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Executives

Manny Chirico - Chairman and CEO

Mike Shaffer - EVP, COO and CFO

Dana Perlman - Treasurer, SVP, Business Development and IR

Allen Sirkin - President

Ken Duane - CEO, Wholesale Apparel

Analysts

Adrianne Shapira - Goldman Sachs

Robert Drbul - Barclays Capital

David Glick - Buckingham Research Group

Eric Beder - Brean Murray, Carret & Co.

Omar Saad - ISI Group

Robert Ohmes - Bank of America/Merrill Lynch

Kate McShane - Citi

Howard Tubin - RBC Capital Markets

David Weiner - Deutsche Bank

Evren Kopelman - Wells Fargo Securities

Phillips-Van Heusen Corporation (PVH) Q4 2011 Earnings Conference Call March 28, 2012 8:30 AM ET

Operator

Good day ladies and gentlemen and welcome to today’s PVH Corp. Fourth Quarter 2011 And Full-Year Earnings Conference Call. As a reminder today’s conference is being recorded. This webcast and conference call is recorded on behalf of PVH Corp. and consist of copyrighted material and may not be recorded, reproduced, retransmitted, rebroadcast, downloaded or otherwise used without PVH’s expressed written consent. 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 forward-looking statements that reflect PVH’s view of future events and financial performance as of March 27, 2012.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 ready to change its strategy, objective, expectation and intensions, it need to use significant cash flow to service its debt obligations, it's vulnerability to weather, economic conditions, fuel prices, fashion trends, lost of retail accounts, disease, epidemics, war and terrorism, availability of raw materials and other factors. If reliance on the sales of its licensees and retail customers, and it's exposure to the behavior of its associates, business partners and licensors. 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 with the SEC in advance of this webcast and call.

And now I’d like to turn the call over to Mr. Manny Chirico. Please go ahead.

Manny Chirico

Thank you. Good morning everyone and thank you for joining us. Joining me on the call this morning is Mike Shaffer, our Chief Financial Officer; Dana Perlman, our Treasurer; Allen Sirkin, our President; and Ken Duane, who is in charge of all of our Wholesale Apparel business.

Just some general comments before I get into the businesses. We are very pleased with our fourth quarter results. We beat the top end of our fourth quarter earnings guidance by $0.08 and we gave that guidance in mid-January of this year. And the momentum we see in all of our businesses we were also able to increase our 2012 earnings guidance by $0.20 to $6.10 to $6.20 from $5.90 to $6 that we gave about two months ago.

Moving to each of our businesses. Our Calvin business continued its strong momentum. Total revenues in the fourth quarter for the combined Calvin Klein businesses were up 12%, and operating profits increased about 6%. The Calvin Klein wholesale and retail business that we operate directly posted a 13% sales increase in the quarter, but strong performance was driven by our Calvin Klein retail businesses which posted an 18% comp store increase in the quarter.

For 2012 we are planning our Calvin Klein wholesale and retail businesses to grow about 7 to 9% which will be driven by mid single-digit comp store increases and a growth in square footage at both our wholesale and retail businesses.

Moving to our licensing segment. Royalties in the quarter were up about 16%, the business posted strong double-digit growth in all geographic regions with the exception of Europe. Specifically, North America was up about 10%, Asia was up about 21%, Latin and South America were up about 30% and Europe was up low single-digits with fragrance posting strong performance while our apparel businesses were down for the quarter.

For 2012, as we look at the Calvin Klein business, we are planning the growth more conservatively than in prior years. Overall, we are planning royalty revenue growth on a constant currency basis to grow about 4 to 5%. Foreign exchange will have about 200 basis point headwind against this business.

In North America, royalty revenue the plans call for mid single-digit growth with [performance] in department stores, being partially offset by a planned reduction in sales to the off price channels, resulting in planned overall North American royalty growth in the low single-digit range for 2012.

In Europe, the macro environment is causing us to conservatively plan this business for 2012. In addition, our take back from Warnaco of the European CK Bridge business will result in about $3 million reduction in royalties for 2012. As such our overall European royalties are being planned down about 5% in 2012.

Geographically, our Asian and South American royalty revenues are being planned to continue their explosive growth of about 20 to 25%. This growth has being driven by retail square footage growth coupled with strong comp store sales increases which will drive growth in these regions.

I’m going to just touch on some of our bigger Calvin Klein businesses and just a little color on the total 2011 businesses. In underwear the Calvin Klein business was ahead in 2011 about 11% with all regions U.S., Europe, Asia and South America posting strong sales gain. The growth was driven by the continued strong performance in international markets where we grew retail square footage and had extremely strong performance from CK ONE.

CK ONE results were strong in all markets. In men’s CK ONE continues to exceed our plan and help us to grow to a number one position within U.S. department stores. CK ONE currently represents over 10% of our annual underwear business.

In 2012, a major initiative for us is the launch of Bold. Bookings in men’s are very strong for Bold and are exceeding our initial bookings to CK ONE.

Moving to jeans. Our global jeans and related businesses were up about 6% for the year; relatively soft businesses in the U.S. and Europe were offset by strong performance throughout Asia and South America. For 2012, we expect our jeans category to grow in the mid single-digit range overall, driven by new product initiatives particularly our power stretch program which will see significant sales increases in the spring season.

