the white label product, and we've really been the growth engine for Calvin Klein since we acquired it. And it's a way to potentially long-term have somewhere around 80 to 120 stores throughout the United States, in the best malls and freestanding locations in America, and to open stores that average somewhere between 8,000 to 10,000 square feet. We'll open five of those stores in the fourth quarter of this year. We'll open five stores next year, and we will see how they perform and make a determination whether we are going to invest and roll that strategy out or are we going to have 10 flagship stores that will break even and be great marketing vehicles for the brand? And that's what we need to really experiment with and understand. So we believe it's really important for the brand to do that, understand it, and from our... from a driver's top line growth and profitability, there clearly could be but that's the test that's going on and we'll know better in the next 12 months.

On the distribution issue, all of our contracts especially the ones... anything that we've ventured into in particular but all of our contracts have very stringent guidelines about distribution with Calvin Klein and we monitor that very closely. That doesn't mean to say that you wouldn't see some product in the secondary channel distribution. These are big wholesale businesses and we sit next to Ralph Loren and... we sit next to Polo. We sit next to Tommy in the United States and Nautica, sit at Marshall's clearing goods as appropriate but we are very close to the distribution.

From a percentage point of view and a dollar point of view, the distribution has not increased at all in the secondary channel. In fact, when you go back three or four years, one of the lawsuits that Calvin had with Linda Wachner and the former Warnaco management, really all centered on the over distribution of Calvin Klein product. From that point part of our... when we bought the company, part of our negotiation was to put hard caps into those businesses, so there is a limitation about how much product can go into that channel of distribution. So we are very judicious how we monitor that. And if you look on the propensity of product that's out there, clearly the secondary channel on a percentage basis hasn't grown at all. In fact we've tried to keep it well under control and the total dollar basis hasn't grown at all. So we're very much on top of that. So the growth has clearly come from the primary channel distribution and from us opening our own stores in the United States.

The last point is why is Calvin Klein doing better than the competition in the market? And not to be flipping but it is Calvin Klein. Calvin Klein... and the reason we acquired the brand was, we felt it was one of the world's great fashion brand that was significantly underdeveloped at retail. And I think we've basically doubled the size of the business almost since we've owned it. So clearly, it clearly shows and we think there's a substantial growth above that.

With underwear in particular, clearly the U.S. underwear market is not growing but the Calvin Klein presence at retail is growing. They've done it with brand extensions initially with 365 in the United States and around the world due to a slightly younger consumer. It was a situation where they were able to secure more shelf space at retail. We are doing it, I believe, with higher priced goods from hello [ph] point of view with Calvin Klein Steel. Again, it just launched but we're getting more position at retail in the United States and around the world.

And Warnaco's numbers speak for themselves and Warnaco's numbers have also done it with the opening of retail stores internationally, Calvin Klein underwear and now that they have controlled jeans and sportswear in Europe growing those franchises through opening stores. So that's the way we have attacked the market. Clearly, the international component just to say one more time is going to be a significant driver for us as we go forward. And it is going to be a significant driver particularly in those emerging markets, China, Russia and India where we think there is a growing middle class that clearly the Calvin Klein product is desired.

Margaret Mager - Goldman Sachs

Well, thanks for the insights into your strategies. I appreciate it. A quick one on fragrances. I can tell you're really excited about what's happening. Just wondering of your royalty income stream, how much of it is represented by fragrances?

Emanuel Chirico - Chairman and Chief Executive Officer

Well, I guess...

Michael Shaffer - Executive Vice President of Finance and Chief Financial Officer

Round numbers Margaret, they are the royalties of foundry [ph] but I guess just to put into perspective, the Calvin Klein business last year was about $4.5 billion in retail sales and fragrance was about $1 billion in sales. That business has grown, so this year I think it's about $1.2 billion in global retail sales and I would imagine that we will be over $5 billion in global retail sales with Calvin Klein. All that said, it's approximately 25% of the royalty revenues.

Margaret Mager - Goldman Sachs

Okay. Well, congrats on another big quarter and that homerun acquisition on Calvin Klein.

