PVH Corp's CEO Discusses Q1 2012 Results - Earnings Call Transcript

| About: PVH Corp. (PVH)

PVH Corp. (NYSE:PVH)

Q1 2012 Earnings Call

May 24, 2012 08:30 am ET

Executives

Emanuel Chirico – Chairman and Chief Executive Officer

Mike Shaffer – Executive Vice President and Chief Operating & Financial Officer

Analysts

Robert Scott Drbul – Barclays Capital, Inc.

Adrianne T. Shapira – Goldman Sachs & Co.

Omar Saad – International Strategy & Investment Group, Inc.

Evren Dogan Kopelman – Wells Fargo Advisors LLC

Howard Tubin – RBC Capital Markets Equity Research

Robert F. Ohmes – Bank of America/Merrill Lynch

Jeff P. Klinefelter – Piper Jaffray, Inc.

David Weiner – Deutsche Bank Securities, Inc.

Carla Casella – JPMorgan Securities LLC

John D. Kernan – Cowen & Co.

Christian Buss – Credit Suisse Securities (NYSE:USA) LLC (Broker)

Operator

Please standby, we’re about to begin. Good day, everyone, and welcome to the PVH Corp. First Quarter 2012 Earnings Conference. This webcast and conference call is being recorded on behalf of PVH Corp. and consist of copyrighted material. It may not be recorded, rebroadcast or otherwise used without PVH’s expressed written permission. Your participation in the question-and-answer session constitutes your consent to having any comments or statements you make appear on any transcript or broadcast of this call.

The information made available on this webcast and conference call contains certain forward-looking statements that reflect PVH’s view of future events and financial performance as of March 23, 2012. All 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 call.

These include the company’s ready to change its strategy, objective, expectations and intensions, it’s 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. It’s 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 its current report on Form 8-K furnished with the SEC in advance of this webcast and call. On today’s call, we have Mike Shaffer, EVP, Chief Operating Officer, and Chief Financial Officer, PVH Corp. and Manny Chirico, Chairman and CEO of PVH Corp.

At this time, I’ll turn the conference over to Manny Chirico. Please go ahead, Sir.

Emanuel Chirico

Thank you, [Voger]. Joining Mike and myself on the call is Dana Perlman, our Treasurer and Senior Vice President in charge of Investor Relations; Allen Sirkin, our President and Chief Operating Officer; and Ken Duane, our CEO of our North American Wholesale.

In general, we are very pleased with our first quarter results. We beat the top end of the guidance by $0.05. And given the momentum in our business, we also increased our 2012 earnings guidance by $0.05 to US$6.15 to US$6.25.

Let me jump into some of the businesses, I’ll start with the Tommy Hilfiger business. The Tommy business continued its strong momentum during the quarter. We posted an 8% revenue increase and a 13% increase in operating income.

When you take out the foreign currency headwinds that we felt in the first quarter, our operating performance was just outstanding on a constant currency revenue basis. They were up 11% and operating income was up 18% for the quarter.

Focusing in on our International businesses, the Tommy international revenues were up 9% in local currencies. Our retail comps in Europe posted a 5% increase for the quarter, while wholesale revenues were up 9%.

Geographically, we continue to see strong growth in Central, Northern and Eastern Europe, partially offset by the softness in Spain and Italy. On a product category basis, we saw a strong performance in men’s and women’s sportswear denim and footwear. Overall saw a strong sell-throughs within our retail department store counts throughout Europe and feel like, we’re gaining significant market share during this turbulent time in Europe.

Moving to our North American business, we posted a 12% increase for the quarter driven by a 16% comp store sales increase in our retail businesses and mid single-digit growth in the Tommy wholesale businesses. We continue to elevate product and gain an additional [four] space in top doors at Macy’s, which is fueling the brands exposure. We see tremendous momentum in this business and strongly believe that the significant investments we are making in product and in our marketing programs are paying dividends for us with the consumer.

In North America, we experience to get 10% increase in our average unit retails at the door at both wholesale and retail. We strongly feel that our marketing and product initiatives only intensify in the second half of the year and believe we are well position to continue to exceed our plans for the balance of the year. For 2012, we are planning our overall Tommy revenues to grow 7% to 8% on a constant currency basis. Given the uncertain economic environment, we are planning our revenue growth more conservatively for the balance of the year than the current business trends would indicate.