Fragrance had a very strong performance growth in 2011; we posted just about 10% increase in revenues for the year. Business was very good across the Board with our [Euphoria] and CK ONE fragrances continuing to post very strong performance for us both domestically and internationally.

In the U.S., our women’s business continues their strong performance both women’s apparel and footwear businesses were up in excess of 15% for the year. On the apparel side this growth has being fueled by strong selling of women’s sportswear and outerwear. In footwear, revenues are running ahead about 20%. Our two licensees there G-III and Ghim Li continue to do an outstanding job for us. In addition, our new handbag and accessory business had a very strong 2011, its initial performance under G-III. G-III saw excellent sell through both at Lord and Taylor and Macy’s. In its first full year, sales exceeded $50 million at wholesale.

Moving to our CK Bridge business in Asia with Club 21, this business continues to grow dramatically posting a 25% increase for the year. The growth has been driven by China, Korea, and the Hong Kong markets. We experienced significant door expansion and double-digit comp store increases.

Moving to the Tommy Hilfiger business. Overall, the Tommy Hilfiger business had a very strong quarter, and a significantly exceeded both our sales and profit expectations. Revenues for the fourth quarter were up 16% and operating earnings increased 25% over the prior year. The brand performance both in North America and in Europe were particularly strong.

Just to give put some color on each of those business, in Europe for the full holiday 2011 season; we saw sales growth in excess of 15% over the prior year. On a product category basis, we posted double-digit sales increases in men’s sportswear, women’s sportswear, denim and in footwear. All countries with the exception of Ireland posted strong sales growth in 2011.

Moving to our Tommy Hilfiger international retail business. In the fourth quarter, comp store sales were up 16% with the exception of Italy and Japan all of our major markets posted double-digit comp store sales increases. And margins were up significantly in our retail businesses internationally.

Moving to North America retail, we had a very strong quarter of comp stores plus 15% in the fourth quarter. We saw strength in all regions of the country with particularly strong performance in the geographic areas that cater to international tourist. The Tommy retail results in the fourth quarter were very consistent with the strong sales performance we saw in our own Calvin Klein retail businesses in the North America.

Our U.S. wholesales business which is particularly focused at Macy’s saw a very strong performance in the quarter both in men’s and women’s sportswear. Sales ran ahead of last year, and sell through at retail were well above the plan. Our average unit retail out the door in the quarter ran up between 7 and 8% over the prior year.

As we look out for 2012, we are planning the Tommy Hilfiger business to grow 5 to 7% on a constant currency basis, with foreign exchange conversion being planned to result in about a 500 basis point negative impact to our overall sales growth. Given the uncertain economic environment in Europe, our international growth is being planned much more conservatively than in the past, and much more conservatively than current business trends within decade. We are planning the international Tommy business revenues to grow between 7 to 8% on a local currency basis, while the U.S. has been planned to grow between 4 to 5%.

Moving to our Heritage businesses. Revenues in the quarter were down about 1% driven by 17% decline in wholesale sportswear, which was partially offset by a 9% increase in dress furnishings. Our Heritage retail businesses had a very healthy quarter posting a 6% increase in comp store sales.

Operating earnings in the quarter were down significantly driven by the poor performance in our wholesale sportswear business. We have been aggressive in clearing goods, providing margin support for our retail partners and taking markdowns on the floor to move through holiday seasonal goods. These steps were taken to position us well for 2012 to really begin our turnaround there. We expect that our business will continue to underperform in the first quarter and we should see a significant turnaround beginning in the second quarter of 2012.

I thought I’ll give you a sense of how business is performing through the first two months of the first quarter of 2012. In North America we have really seen our business accelerate in the first quarter, particularly with our Calvin Klein and Tommy Hilfiger businesses. At U.S. retail, our comps for the Tommy Hilfiger business is attracting in the mid-teens range about 16% up against the sales plan that’s up about 4 to 5%. For Calvin Klein, our business are running on a comp store basis up about 10% with a plan that’s planned between 4 and 5% as well.

Comps for our Heritage business are running up about 3% against the 1 to 2% comp store plan for the first quarter. In our U.S. wholesale businesses, both Calvin Klein and Tommy Hilfiger continue to perform ahead of sales plan and we continue to seek increases in our out the door retails. It's early in the spring season, we haven’t gotten to Easter yet, but the feeling on those two businesses that we have a lot of momentum in those businesses and we continue to see growth as we go forward.

In dress furnishings business is good, we continue to have excellent success passing on higher retail prices, with our average unit retails up between 6 and 7% for the first two months of the quarter.

Heritage sportswear continues to be challenged, however, we are moving through goods we are moving through seasonal goods there, and we are starting to see some improvement in early selling of spring. So, we are optimistic how that business is doing.

Moving to Europe, wholesale which represents about 70% of our business continues it strong momentum. Our spring summer order book is up about 13% ahead of last year’s booking, and for the full holiday 2012 season we are planning that order book up about 4 to 5% and given the environment in Europe and given what we are hearing about how retails are coming back, they are open to buy and open to buy it down in the mid single-digit range. We think our performance is clearly ahead of all of the competition we see out there. And retail our comps are running up about 5%, against about a 3% comp store sales plan.