Emanuel Chirico - Chairman and Chief Executive Officer

Thank you.

Margaret Mager - Goldman Sachs

All right. Take care Manny.

Emanuel Chirico - Chairman and Chief Executive Officer

You too.

Operator

Thank you. Our next question comes from Robby Ohmes with Banc of America Securities.

Robert Ohmes - Banc of America Securities

Hello, thanks. Just a quick follow-up on Superba. Can you give us clarity on the seasonality? I think you guys are... I think Manny has said that you think Superba is $0.07 to $0.08 now for the year but could you remind us, did Superba make money in the second quarter? And then just sort of how that $0.07 to $0.08 flows through the year, is it even more than $0.07 to $0.08 in the back half? Thanks.

Emanuel Chirico - Chairman and Chief Executive Officer

Yes. Robert, when we look at the business the second quarter, if you just look how it falls from a calendar point of view it's seasonally the weakest quarter for neckwear business. Most of the shipments for Father's Day are out and as you go in June and July are very slow months for neckwear overall. So for us, the neckwear business is a loss quarter in the second quarter, breakeven if you go to a small loss. First quarter was better than we had expected, so we really see the growth... the business breaks, like most wholesale businesses with Toly [ph], it's 60% for 40% spring first half, second half, and we are expecting real positive things in the second half of the year. And it seems to be a little long and we don't see... we've got to get sell-through like any other business but the logistic issues, the transition issues, if we were conservative, we were conservative but they just hadn't materialized to the degree we thought. So a lot of it is just not $2 million to $3 million of less transitions less integration cost on... both on the margin side and the expense side has really benefited us well. The management team has done a great job of getting it in quickly on our systems on our platform and not having a glitch in dealing with them.

Robert Ohmes - Banc of America Securities

So just to clarify, the accretion to the back half could actually be more than $0.07 to $0.08 that you [indiscernible] for the year?

Emanuel Chirico - Chairman and Chief Executive Officer

Well the first quarter was accretive... the first quarter was slightly accretive, the second quarter was breakeven, so I told that $0.07 to $0.08 there could be... there is a nickel in back half of the year I think.

Robert Ohmes - Banc of America Securities

Okay, great. Thanks a lot.

Operator

Our next question comes from Brad Stephens with Morgan Keegan.

Brad Stephens - Morgan Keegan

Hi, congratulations on another excellent quarter. At the end of this year, where do you expect the Calvin Klein royalty? What percentage of that will come from international distribution?

Emanuel Chirico - Chairman and Chief Executive Officer

I think it's basically 50%, 48% to 50% will be international and that's not much different than what it has been. What I think is really going to happen international over the next three years 2008 and beyond will probably accelerate faster than our domestic business. Particularly on the license side of the business since we operate a number of big businesses ourselves and there is not licensing revenues, obviously we have a sales and profitability associated with that. So I don't think it's more that the growth in licensing in particular will be more driven internationally.

Brad Stephens - Morgan Keegan

And the international has a higher profitability to it. What kind of a higher contribution--

Emanuel Chirico - Chairman and Chief Executive Officer

Robby... I'm sorry Brad, Brad it's a licensing business. I don't think that there is that much of a difference in running a licensing business internationally, domestically. We collect the royalty of between 7% to 9%. This is the same marketing, advertising. Our expense base is spread over. There is not a distinction international or domestic. So I don't think from our point of view, it's a significant difference in that. Operating businesses when they are successful, it seems like Europe and Asia are more profitable models but not from a licensing point of view.

Brad Stephens - Morgan Keegan

Okay. On your outlet business, I think last year, you ended the year doing about $250 a square foot in your non-Calvin Klein stores. Comps are continuing to be strong there. Where can that go to over time?