Moving to our Calvin Klein businesses, these businesses continue to exceed our financial guidance and post strong results. Total revenues in the first quarter for the combined Calvin Klein businesses were up 7% and operating profits increased 5%. The Calvin Klein wholesale and retail businesses that we operate directly reported a 12% increase in sales in the quarter. This strong performance was driven by our Calvin Klein retail businesses, which posted a 9% comp store increase and equally strong performance in our wholesale businesses.

The businesses experiencing comp store sales increases and growth in square footage. The square footage growth is being driven both by new doors, as well as the expansion of existing doors and shops.

For the year, we are planning our Calvin Klein wholesale and retail businesses to grow about 10%, which will be driven by a mid single-digit comp store growth in our own stores, and growth in square footage at both wholesale and retail.

Moving to our Calvin Klein licensing segment; licensing revenues were up, royalty revenues were up 2% on a constant currency basis. The business posted strong revenue growth across all regions with the exception of Europe, specifically North American sales were up between 4% to 5% despite a significant reduction in jeans sales for the value channel.

Asia sales were up 6%, driven by double-digit growth in China, partially offset by soft sales in jeans and underwear in Korea. Latin and South America sales were up 10% driven by Brazil; and Europe sales were down 8% and I will put some more color on that.

Focusing in on some of our key businesses with our key licensing partners, the overall Warnaco business was down about 6% on a constant currency basis in the first quarter. This reduction was due to a 11% decline in jeans, driven by poor performance in Europe and a $30 million planned reduction in U.S. jean sales sold to the secondary channel.

Moving to Calvin Klein underwear, revenues were up 3% for the quarter led by strong growth in both the U.S., Asia and South America.

Our men’s business continued to perform well up 7% for the quarter with a launch of Bold that is driving that growth. Women’s was down slightly in the quarter, reflecting the timing of new product launches versus 2011. In 2011, we had the CK ONE launch; we’ve had significant fixture fill in the first quarter. For 2012, our launches are much more second half driven and for women, we have the launch of push positive, which is an innovative new product for women’s Calvin Klein underwear.

Moving to fragrance with Coty, our fragrance business continued its strong performance across all regions. For the current year, our new fragrance launch schedule is all second-half weighted, compared to last year’s spring launch of CK ONE. Despite that timing issue, fragrance sales were flat for the quarter and well ahead of projections. We continue to see strong performance from our Euphoria, CK ONE and Calvin Klein beauty franchises.

For the second half of the year, we have two new product initiatives planned. The first is the new men’s fragrance for fall, which we call encounter. And the second is the new global marketing and advertising campaign with Euphoria, our largest fragrance franchise. Both of these launches will be supported by a significant marketing and advertising spends, as well as new celebrity talent, which should fuel significant growth in the second half of the year. We will have much more to say about these two exciting initiatives on our second quarter earnings call in August.

Moving to our U.S. women’s business, our North American U.S. women’s apparel and accessory businesses were very strong in the quarter. Our royalty revenues with our licensees G-III and Jimlar were up over 15% for the quarter. On the apparel side, this growth is being fueled by the strong selling of women’s sportswear, women’s performance, dresses and suits. In footwear, revenues are ahead about 20% with strong growth in both the men’s and women’s businesses.

In addition our new handbags and accessory business continues its very strong performance. G-III has seen excellent sell-throughs at all department store accounts. We are targeting 20% growth for this category in 2012.

Our CK Bridge business in Asia continues to grow dramatically, posting an 8% increase for the quarter. We expect this business to grow about 20% for the year. The growth has been fueled by the China, Korea and Hong Kong markets where we are experiencing significant door expansion and comp store sales growth.

For 2012, we’re planning the overall Calvin Klein royalty growth more conservatively than in prior years due to the uncertainty in Europe. We’re now planning royalties to grow on a constant currency basis at 3% to 4% compared to our prior guidance of 4% to 5%, with foreign-exchange providing about 200 basis points headwind.

The primary driver of this reduction is the weakness we see in Europe particularly in the Warnaco apparel businesses. In order to take the financial risk out of those businesses, we are currently projecting the European jeans wear and CK Bridge businesses at contractual guaranteed minimum royalties for fiscal 2012. As such our overall European royalties are being planned down in the high single-digit range for 2012.

In North America our royalty revenues plan to grow for high single-digit growth with department stores being partially offset by a $30 million planned reduction in sales to the off-price channels, resulting an overall North American royalty growth of mid-single digit for 2012.