Finally, just before I turn it over to Mike, I’d just like to make a comment about our guidance. We believe we have been prudent with our estimates and it's early in the year. We feel we’ve put together sales and operating margins projections that we can, not only me but a business trends continue we can exceed as we go forward. We believe that the momentum we see in our Calvin and Tommy businesses will continue to drive our growth and should allow us to outperform our current projections.

And with that I’d like to turn it over to Mike to quantify some of those results.

Mike Shaffer

Thanks Manny. The comments I’m going to make is based on non-GAAP results and are reconciled in our press release. We are very happy with the fourth quarter results and particularly the momentum we have as we move into 2012.

For the fourth quarter we delivered revenue and earnings per share above our guidance and significantly greater than in the prior year. Our revenues for the quarter increased 135 million or 10% over the prior year and were 4 million greater than our previous revenue guidance

Revenue growth over the prior year was driven by increases of 16% and 12% at Tommy Hilfiger and Calvin Klein, respectively. Total operating income for the quarter was relatively flat to the prior year as earnings increases in Calvin Klein and Tommy Hilfiger businesses were offset by a decline in our Heritage business. Wed delivered earnings per share of 1.18 for the fourth quarter, which was $0.08 greater than our guidance of $1.10. Our earnings per share breaks down as a $0.04 EBITDA and a $0.04 beat in taxes.

Moving to our guidance for 2012. Revenues are planned to up 4 to 6% excluding the impact of foreign exchange and the impact of our discontinued businesses. Including the impact of foreign exchange discontinued businesses; we were expecting revenues to be flat to up 2%.

Total Tommy Hilfiger revenues are planned to up 5 to 7% on a constant currency basis with Tommy Hilfiger North America increasing 4 to 5% and Tommy Hilfiger international increasing 7 to 8% on a constant currency basis. Including the negative impact of the foreign exchange, we are expecting that Tommy Hilfiger revenues to be flat to up 2%.

Calvin Klein revenues are planned to increase 5 to 7% while our on-going Heritage businesses are planning revenue up 2 to 3%. Our total Heritage revenues are planned to decline 3 to 4% including the negative impact of about 6% relating to the exit of the Timberland and IZOD women’s wholesale businesses.

Gross margins for the year are planned up about 100 basis points with expenses for the year planned up about 50 basis points do in large parts to an increase in pension expense. Impacting our gross margin and expense in 2012 is our mix of business as a result of faster growth and our higher gross margin and higher expense Tommy Hilfiger and Calvin Klein businesses.

Operating margins for 2012 are planned to increase approximately 50 basis points over 2011. Our tax rate for the year is planned to 23.5 to 24% and reflects the continued benefit of additional foreign earnings which are taxed at a lower rate than domestic earnings.

Interest expense for the year is planned between 115 to $117 million posting a reduction to the prior as a result of debt repayments.

Our earnings per share for 2012 are planned at 6.10 to 6.20 an increase of about 13 to 15%. For the first quarter of 2012, we are planning our revenues to increase 3 to 4% to the prior year excluding the impact of foreign exchange. Including the foreign exchange impact, we are planning our revenues to increase 1 to 2%.

Earnings per share for the first quarter is planned at 1.23 to 1.25, first quarter earnings will be the quarter most impacted by product cost increases as first quarter selling will include fall and spring cost increases. First quarter gross margins will be flat to slightly down to the prior year, with the expenses increasing approximately 125 basis points.

As I mentioned previously, our mix of business is a factor in driving our gross margin and expense percentages. Operating margins in the first quarter will also be down about 125 to 150 basis points. Our tax rate for the first quarter is planned to 24 to 24.5%, and on the balance sheet we continue to project debt repayments for 2012 at $300 million.

And with that we will open it up to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we will take our first question from Adrianne Shapira from Goldman Sachs.

Adrianne Shapira - Goldman Sachs

It was great to hear that the international business the Tommy is about planed, but perhaps maybe you can give us a little bit more color as to the sequential softening you saw, I mean clearly we know the environment there, but the slowdown is sort of the mid-singles from the mid-teens, if you can shed some light on that, that would be great?

Manny Chirico

Well, I guess there is a couple of things on the retail side of the business if you talk around from the comps. As we came out of such a strong selling season in the fourth quarter we clearly had significantly less carryover inventory in the first quarter which had some, you can’t sell goods twice, guess is my point. So, we saw the real benefit of selling through goods sold dramatically in the fourth quarter than our comparative basis that was significantly less spring goods in the store than they were from the year before. So, I think I had some [four] goods in the store. So, I think that had some impact on the first couple of months in selling. No one can, it also continue with that 15 to 16% comp store increase. So, we are pretty satisfied with the 5 to 6% comp store increase that we are experiencing right now. It's running ahead of plan. It's running at very strong gross margins as you can imagine one benefit you get when you are much leaner on inventories seasonal inventory is coming out in the first quarter is higher gross margins as you go forward. So, I think those things will all benefit our profits in the first and second quarter.