Emanuel Chirico - Chairman and Chief Executive Officer

Well, I think Brad, I think that will grow with the type of comp store increases that we are putting on. We are talking about 2% to 3%. We seem to be opening some more... the new stores we are opening are more productive on balance. So I guess over time, I think our target... this is not a financial thing to put into your mouth but as we target the business and we talk about store openings, we talk about a minimal of $300 a square foot for new stores in order to open and make those investments. So I think as the new stores open, they tend to be potentially in better geographic locations and hopefully, we can drive some of that higher than that. The Calvin business as you know is well over $500 a square foot but it's not a fair comparison given the retail selling points and to be fair just the strength of the Calvin Klein brand.

Brad Stephens - Morgan Keegan

All right, thanks. Good luck guys.

Operator

Thank you. Our next question comes from Carla Casella with J.P. Morgan.

Carla Casella - J.P. Morgan

Hi. I have to ask the token bond question about with all your free cash flow, are you considering either buying back bonds on the new open market or calling them ahead of maturity?

Emanuel Chirico - Chairman and Chief Executive Officer

Carla, buying the bonds back... I would have said the easy answer four months... four weeks ago, five weeks ago is of course to look at our capital structure. To give an answer now, I don't know what's going on with the capital markets from the point of view of what's available? Is the bond market open? Two months ago, if we... our bonds aren't callable but if they were and if we chose to do something, we clearly could have gotten an advantage against the interest rate when we award today on those bonds. But now I am no sure what really it's going to ultimately last. For me to try to guess where that is I think it's tough. So I don't... given the diceyness [ph] of the bond market until that settles down, I don't think we would do any thing with our bonds because it gives us a lot of looking at pain. It gives us a great deal of flexibility to really... to focus on what our strategic use of our cash is. First priority above all is to try and do an acquisition that makes sense. And if that doesn't transpire over the next three to six months, we will generate round numbers about $100 million in cash this year, end the year with over $500 million on our balance sheet. And we will have about $500 million on our balance sheet. We will have to look hard at potentially may... being in the market to buy back our stock, especially --

Carla Casella - J.P. Morgan

Okay, great. Thank you.

Operator

Our next question comes from David Glick of Buckingham Research.

David J. Glick - Buckingham Research Group

Good morning and another congratulations to the team. Manny, just looking at the Calvin Klein licensing revenue, obviously, the first quarter was up over 30%, high 20s Q2. How do you plan the revenue trends for the second half and do you change your long-term outlook on Calvin Klein licensing revenue from kind of that high single-digit low teens level?

Emanuel Chirico - Chairman and Chief Executive Officer

No. I think it serves us well. We are planning the second half at 8% to 10% growth on the royalty line. The advertising lines go up and down based on marketing plans and royalty line we are planning at 8% to 10%. I touched on I think the... if trends continue, it could be better than that. If it is, we will react to as I think given the size of the business to look out next year, we are up against very strong growth in fragrance, which we would have thought was a mature business and it had growth in it but not the type of growth that we've experienced. There is a lot of initiatives still out there but I think financially, it is prudent. We continue to target top line Calvin Klein royalty growth in that 8% to 12% range. I think we talked 9% to 11%. I think that's the right range to really focus in on.

And if it's coming quicker, we will react and try to communicate that. I don't... I really, I don't want to sound Pollyanna. I don't think I can sit here and say it's going to grow 15%, 16%... I think it will be foolish at this point of view to get too far ahead of ourselves on a business that really experienced the kind of growth that we talked about to put growth on top of that higher than 10% and plan so that from an EPS point of view and a financial modeling point, I think would be silly. So I don't think it makes a lot of sense and I think we will capture it if it happens, and we will try to communicate it as quickly as we can. But I think those are the targets we are dealing with and I think anybody who's following us knows our targets and they should continue to follow as well.

David J. Glick - Buckingham Research Group

Okay. Thank you. Moving on to sportswear, which all your businesses have been very strong sportswear, accordingly Q1 was challenging, I guess a little better in Q2. How do you plan the second half? Are you seeing any positive signs as you enter into fall?