Moving to Asia and South America, we see these two regions continuing to grow at double-digit rates. Retail store square footage coupled with strong comp store sales increases will drive the growth in these regions. Our Heritage businesses, revenues were down about 3%, which was on plan and in line with our previous guidance. Retail comparable sales growth of 3% was more than offset by a 6% decline in wholesale businesses.

Our Heritage business is in turnaround mode, and we feel we are very well positioned in this business. Our full orders are on plan, inventory levels are in line with our retail sales plans. Second half product course are decreasing in the range of 5% to 8% and our in-store presentations are being enhanced and expanded with key customers. All of this gives us a high degree of confidence that we’ll see a dramatic improvement in this business in the second half of 2012.

Let me move just to some of the trends we’re seeing at the beginning of the second quarter. Our second quarter in May is off to a strong start, in particular, business trends in our Calvin Klein and Tommy Hilfiger businesses continue to outperform our plans. In our U.S. Retail businesses, the comps for the Calvin Klein are running up about 7%, while the comps for Tommy are running up about 12% against mid single-digit comp store plans.

Comp store, our Heritage business are running up low single-digits in line with plan. In the U.S., wholesale portion of our business both the CK and Tommy Hilfiger businesses continue to perform ahead of sales plans, and we continue to see increases in our out the door retails. Heritage is continues to be challenging, while we’re moving through inventory and seeing improvements in spring and summer sell-throughs.

Moving to Europe, wholesale which represents about 70% of our business continues its strong momentum. Our spring and summer 2012 season we started shipping in the fourth quarter is ahead 13% against last year. For the fall holiday 2012 season, our order book is up 4% to 5%. And retail, our comps for Europe have improved from 5% to high single-digits against a 3% comp store plan.

Finally, we’ve been prudent with our guidance and our estimates. We believe we have taken a significant portion of the risk out of the Calvin Klein European royalties by planning the jeans and CK Bridge royalties at contractual guaranteed minimum royalty levels. We feel that we put together sales and operating margin projections that we can not only meet, but if business trends continue we can exceed as we go forward.

We believe that the momentum we have seen in our Calvin Klein and Tommy Hilfiger businesses will continue to drive our growth and should allow us to continue to outperform our current projections.

And with that I will turn it over to Mike to quantify some of our guidance and our results for the quarter.

Mike Shaffer

Thanks Manny. The comments I’m going to make are based on non-GAAP results and are reconciled in our earnings release. We are very happy with the first quarter results.

For the quarter, we delivered revenues and earnings per share above our guidance and greater than the prior year. Our revenues for the quarter increased about $60 million or 4% over the prior year and were about $35 million greater than our previous revenue guidance.

Revenue growth over the prior year was driven by increases of 8% and 7% at Tommy Hilfiger and Calvin Klein respectively.

Our Tommy Hilfiger revenue growth of 8% includes a 3% or $20 million FX hit. On a constant currency basis, Tommy Hilfiger revenues were up 11%. We delivered earnings per share of $1.30 for the first quarter, which was $0.05 greater than our guidance of $1.25, and 6% greater than the prior year.

Our earnings per share was driven by stronger than expected revenues for Tommy Hilfiger and Calvin Klein, as our gross margin and operating result percentages were in line with our previous guidance.

Moving to our guidance for 2012, we’ve raised our full year EPS guidance to a range of $6.15 to $6.25, an increase of 14% to 16% over the prior year. Revenues are planned to be up 5% to 6% excluding the impact of foreign exchange and our discontinued businesses.

Including the impact of foreign exchange and discontinued businesses, we’re expecting revenues to be up 1% to 2%. Tommy Hilfiger revenues are planned to be up 7% to 8% on a constant currency basis with Tommy Hilfiger North America increasing 5% to 6% and Tommy Hilfiger International increasing 8% to 9% on a constant currency basis.

Including the negative impact of foreign exchange, we’re expecting total Tommy Hilfiger revenues to be up 2% to 3%. Calvin Klein revenues are planned to increase 6% to 7%, while our ongoing Heritage businesses are planning revenues up 1% to 2%, excluding the impact of exiting our IZOD and IZOD women’s and Timberland businesses.

Our total Heritage revenues are planned to decline 4% to 5%, including the negative impact of related [exhibitors]. Gross margins for the year are planned up about 125 basis points with expenses for the year planned up about 50 to 70 basis points, due in large part to an increase in pension expense. Impacting our gross margin and expense in 2012 is on mix of business, as a result of faster growth in our higher gross margin and higher expense Tommy Hilfiger and Calvin Klein businesses.