Adrianne Shapira - Goldman Sachs

And then just, as we step back and think about last year you handedly beat your initial guidance and it seems like it was driven much more by top line and SG&A control. As you said, the guidance for 2012 looks prudent and hopefully room for continued improvement given momentum continues. But where you sit today, maybe you help us think through where you think there is potential upside coming from maybe a shift from last year, more expensed control leads to perhaps this year, more opportunity on the margin. And how you see that opportunity pacing as we progress through the year?

Manny Chirico

Well, I guess, I’d characterize it in two ways. I see the upside based on the sales trends right now and our plan. We are planning comps in North America when you put it all together probably in the 3 to 4% range. And right now for the first two months of the year, our comps are running up 10, 11%. So, clearly that bodes well for retail performance in North America, it bodes well for gross margins given how clean our inventories were coming out of the year, and see that kind of sell through. I think the expectation would be that our margins given the product course, the increases that we experienced for spring 2012 would be under more pressure and I think that actually could be that we could actually be flat in gross margin in the first quarter if the trends continue. So, I think that’s where significant amount of upside I think will continue to come. Clearly the Calvin and Tommy businesses in retail are driving that.

On the Heritage side of the business, I also think that we are just in operating margin recovery. And I think that really could bode well for the second half of the year, particularly in a way we plan the business, we are not looking to do anything really heroic in the business compared to historical benchmarks. So, I think there is an opportunity there. And clearly our Tommy international business, this is about conservatively as we have planned the business coming out of the box. I think that’s very prudent given the volume it, but we really just have to see how sell throughs continue there and the current trends whether continue we really feel we can outperform those numbers as well So, I think in some ways, I think potentially there was we didn’t have some of the headwind that we had last year that we had this year. The biggest one being foreign currency, but absent that, I think we plan that all into our businesses and I feel as good this year coming out of the gate for 2012 about our projections and what they may actually turn out to be as I did at this time last year. So, I think there is no guarantees given the trend of the business we feel particularly bullish about it.

Operator

Moving onto our next question from Robert Drbul from Barclays Capital.

Robert Drbul - Barclays Capital

Manny the question that I have is on the European side, can you talk a little bit about the geographic trends like country-by-country, what’s happening with the spring order book to the fall order book and any of the changes that you could call out from that perspective?

Manny Chirico

Sure, I think there is a couple of things I think geographically it's exactly as you would expect, about 30, 35% of our business is in Southern Europe and that business is under more pressure. And for us, some of those markets particularly had been growing out of sales rate a year ago which was in excess of 20%. Italy now for fall is being planned mid single-digits. So, although we are still growing in a very, very tough market there that business has clearly has seen a shift in the momentum that we were experiencing and that’s clearly the environment that what’s going on with that consumer.

I think Spain is a business that for us is being running up 4 to 5% growth and fall we are planning that business down slightly about 2 to 3%. Those are the two bigger markets just to give you sense of what’s going on in Southern Europe. In addition, we had a very, very strong fall holiday 2011 season where for our business our size to be growing 15 to 17%, and we fulfill those orders, had good sell throughs at retail, but the retail performance overall in Europe at department stores and in specialty stores, our key customers, most European retailers were reporting negative comps in the third and fourth quarter.

So, I think there is a reaction that’s going on there, where they are open to buy dollars are being planned instead of being planned up as they were in 2011 for 2 to 4% growth. They are actually being planned for 3 to 6% negative open to buy dollars. So, in that kind of an environment with the overall open to buy is down anywhere from 3 to 6%. Your thought business has been planned on 4 to 5%. We are clearly outperforming the market and continuing to gain market share there, but it's just in a much tougher market, and you don’t want to take a much sales inventory risks given that kind of sales environment. So, we are trying to plan that business a little bit more conservatively and I think it gives the opportunity to maximize gross margins as we forward in our international business if the sales trends continue.

Robert Drbul - Barclays Capital

And speaking about gross margins, Mike, can you put a little bit more detail around the drivers for gross margin in the first quarter and your assumptions around first quarter and full-year 2012 in terms of mix of the wholesale versus retail?

Mike Shaffer

I guess, Bob, you cannot broke up, but in terms of the color we are thinking about our margins for the year up about 100 basis points. And there is really what’s going on is we have got a real favorable mix change in our business. We are seeing higher margin, higher gross margin, higher expense, higher operating margin Calvin Klein and Tommy Hilfiger businesses growing faster than the Heritage business. So, in effect, we are going to see improvement in operating margins and improvement in gross margins.

Manny Chirico

And the only other thing I’d say is in the U.S., the retail business is so strong, posting double-digit comp store increases that mix change also has the same dynamics and it's favorable both from an operating margin point of view and from gross margin point of view.

Operator

And we will take our next question from David Glick from Buckingham Research Group.

David Glick - Buckingham Research Group

Manny, we are looking at 2012 a little more muted revenue growth outlook obviously lot of factors impacting that are a bit more transitory, but as you look out beyond some of those issues this year. I mean has your outlook changed in terms of the revenue growth potential for Tommy Hilfiger and Calvin Klein. And if you could highlight some of the emerging opportunities that might accelerate that growth and what impact that may have on your operating margin moving forward and if the Heritage business recovery could obviously play a part in that as well?