Emanuel Chirico - Chairman and Chief Executive Officer

It's still too early for me to say there is positive signs. I think it's still too early. I think we... the best news is we make sure we came out of the six months clean and we are positioned for back-to-school. Initial selling of back-to-school has been... Dave you are in the industry. You've better talked to retailers probably more than I do. Everybody is trying to deal with calendar shifts. Everybody is trying to deal with different back-to-school schedules. It's a hard read right now. And that's what we are trying to understand especially with our wholesale customers. I'll ask Allen to talk about it maybe to put a little more flash on it. He walked out.

Allen E. Sirkin - President and Chief Operating Officer

Hello. Hi Dave.

David J. Glick - Buckingham Research Group

How are you doing Allen?

Allen E. Sirkin - President and Chief Operating Officer

The first half of the year was pretty strong for us in spite of the mix mostly driven by the success of Calvin Klein. Calvin Klein pulled the shift. We think the market in general was fairly flat. Most of our brands performed at department level as slightly better with the exception of Calvin Klein. We were actually up for the first half of the year in retail at about 8%, and we budgeted the second half of the year at about a similar number, at about 7%. And we think it's fairly positive and our first reads although it's only a couple of weeks on early fall, receipts have been positive and we think that the positioning of our brand and the ability for us to outperform the competition, strong product, strong point of sales, strong management in the field allows us to feel fairly confident that what we've put on remains stable for the back half of the year, we will certainly deliver.

David J. Glick - Buckingham Research Group

Great. Any early sell-throughs you can report on women's IZOD. I know it's just in stores few weeks?

Allen E. Sirkin - President and Chief Operating Officer

I'm sorry.

Emanuel Chirico - Chairman and Chief Executive Officer

Can you speak up a little?

David J. Glick - Buckingham Research Group

Yes. Any early sell-through on women's IZOD that you can talk about. I know it has only been in the stores a couple of weeks?

Emanuel Chirico - Chairman and Chief Executive Officer

It's all anecdotal. David, the first shipments of the women's jean bottoms has been very strong. We felt but it's just too early. I don't want to read anything into it except that it feels good.

David J. Glick - Buckingham Research Group

Okay. Last question and then I'll get off the mic. Inventory up 26, receivables up 42, how much of that was due to the 53rd week or your shipping goods a week later?

Allen E. Sirkin - President and Chief Operating Officer

It definitely had an impact... just to remind you on inventory were up 26% of our sales for the third quarter, up about 25%. So that was in line but there was an impact on the 53rd week. Receivables also we shipped maybe towards the end of the month also imparting that by the 53rd week.

Emanuel Chirico - Chairman and Chief Executive Officer

That's going to... third quarter ended... last quarter our third quarter ended November 2nd. This year it's going to end November 8th. That week is a huge shipment week. There is a lot going on. We have shipment and receipt week for us on inventory signing off for deliveries both in, for our retail stores and for wholesale accounts. So it's... there is a comparison I think in the third quarter, you won't see the inventory high again but it really has much more to do with the shift in the week than anything else, and we have known about it. And when you look at it, it makes sense being we played it right before the holiday season.

David J. Glick - Buckingham Research Group

Okay, great. Thanks for that color. Obviously, the Superba acquisition added to the inventory increases as well, correct Mike?

Michael Shaffer - Executive Vice President of Finance and Chief Financial Officer

Correct.

David J. Glick - Buckingham Research Group

Okay. Thanks a lot.

Emanuel Chirico - Chairman and Chief Executive Officer

And IZOD women's.

David J. Glick - Buckingham Research Group

And IZOD women's, great. Thanks a lot, nice job. Good luck.

Operator

Thank you. Our next question comes from Omar Saad with Credit Suisse.

Omar Saad - Credit Suisse

Thank you. Good morning.

Emanuel Chirico - Chairman and Chief Executive Officer

Hi Omar.

Omar Saad - Credit Suisse

Manny, I have got a few more questions. I am going to do them one at a time, so you don't have to try to keep track of everything. I know we are getting towards the end here. The marketing strategy, you mentioned it in your prepared remarks. I just wanted to kind of dig into that a little bit further. Last year you did a bunch of TV ads, Super Bowl. I know you had some activity during the Super Bowl. As you think about your philosophy around marketing behind the brands in the portfolio, is there a little bit of shift in philosophy to more of a broader approach, or what did you learn from those activities last year?