Operating margins for 2012 are planned to increase about 60 to 70 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 is planned between $115 million to $117 million reflecting a reduction to the prior year as a result of debt repayments. We currently anticipate to make $300 million of term loan payments in the current year.

For the second quarter of 2012, earnings per share are planned at 1.18 to 1.20 or an increase of 10% to 12% over the prior year. We are planning our revenues to increase about 4% to the prior year excluding the impact of foreign exchange and exited businesses. Including the impact of foreign exchange and exited businesses, we’re planning our revenues basically flat.

Our gross margins for the second quarter will be up about 125 basis points with all businesses plan to show gross margin improvement as we begin to sell four product later in the second quarter, which is showing cost decreases of about 5% to 8%.

Overall operating margins will be relatively flat for the second quarter as expenses were up the mix of business and as a result of the pension expense increase. Our tax rate for the second quarter is planned to 26.5% to 27%.

And with that we’ll open it up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We’ll first go to Rob Drbul at Barclays Capital.

Robert Scott Drbul – Barclays Capital, Inc.

Hi, good morning.

Emanuel Chirico

Good morning, Bob.

Robert Scott Drbul – Barclays Capital, Inc.

Hi, Manny, I guess the first question I have is a bigger picture question, Manny. When you look at the European outlook and the performance of Tommy, are you more concerned about your Heritage business performance given the Q1 results or are you more concerned about the outlook on the European side?

Emanuel Chirico

You know, look, I guess, we get paid to worry about everything, but on balance, I think is feel very confident about the Heritage turnaround, because the business is in front of us. We see the cost declines that Mike discussed a 5% to 8%, we see where we’re positioned from an audit flow with our retailers, the inventory is in line. If the inventories are controlled and we just continue to see the kind of sell-throughs that we are experiencing in spring and summer, we should be very well positioned for second, third, and fourth quarters outperform our guidance and so to really see significant improvement in the second half of next year. So that seems to be within our grasp and the only thing that can really screw result of this inventories get on line and we lose control of the promotional agenda, which I just don’t see happening at this point.

Europe, we’ve consistently seen strong performance there since the acquisition of Tommy. We are now approaching now a 30th month of running that business. And feeling very strong about the trends in the business, we feel very strong about how that business is happening and, but you have to be concerned what you read in the paper and a constant drum beat that goes out there. So it’s really a balancing, I read the headlines and then I look at our daily sales reports, and we continue to comp, meet the high single-digit comps there and we see a spring, summer of retail sell-throughs very strong.

So I know we are gaining market share. I know we are doing everything that’s in our control to manage that business. And if Greece pulls out, I can tell you what kind of impact it’s going to have on the consumer and where it is. So this uncertainty that’s just over all lines of the business, and I think that’s why we’ve been much more cautious with our guidance. Given all of that, I couldn’t be more confident given where we are in the world, then we are going to deliver or exceed with the guidance that we’ve given to the street. It just seems like there is a lot of momentum in all of the businesses we operate.

Robert Scott Drbul – Barclays Capital, Inc.

Got it and in terms of the progression of the comps in Europe, can you just talk about like, was there a major change from the beginning of the quarter until sort of where you are right now, through the second quarter?

Emanuel Chirico

No, I think the trend has been pretty consistent. It’s just all of it is just moved. So in the last three or four weeks, we’ve just seen business get better almost in every market from what it was three months ago. And it was obviously the plus five moving to high single-digit comps for the last three weeks.

Now, leading into that, it’s a three week trend, feel very good about it. But, I’m not ready now to that take and extrapolate it out. So, at this point in time, it gives us confidence and it makes us feel good about that, obviously the spring and summer lines are very strong and the consumer’s reaction to it. But, I wouldn’t want to draw any conclusions of the economy in Europe overall.

Robert Scott Drbul – Barclays Capital, Inc.

Great, thanks very much. Good luck.

Emanuel Chirico

Okay.

Operator

We’ll go next to Adrianne Shapira at Goldman Sachs.

Adrianne T. Shapira – Goldman Sachs & Co.

Thank you. Manny when you initially provided the guidance in January of this year, it seems if what has changed since then, besides the fact that obviously we’re starting off with a strong feed and you’re passing that on. On the one hand, the world has gotten a bit scary, but on the other, it seems like you’ve taken out risk to your guidance, especially with the Calvin Klein business now planned at contractual minimum. So, maybe in terms of where we sit today versus where you’re ahead with that in January, you provided the initial guidance, how do you feel about the remainder of the year, especially with the back half being better than the first?