Manny Chirico

The opportunity really for both Calvin and Tommy, what we always talk about we plan the business. Those businesses will grow 8 to 10%. And given what’s going on long-term in those businesses, I search engines no reason why we will not exceed those numbers. On the Calvin Klein side, we continue to see strong growth with our royalty partners, there will be in the next two years you will see some shift as particularly given the CK Bridge business in Europe coming in-house. We believe that business long-term next 5 to 7 years is a $500 million business for us as we go forward. We think that has extraordinary growth given the platform that exist in Europe with our Tommy management team there given their expertise, given their establishment country-by-country, their knowledge of the retail base there, and the strength of the Calvin brand with the European consumer that we believe is significantly untapped. We clearly believe that that’s an opportunity for us to grow into that we can get too quickly.

In addition in Europe in 2013 we take in-house, the tailored business, it's a solid business for us today, that’s somewhere in this €60 million range that we think over the next 4 to 5 years could grow to €200 million. That’s a strong opportunity for us given our selling base and converting from a licensing model to a direct sales model there at very good operating margins that we can leverage the infrastructure.

So, I think those are just two pretty significant examples of where we think it's really dramatically grow the top line. With Calvin Klein royalties I think will continue to be driven by explosive growth in Asia and South America, given those high operating margins. I think the noise gets out of those numbers surrounding the CK take back, the reduction of what price that we have this year that will be behind us when we get through 2012. Hopefully, currency we said, becoming a headwind might become a tailwind going forward. So, I think clearly we don’t feel any less optimistic about the growth trajectory both for the Calvin and Tommy and in fact we think there is opportunity that will accelerate that growth 2013, ’14, ’15 and beyond.

David Glick - Buckingham Research Group

And Asia obviously a part of that as well?

Manny Chirico

Asia for us in Calvin is a licensing model. In Tommy we run some businesses directly, but the two big markets there India and China, I think will enjoy significant royalty growth there and as those businesses really start to come on, we own a 50% interest in India and about a 45% in China. And although we will be re-quoting those sales directly, we will be picking up some substantial income benefit as we go out to 14 and 15, a name we should also see an opportunity to potentially bring those businesses in-house as we have the opportunity to buy those businesses some forth in the future, that’s going to be an interesting discussion for us, but clearly those are two growth markets for the brand that we think has tremendous upside.

David Glick - Buckingham Research Group

Last question, there is a lot of dislocation going on in the department store industry and this is more related to your Heritage business. You have increased distribution in ARROW, you have the IZOD shop opportunity at Penney’s. Can you give us a sense of how you are navigating the change there and whether this will be a positive neutral or negative for the company?

Manny Chirico

I think we are well positioned as any company given our stable of brands. Our IZOD brand clearly has been identified by JCPenney as a significant growth driver for the business and Van Heusen is well positioned at JCPenney’s to also have significant growth there. Our Kohl’s business with Van Heusen and ARROW is well positioned there and our Macy’s business given our portfolio of brand. I’m just going to have Ken to talk about to give you some color on some of those dynamics.

Ken Duane

David, in our Heritage business right now in Macy’s we have IZOD continues to perform, Van Heusen continues to perform, and as you come through with the JCPenney, our JCPenney IZOD initiatives begins really September 1, and it will get on board for August but September 1 we are going to pickup 400,000 square feet in opportunity there in IZOD and Van Heusen will be, although we will continue to have position, we will have shops in position for 2013 as we come around the corner. Kohl’s has brought in Van Heusen is performing very well and ARROW has been a good brand for them. So, we see opportunity as we have expanded our brand our distribution within the national change both JCPenney and Kohl’s with both Van Heusen and ARROW. So, we see market share gains.

Operator

And we will take our next question from Eric Beder from Brean Murray, Carret & Co.

Eric Beder - Brean Murray, Carret & Co.

How should we think about the FX impact as we go through the year, and also how should we all see about costing and inventories and how are you planning those to go as we through 2012?

Mike Shaffer

So, when you think about the FX impact, when we think about for the first year we talked about the impact being about 20 to 25 million. And at the same time we think about that being spread fairly for the first and second quarters, I’d think about somewhere about 5 to $6 million. The third quarter will be the quarter impacted the most and fourth quarter impacted the least. Overall, when we think about a penny move in FX we think about somewhere around 2 to $2.5 million of impact to our bottom line.

Manny Chirico

Mike will talk about the EPS. I think the revenues that we categorize about $150 million will follow that as well. And then from a cost point of view, from a product cost point of view clearly the first quarter has being most impacted, I think the second quarter will have some impact, but we really given our second quarter aimed at July, we will have started to have some significant selling of full product at wholesale shipping a product in, and some given our outlet business, significant selling of fall product in the June-July period. So, it will be somewhat muted in the second quarter. So, clearly that cost issues will most dramatically impact the first quarter.

Eric Beder - Brean Murray, Carret & Co.

And in terms of pricing, are you planning to call back any of the pricing here or you plan to try and utilize this lower cost to maybe get some additional margin gains? How you look upon that in the consumer’s ability to take that?

Manny Chirico

Well I guess I’d characterize it this way. In Calvin and Tommy we don’t see any change in the pricing. We raised prices in spring 2011, we raised them again in fall 2011 and we raised them slightly for spring 2012. And we are planning to raise them in fall 2012, but we are planning to maintain the higher retail prices that we established over the last three season. And I think that’s pretty consistent with Tommy and Calvin and pretty consistent both domestically and internationally.