Emanuel Chirico - Chairman and Chief Executive Officer

Well I think we... from a lot of the consumer research we have done, one thing we've... if you would have looked at us two years ago, we were very print focused with our advertising, particularly on our... I am really focused now on our heritage brand, IZOD, Van Heusen and ARROW and I think like a lot of apparel brands, we are very focused on the print. Our consumer research told us print is important but our consumer is in a lot of different places. So we made it... last year and particularly second half of the year, during much in the fourth quarter we really decided to make a decision to really diversify our media mix and we also made the decision to significantly increase our media mix which gave us the ability to have a significant presence in print... in print, we cut that a little bit but not significantly but to really put all of the increase into TV, cinema, the Internet, point of sale marketing, outdoor marketing. We do a special hanger programs with Van Heusen and ARROW in particular. So, we're really talking to our consumer in different places not just in fashion magazine.

Calvin Klein has always done it. As we've been able to increase our marketing expense, we've been able to diversify and do it very effectively. We have continued that trend this year. We have intensified it and we've... the only other shift is going on and we have talked about it in our press release, combination of the calendar shift coupled with that... the first week of November is falling into the third quarter this year, coupled with just that we think it's better way to market is, we are spreading the second half spend through the back-to-school period and the holiday season where last year was much more intensified into the holiday season. So $9 million we spent is moving into the fourth quarter and into the third quarter we are down about... in the third... second, fourth quarter right now is planned on about 7. So overall it's about flat, so we have intensified the third quarter presence which we think is the right way to go.

Omar Saad - Credit Suisse

Okay. Great. Thanks. And then also would like to see if you could elaborate on this Calvin Klein Week, 10 days, when is this happening? Is it all stores and what are the dynamics of the promotion? Is it price driven? What's the arrangement with Macy's? It seems to me...

Emanuel Chirico - Chairman and Chief Executive Officer

They had a $9 million stock [ph]. Let me give you a background.

Omar Saad - Credit Suisse

Sure.

Emanuel Chirico - Chairman and Chief Executive Officer

Not asking other question that I will touch on. This is about regular price selling. This is not about discounting, this is not about promotion. It's about some exclusive product from Macy. It's really focused on... focus of it is on the East Coast and the West Coast, Macy's east and Macy's west. There will be a significant marketing campaign by us surrounded by as well as Macy's at Herald Square store. The kick-off event will be September 24. There will be significant amount of marketing at the store, most of ... not all the windows will be dressed in Calvin Klein product, all product categories. This is covering men's sportswear jeans, tailored clothing, dress shirts, neckwear, footwear accessories, fragrance, just about every product category because Macy's carries just about every one of our product category.

It'll... a significant direct marketing campaign on 32-page Calvin Klein magazine I will call it, it's a brochure, it really focused on the lifestyle Calvin Klein from the products worn throughout the day from work to evening to casual on weekend. It's just a great marketing piece. It's going to be sent to about 2 million key Macy's credit cardholders customers.

On the West Coast, the event kicks off in San Francisco, September 18 at the Union Square store. It will also be dressed in similar fashion with Calvin Klein. In Los Angeles, the event kicks off on September 27, significant amount of marketing both in the geographic area as well as at the store. So it's just a very exciting way to position the brand with our key partner in the United States, Macy's and trying to grow the regular price business and drive regular price selling. I think its high driving to Macy's strategy and clearly dives into the off-strategy for Calvin Klein. So we are very excited about it. We think it's a great way to spend our marketing money and I think it helps the brand and we believe it helps Macy's perception as well being part of the Calvin Klein.

Omar Saad - Credit Suisse

Is it something new for me... is this kind of a new approach for them? I don't know that they have done many things like this in the past and are you kind of the... is Calvin Klein the first brand to kind of embark on this endeavor?