Mike Shaffer

Sure. Well, look I think, let’s put it in perspective. When we first came out in January, we said that the first half would be flat to down. And right now the first quarter was up, earnings per share 6%, and the second quarter, we’re guiding now to a 10% to 12% increase.

So clearly, what’s in front of us, we feel really good about. And that’s enabled us to do a couple of things. It’s enabled us to take some of the risk out of the Calvin Klein royalty business by taking future royalty in Europe down and also at the time we were looking at a Euro that was $1.30, and now we’re projecting something more like $1.27, $1.26.

So clearly, we factored that into it as well and took those EPS hits while raising guidance from January, up probably $0.15. So we feel much better about the tone of business right now. But just don’t have a crystal ball to tell you how everything is going to actually come together in the macro environment.

Adrianne T. Shapira – Goldman Sachs & Co.

Great, okay. So in light of the Q1 6%, 2Q 10% to 12%, we should still be thinking about the back half better than the first half, even though you had thought, it was going to be flat to down, that still holds through that the back half still presents an opportunity?

Emanuel Chirico

Yeah, just the math, I don’t have it in front of me, but the earnings per share growth in the back half of the year is well in excess of 15%, when you put it altogether, since we’re growing at the top end of the guidance 16%. So clearly, I don’t have the math in front of me, you guys can do your own, but based on our guidance we’re looking for even a stronger second half. I think two things will fuel that.

Overall, just a natural flow through of the cost declines that are in the system have been ordered, booked and in place and we should really, we were feeling more and more confident about Heritage getting back on to its track that delivering steadier earnings, nine out of the last 10 years. So with the exception of the blip that we had last year with Heritage with all the chaos in the market, we really feel strongly that business get back on track second half of the year.

Adrianne T. Shapira – Goldman Sachs & Co.

And then Manny just following on that, it is exciting to hear that you see opportunity for Heritage to get back on track, but on the flip side, we are obviously seeing some pretty strain out of JCPenney was comps down 19% in Q1. Maybe help us think about how you’re getting more excited about Heritage, but we’re obviously seeing some challenges as JCPenney tries to transform that business?

Emanuel Chirico

I guess on a couple of this, overall in the Heritage side, we sell everyone, so I think that’s important to take into consideration. On the Heritage side also the key in the Penney situation from an operating point of view, I think is to make sure your inventories continue to be on plan. Not everybody was surprised business was softer in the first quarter for Penney’s and we’ve adjusted all of our inventories and out flowing our order book to really take that into consideration.

One of the advantages we are going on as we have two new brands with JCPenney, we have one brand at JCPenney that didn’t exist which is the ARROW business, which is growth against last year. And in addition, the IZOD business which is the same number of doors, but it is getting stronger presentation and a deeper buy is very positive for us as well.

So all those businesses at Penney, as top as the Penney’s business has been or Van Heusen or ARROW and our IZOD business for the first quarter we’re right on plan against our projections, our inventories are in line and we’ve just adjusted the inventory flow and the inventory purchasing for the back end of the year. So that’s what’s happening there. Offsetting whatever chaos that Penney’s is creating in the market is just very strong business with Macy’s with our Heritage Brands and very strong businesses at Kohl’s with our businesses there as well, both sportswear and dress shirt. So that flow is really coming back and the order flow seems to be in place for us.

Adrianne T. Shapira – Goldman Sachs & Co.

Perfect. Best of luck.

Mike Shaffer

Thank you.

Operator

We’ll go next to Omar Saad at ISI Group.

Omar Saad – International Strategy & Investment Group, Inc.

Thanks. Good morning, guys.

Mike Shaffer

Hey, Omar.

Emanuel Chirico

Good morning, Omar.

Omar Saad – International Strategy & Investment Group, Inc.

Hey, guys. We’ve been hearing some rumbling about in Europe that some department stores are getting a little bit more cautious in terms of their planning given all the kind of macro and headline stuff that you mentioned. Are you guys seeing department stores kind of book to maybe kind of orders a little bit, just to manage inventories a little bit more tightly, and then how do you feel overall about the inventory levels in your business and then at retail in Europe?

Emanuel Chirico

Okay, we’re not seeing with any of the major accounts any cancellations at all on the Tommy business. For Fall and holiday as you can see we open to buy our sales order flow in our order book, we’re planning the business 4% to 5% based on the order flow, so clearly based on five to six consecutive seasons since we’ve been operating the business of double-digit growth open to buy dollars has shrunk in the second half of the year, retail is getting their inventories back in line.