In our Heritage businesses, dress shirts clearly benefited and AURs last year were up about 9% and in spring they were up about 8%. So, we don’t see any give back there, we will watch the market carefully. So, we are hoping to get some of the margin that we lost last year in those businesses back overtime and we are planning second half gross margins up year-over-year. And I think we feel pretty confident given the tone of business and the consumer’s acceptance of those increases.

Operator

We will take our next question from Omar Saad from ISI Group.

Omar Saad - ISI Group

I got couple of questions. My first one is on the Europe macro outlook, the change in trend it sounds like you are expecting or starting to see new businesses. How much of that do you think in your wholesale business where your retail customers are kind of reacting to what happened in the fourth quarter, which was a little bit tough on a weather standpoint. It was height that appears around the Greece debacle and the wholesale customers are just looking out to next fall and saying, it was little bit of a tough holiday season, let’s plan conservatively. And is that marry up with kind of what you are seeing in your own store, I know it's not a huge retail business for you in Europe, but does that, do they jive with each other and you are kind of seeing the same trend or is the department store react in the environment.

Manny Chirico

I think department stores are reacting to the environment, I think they are clearly trying to manage their gross margin and inventory, given the what I’d characterize in Europe particularly at a department store level, you saw the comps, I think it was a relatively tough fall holiday season, blame it on weather, blame it on the macro environment. And I think when retail is doing on environment if they manage their inventories and we have got a sense that open to buy dollars are actually being cut on balance as I said before, 3 to 6%. So, I think that really what was happened. For us I can’t give you except strong performance. I can’t give you the great reason why we significantly outperform the market except the strength of the brand, the marketing that’s gone behind it, and our inventory position was very strong in order to really drive sale.

We saw for the third and fourth quarter sales up, if you look at a combined probably 9 to 11%. So, given that kind of sales performance, given the macro environment we are not accountable putting on another planning for another double-digit sales increase in Europe. So, we are planning to visit somewhat more conservatively, we are seeing about mid single-digit comp store increases right now. I think that’s very good performance considering that our inventory position is good, but we didn’t have as much fall carryover of the product in those stores. And I think in February, March you continue to sell a lot of seasonal goods there from the carryover season. So, you can’t sell the goods twice I said that before. So, I think we are feeling good about how that’s all shaping up but I think as a reality just listening to what’s going on in the European market I think it's better for us to be more conservative in our inventory and our sales plans as we go forward.

Omar Saad - ISI Group

One follow-up on the topic of Europe, as you think about this Bridge business you bringing back in-house and team you already have over there, Tommy platform with Fred and everybody. How do you frame that out, I know the Tommy business is actually really quite big, you talked about a $500 million potential for the CK Bridge business. How do you put it in context where Tommy is today, how Tommy got to where it is today in Europe. Is it analogous situation or are their differences, structural differences in terms of either categories or the price points or applicable markets for that CK Bridge sportswear business.

Manny Chirico

The Tommy business is over 15 year period grew to €1 billion business and that business includes denim which is probably a €300 million business. So, when you think about the opportunity for Calvin, we don’t see any reason overtime as it develops a wholesale, retail strategy overtime why the Calvin business cannot be as big as the Tommy business. I think there are different brand dynamics, Calvin tends to be a more tailored business which is actually a very positive thing given the price points in tailoring, Tommy more of a casual business, sportswear business. From a design aesthetic they completely difference, so I don’t think there is a lot, there would be much cannibalization between the two brands. So, for us we think it's a perfect marriage as the two brand set along side of each other. But $500 million is a pretty big number that come out of the box and talk about.

And I think we clearly need to if we execute given the talent on the ground in Europe it gives a huge leg up. The brand is well known in Europe, I think we will have a significant marketing launch the fall of 2013 when we re-launch the brand. And I believe those things will build momentum and excitement about the brand. And I think we will see some dramatic growth there at this point $500 million. I think as far as we are willing to go and we will play it out, but I think as you said to me, what could it be 10 to 12 years, I think overtime there is no reason to believe why Calvin wouldn’t be as big as Tommy. I think the only reason we are not, is we have an executed as well as the Tommy team has done throughout Europe.

Omar Saad - ISI Group

And to iterate in your mind Tommy is by no means mature in Europe?

Manny Chirico

I think that’s right, just given the kind of growth we are seeing significantly underdeveloped in some key markets, like France, like the UK, Italy, Russia and the Middle East. Those are clearly market that today are on round number €50 million markets that we think overtime could approach the size of our German business, our business in Germany which is well over €350 million. So , I think each of those markets have that kind of potential, so we don’t see any reason why that in the next three to four years why that business has slowed down.

Operator

Our next question comes from Robert Ohmes from Bank of America/Merrill Lynch.

Robert Ohmes - Bank of America/Merrill Lynch

Couple of questions, first just a follow-up on the North American comps for Tommy Hilfiger and Calvin Klein. You gave the AUR on Heritage, what’s the AUR look like for them. And what’s the AUR plan look like for Tommy Hilfiger and Calvin Klein for comps for first half versus back half.