Emanuel Chirico - Chairman and Chief Executive Officer

This is probably... I think Macy's can speak to themselves but I think if you look at Macy's is trying to lift the perception of their stores particularly in the May... the May company legacy stores. And this is key to their growth. Calvin Klein for Macy's is a key resource. It anchors the modern side of the floor for Macy's and I can't tell you if this is the first time that they've run a vendor, of that I am a not sure of this magnitude. It is clearly one of the first, I can't believe it's not the first, it's one of the first and it's clearly... I think it demonstrates how they feel about the Calvin Klein brand and I think it's trying to drive regular price business for themselves and one of the best ways to do that is with one of their strongest brands Calvin Klein.

Omar Saad - Credit Suisse

Okay. Very good and then last question quickly legacy, Calvin Klein think of about the acquisition a few years ago. Where is your feeling in terms of where we stand, in terms of the growth in that business? How much of it has come from legacy? How much has it come from really the new category launched? Or are we really still in a place where most of the growth has been in kind of the denim and underwear and fragrances categories?

Emanuel Chirico - Chairman and Chief Executive Officer

I think I would say to you is the upside we have incurred overall. We've targeted 10% to 11% growth to that business. And two years ago over the last three... up until last year we have averaged more like 14% top line growth. I think that disproportionate amount of that has come from the heritage businesses. We plan those businesses more conservatively and those businesses have really surprised us, fragrance in particular, the international jeans business. And underwear which has always been a growth has just continued to drive and we thought, can it really get as big as it has become? And we see opportunities there.

So I think from that point of view, as we go forward we are not to get to our 11%. We are not counting on those heritage businesses growing disproportionately as they have, when planning them in the low in the 3 to 5% range. And the balance of the growth is really coming from the new entries, the geographic areas that we have opened over the last 2 or 3 years, that's really start to contribute as we go forward. New product launches, we have been through all in the cosmetics launching next year. A lot of the areas which are really not anywhere near maturity with some of the launches, women's dresses, women's sportswear both internationally and domestically. Those businesses we think will fuel a lot of our growth as we go forward and we feel good about it.

Omar Saad - Credit Suisse

Thank you. Nice work.

Emanuel Chirico - Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Melissa Otto with WR Hambrecht.

Melissa Otto - WR Hambrecht

Hi congratulations on a great quarter. Just a couple of follow-up questions on the international business. You mentioned that 50% of the revenues are generated internationally for Calvin Klein and I just wanted to get a sense in terms of what that split is percentage wise for Far East versus Europe?

Emanuel Chirico - Chairman and Chief Executive Officer

I think right now... it's about... it's almost 50-50. I would say Europe is probably is 60% of this 50% and the Far East is about 40% of it, and that's about we are in.

Melissa Otto - WR Hambrecht

And then could you maybe give us some quantifiable color in terms of how large you think the Far East business potentially could become in the next three years?

Emanuel Chirico - Chairman and Chief Executive Officer

Well I don't... I hate to... I hate to get in area, geographic areas. We talked about it. We think the brand to be a $7 billion brand over the next four years. We talked about that last year. I think we're going end this year over the five billion in global research sales. So I think there is $2 billion of growth. We are at $2 billion of growth that's going to come from I think more... I think 60% of that will come outside the United States as 40% will probably come from the United States with the new product launches and the new distribution that we have put on our own retail stores. And so I think that's the way to really look at it. Clearly the Asia is a growth area for us particularly which some of the emerging countries. Just China by itself, will continue to be a growth vehicle for us and I think we will try to put more color on that as we start to see 2008, start to unwind, we will put some more color on that in the year as we go forward.

Melissa Otto - WR Hambrecht

Great. Yes I had a great meeting with Udith Cheng [ph] last week in China. She has really geared up for the rollout of a lot of new stores. Could you talk a little bit about your perception of the brand in that market and perhaps what the company is doing to localize in order to fuel the growth?