Manny Chirico

I’d say we are looking for somewhere for this year versus last year AURs to grow about 5%. That’s the plan, right now we are pacing pretty much ahead of that both at wholesale and at retail. And I think that will play itself out, I think we are really enjoying the benefit of being having significant clean inventories in all channels and distribution. We are benefiting from outperformance on the selling line which has allowed us to not be as promotional as our plans had called for. So therefore, AURs are going out the door higher. So, I’d say at least 30% of the comp increase that we are looking at above plan at our retail stores is just being driven by AUR improvement. So, I think that bodes well for gross margins as we go out.

Robert Ohmes - Bank of America/Merrill Lynch

And so the really strong comps that you guys are seeing quarter to-date for in North America ex-Heritage. Is the AUR higher for Tommy and Calvin in North America comps than Heritage right now?

Manny Chirico

Yes, significantly.

Robert Ohmes - Bank of America/Merrill Lynch

Okay. So, it's double-digit right now.

Manny Chirico

Yes.

Robert Ohmes - Bank of America/Merrill Lynch

That’s great. Second question was just on the marketing plans for 2012 versus 2011. I was just curious if had anything to call out either by brand or by region sort of what you see yourself doing this year versus last year. Thanks.

Manny Chirico

The plan is to stand in local currencies all in about the same that we have spend this year with a hope just like last year, if we outperform, we will continue to increase that to some degree. But we have really gotten those marketing plans up significantly over the last three years both in Calvin and Tommy. So, we really feel good about the spend, we look for opportunities to rally drive it. There are some product initiatives I really can’t talk about their some fragrance initiatives that will happen second half of the year, new master men's brand and there will be a lot of that, the Calvin Klein underwear campaign around Bold will continue to be very strong. So, I think you will continue to see the kind of marketing that you have seen this year, we are planning to continue to meet the Hilfiger campaigns, it's just been phenomenal for us, that campaign continues to have legs, it works very well on television and digitally and it works great at point of sale. So, we are really able to get leverage across the Board there with the Tommy campaign and we are really happy to continue to play out.

From a PR point of view, Tommy with his American Idol appearances, has really given a shot in the arm to the brand, just becoming much more, is becoming more seen really been very positive for us from that point of view, he is a great ambassador for the brand and we plan to continue those initiatives throughout 2012.

Operator

Our next question comes from Kate McShane from Citi.

Kate McShane - Citi

Just a follow-up on the last question with regards to SG&A dollars spend for 2012. Like how should we be thinking about the cadence for that throughout the year.

Manny Chirico

Could you just repeat it, you broke up I’m sorry.

Kate McShane - Citi

With regards to SG&A spend for 2012, can you give us a little bit more color on the cadence throughout the year of how we should remodeling our increase in dollar growth.

Mike Shaffer

Sure. For the first quarter, I guess for the year, we are talking about expenses being up about 40 to 60 basis points. And I think if you think about that for the first quarter with expenses be with operating margins being down 125 to 150, gross margins being down flat to slightly down. There is a bigger impact on expense in the first quarter versus the balance of the year. I guess that’s what I think about it.

Kate McShane - Citi

And one unrelated question back to sportswear. I think you said during your prepared comments, that you do expect a turnaround in sportswear in Q2. And I wondered if you could identify what exactly is driving that, is that more margin recovery or is it more top line recovery. And have you had to rollback your prices in the sportswear category just based on that.

Manny Chirico

Again we were talking Heritage, IZOD, Van Heusen, and ARROW. I’d characterize it's all margin opportunity and the whole Heritage story, historically our operating margins are being between 10 and 10.5% last year they were below 7.5%, but I think 7.2%. So, clearly I think there is a story over a period of time where margins will recover. If you look at our AURs in sportswear, out the door retails, when you factor in clearance in what happened in the fourth quarter, we saw no retail selling price increases last year at all even given this cost increases when you think about there was so much private label on the floor there was so much. The main floor was really crowded, too much inventory when we got to November everyone really started to get very promotional on the main floor, required us to do that liquidated goods. We moved as fast as possible to do that.

The benefit that we really see is that they should with better control of inventory at retail in the channel, there really should be an AUR improvement, not by higher ticket prices or driving higher prices, but just by having less clearance and requiring less promotion. So, key will be watching inventory levels at retail, particularly on the main floor that really just should naturally come back to us without having to do anything heroic from a retail price point of view if inventories are controlled. And right now I feel is we are going to bring inventories on the floor and much better controlled than it were this time last year. And open to buy dollars are being planned much tighter, particularly in the mid-tier department stores where all brand play.

Operator

And we will take our question from Howard Tubin from RBC Capital Markets.

Howard Tubin - RBC Capital Markets

You have done a good job with inventory and managing inventories. How are you planning inventories really coming out of the spring season going into the fall season versus last year?

Mike Shaffer

We are seeing a decline as Manny said, we're anticipating a decline in fall costing. So from a perspective of moving into fall we will be selling slightly more units in the fall of 2012. But the cost will be down. So I think you will see more of a relationship to sell as we move into the second quarter and third quarter and fourth quarter. We will see more of a inventories coming in line with sales growth.

Operator

And we will take our question from David Weiner from Deutsche Bank.

David Weiner - Deutsche Bank

Two quick questions, one on China just to follow-up on some of your comments. I think you mentioned in your interview last night that overtime over the next several years there will be a $1 billion brand in China for Tommy. Can you talk about or can you just tell where are those revenues right now. And then second, when I think about the Meet The Hilfiger campaign, I think that’s being running for right coming up on two years and to your point I think it's been a pretty successful campaign. What are you trying to do with the Tommy brand both at retail and at wholesale overtime in terms o positioning the brand. Are you trying to take at higher end or are you trying to take it someplace it's right now. What are the growth opportunities with Tommy in the U.S.? Thanks.

Manny Chirico

Let me talk about China first, when that red light goes on the in the camera sometimes you get little ahead of yourself. So, $1 billion comes out pretty easily.

David Weiner - Deutsche Bank

It's a round number.

Manny Chirico

It's a round number, it seems to get Jim Cramer excited, so you take advantage of that. But all okay, I don’t know how to, China was such a hard thing to quantify. We are growing at both the Calvin and Tommy. We are growing 20% plus, 30% plus, Tommy are off to relatively small base. Retail sales in China are little bit over $100 million for Tommy. Clearly we don’t see any reason why that 20, 30% kind of the growth is going to slow down over the next three years. How fast that ramps up, how quickly we go after, how aggressive, but clearly if you start to extrapolate and get five years out, you get to some enormous numbers. So clearly I think if that Tommy continues to grow that consumer continues to develop the Tommy brand is well known in China, getting better known throughout China as it develops it's platform in Asia, Japan, it's platform in Hong Kong where the Chinese accounts, those China consumer are constantly travelling. I think clearly we look at that as a huge growth opportunity for the brand.

Calvin somewhat like few years ahead of Tommy there. Warnaco has done a tremendous job in jeans and underwear, Club 21 has been outstanding in growing the CK business throughout China and Asia we have large platform in Asia with the Calvin business and I think that’s one of the reasons why it has gotten a jump start on Tommy. But I don’t feel compared to some of the other large U.S. brands, we are not behind anybody there at all. I’m saying some ways we are ahead of most. So, I think that’s a significant opportunity and we will continue to be a big growth opportunity as we go forward.

Looking at the campaign, for us in North America it's all about continuing to elevate the Tommy Hilfiger brand. The Tommy internationally is a premium brand. In Europe the average unit retails if we take all product categories between 75 and €85 out the door. It's comparable to that in Brazil, it's slightly higher, it's comparable to that 75 to €80 out the door throughout Asia. In the United States that brand, we all know the history and what it's gone through, the last three years we have seen the AURs continue to increase in the high single-digit range and we believe that that’s starting to really even gain momentum and accelerate as we go forward.

So, it's all for us particularly our wholesale business at Macy’s, particularly our specialty retail store business throughout the North America. It's all about its continuing to use those platform to elevate the brand, communicate with the consumer, get the message across to the consumer and continuing to raise those AURs. And that’s a big part of the strategic plan for our Tommy Hilfiger brand. We talk about it all the time. It's one of the reasons why we are not planning as dramatic growth in the U.S. for the brand, because we are continuing to push the SURs higher and higher, but we have been surprised the last two years, the consumer acceptance of great product, they are more than willing to pay for it and that’s actually enhanced our growth for the last two years by driving up the AURs, putting more into product and positing the brand as an alternative to Ralph Lauren. And what we’d like to see it similar to where we priced around the world 10 to 15% below Ralph Lauren AUR 30 to 40% where it was 3 to 4 years ago.

Operator

(Operator Instructions) We did have a question from Evren Kopelman [Wells Fargo Securities]. Please go ahead.

Evren Kopelman - Wells Fargo Securities

Quickly I want to ask about the Heritage business and kind of understand what were the drivers of the revenue decline versus what you were initially planning for. And is it really more of a function of the mid-tier channel or the mix of outerwear and sweaters? Could you help us understand that a little bit more. Thanks.

Manny Chirico

I guess the sales came in in Heritage again let’s talk about, if you look at the fourth quarter we came in right where we thought we would be. We just really continued margin pressure. The selling shortfalls that we had in Heritage were in our sportswear businesses only, wholesale sportswear business is only the (inaudible) business last year was very tough. The IZOD women's business was very tough and IZOD men’s business was very tough. There was some product issues, sweaters you talked about, and outerwear to a degree but I think it was more of an issue really on the main floor, moderate price national brand is under a lot of pressure. And I think that whole main floor sportswear area, private label, really saw pressure. I think if you look at sales performances at retail, it was our customer base. I think the mid-tier players were in the more pressure. And I think the Macy’s business which was very strong had great performance in their accessories, cosmetics, and their collection businesses. And the one area that was tougher for them tended to be main floor sportswear overall on a relative basis. So I think it was just was a weak area overall and the real mix for us in the Heritage business and principally the sportswear businesses was gross margin dollars and not so much from sales. But I think by really getting control of the inventories getting back over the next 24 or so months, I think we could work our way back close to that 10% operating margin in that business than where we are today.

Thanks Evren. With that we would like to close the conference call. I thank everybody for their attention and for joining us for that, and we look forward to speaking to you at our May conference call, the first quarter results. Have a great day everyone.

Operator

And once again ladies and gentlemen that concludes today’s conference. We appreciate your participation today.

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