Emanuel Chirico - Chairman and Chief Executive Officer

I think when you talk about Asia and Calvin Klein, I think the brand perception there is as strong as the brand is in United States, now well worth the brand is in United States. The positioning outside the United States is higher. And we have talked about it outside the United States the growth... the focus is really on ck Calvin Klein which is anywhere from 30% to 50% higher retail selling price points than white label better product in the United States. It's better piece goods made in, in Italy but more product is Italian base. It's a different product but very much the perception of the brand is higher outside the United States than even it is in the United States.

We are very... I think our licensing partners because of their expertise are very attuned to the market dynamics and the tweaks that need to be made for that market. So if you look at our sportswear business, if you walk into a department store in Japan, especially a store in Milan or if you walk into Macy's, I believe you look at that product and you know it is Calvin Klein. But there is clearly geographic twists to that product that really or for that market, and I think that's where our licensees being very close to the ground really have a great understanding of the market, probably with our design studio to keep the Calvin Klein static, consistent worldwide. I think that's why the brand performs so well around the world.

Melissa Otto - WR Hambrecht

Great. Thank you.

Emanuel Chirico - Chairman and Chief Executive Officer

And then Clara, I guess the only I'll add is clearly outside the United States, owned stores, licensees stores, franchise stores, standalone stores on the key growth vehicle of Calvin Klein, particularly sportswear and particularly Asia as we open more and more stores with our licensing partners around the world. Those stores continue to perform very well for them financially and continue to be a great when you showcase the brand internationally.

Melissa Otto - WR Hambrecht

Terrific. Thanks Manny and congratulations.

Emanuel Chirico - Chairman and Chief Executive Officer

Thank you. I guess operator, I'd like to just take one more question. It is about 12:15 and we do have a company to run, so just if we can, I'd like to take one more question.

Operator

Okay. Thank you. We'll take our final question from Dennis Rosenberg with DSR Consulting.

Dennis Rosenberg - DSR Consulting

Whew, I made it. Hi Manny.

Emanuel Chirico - Chairman and Chief Executive Officer

Hi, Dennis.

Dennis Rosenberg - DSR Consulting

Could you walk through the earnings deltas in '08 versus '07 relating to IZOD women's, Timberland and the Calvin Klein retail?

Emanuel Chirico - Chairman and Chief Executive Officer

I guess... I'm looking at Mike and he is shaking his head. I guess, look those businesses next year, let's talk about IZOD women's. IZOD women's for us this year will probably be a small profit contributor. Next year we would expect the full year's worth of sales. It should be a bigger profit contributor for us. It depends how big the business is. The business today that we inherited is about $40 million to $45 million business. How big it will be next year, it's a little premature to say. We are hopeful that it could be significantly bigger than that at least over the next three years. We are talking $150 million business during that period of time.

On Timberland, we are going from zero to a partial year. Clearly, the startup for us this year but obviously next year being a partial year, I don't believe it's going to contribute profitability lots to us next year. This year it's probably a relatively speaking a loss. Next year it will probably be a smaller loss.

The Calvin Klein better specialty stores, that's a very interesting question because I... we start selling not for the fourth quarter this year. We built the organization this year. We will have selling next year but it's going to be a very small base of stores. I don't know that there will be that much of a difference from overall bottom line impact to 2008, the real benefits begin in 2009 and beyond. So I would think... I am answering... I am walking through it as I'm thinking through the question. I would think that we have talked about startup cost this year of $11 million, and I guess next year that number might be $7 million to $8 million but that's a little bit off the cost but that's the condo delta that I think we are talking about year-to-year and then the big benefit will be in '09.

Dennis Rosenberg - DSR Consulting

Okay, great. Congratulations. Thank you.

Emanuel Chirico - Chairman and Chief Executive Officer

Thank you Dennis.

Operator

Thank you.

Emanuel Chirico - Chairman and Chief Executive Officer

Thank you, operator. I would like to thank everybody for joining us on the call. We look forward to seeing some of you on MAGIC and we look forward to our third quarter press release. Have a great day. Thank you.

Operator

Thank you. That does conclude today's presentation. Thank you for your participation and have a great day. You may now disconnect.

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Source: Phillips Van Heusen Q2 2007 Earnings Call Transcript
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