And that’s all factored into our 4% to 5% growth in the wholesale business for the second half of the year. We’re not seeing any attempt by the retailers to cancel goods at this point. We believe, Tommy unlike most of the brands in Europe continues to gain market share in this environment and is been a proven performer at retail with our key customers. So they continue to get behind that brand and we haven’t seen any softness in that business at all. Whatever orders that we have canceled has been more our decision from a credit point of view with some of our smaller specialty store accounts, but clearly immaterial to the overall business and feeling good about other business seems to be progressing.

Omar Saad – International Strategy & Investment Group, Inc

Gotcha, thanks that’s really helpful. And then could you step back and think about the success you guys are having with that brand and many of the management team has been excellent, and the execution has been great. We were starting to hear other brands over there, comping down, comping down mid-teens, even in Northern Europe, it’s not necessarily just as kind of Southern Europe, Northern Europe split. I know stepping back and you think about that business, how can you explain, what your explanation of why it’s doing so well. Is just execution, is there fashion trend in Europe where they had a Tommy Hilfiger, preppy, red, white and blue fashion, is in fashion right now. What are your thoughts on that? Thanks.

Emanuel Chirico

Look, I mean, this is one of those things which you can never really put your thumb on exactly why we’re outperforming, but clearly the execution is a big part of it. I think the management’s team for localization focusing on each market from a merchandising point of view product assortment point of view really staying on top of it. From that point of view, I think it’s always been a strength and continues to be a strength of the Tommy brand. I think, to some degree, we are in a preppy traditional, very much color focus from a brand point of view.

I think that does benefit the Tommy brands to a degree. But again we’re up against a lot of competitors that fill that bill as well so and getting market shares. So I really believe it comes out of the execution and product assortment. And I think is the intensification of the marketing that’s been going on as 24 months has really been a key both in Europe and in the United States from that point of view. So I think that’s the best I can do from an explanation and just monitoring the business and not seeing any kind of slowdown at this point.

Omar Saad – International Strategy & Investment Group, Inc.

All right. That works for me, Manny. Thanks a lot, great job.

Emanuel Chirico

Me too, Omar.

Operator

We’ll go next to Evren Kopelman of Wells Fargo.

Evren Dogan Kopelman – Wells Fargo Advisors LLC

All right, good morning. Thank you. Your North America outlook business seems to really have outsized growth ahead of your other channels. Can you talk about why, kind of the reasons behind that and also how is the profitability in that channel relative to your other channel?

Emanuel Chirico

Sure. I guess, look, I think where we’re seeing the most outstanding growth is with the Calvin and Tommy. Our Heritage brands are doing fine, low single-digit comp increases, which are on plan delivering, I think the outlet channel, that channel in general is a robust channel. I think there is a significant international tourist component to that in key markets, Florida, Vegas, the New York Metro market, the West Coast. And I think, we benefit dramatically from that both with Calvin and Tommy.

And we have not seen any slowdown in that tourist inflow at all. So the business has been, both from a domestic tourist flow, which I think only intensify in the summer and from an international tourist really adding to the business. Our biggest international tourist for most of those key markets continues to be Brazil, and both the Tommy brand and the Calvin brand are extraordinarily strong in the Brazilian market. And when they come here, they shop significantly in that channel distribution. So I think those are some of the reasons why we are doing as well as we are.

And I think the last reason is we’ve also really focusing on some key markets, expanded stores in those markets to take advantage of the growth that we’re seeing and we’ve been able to really capture more market share because of that.

Evren Dogan Kopelman – Wells Fargo Advisors LLC

And how is the profitability?

Emanuel Chirico

I am sorry. The profitability in our Tommy and Calvin businesses are one of the highest in our franchise, so somewhere in the 11% to 13% range.

Evren Dogan Kopelman – Wells Fargo Advisors LLC

Thank you.

Operator

We’ll go next to Howard Tubin, RBC Capital Markets.

Howard Tubin – RBC Capital Markets Equity Research

Oh, thanks guys, great quarter. May be just some more color on inventories and how do you feel about kind of carryover in your inventory if is there any and how you are planning inventory for the fall season?

Emanuel Chirico

Yeah. I think inventories are in terrific shape in-house and also best as we can sell we monitored weekly and retail and with our key department store accounts. We really jumped on the fall holiday inventory mid fourth-quarter to really keep ourselves well-balanced. So I feel like I guess on true levels I think we’re in excellent position. We’re in excellent position from a quality point of view and from a quantity point of view and being able to stay out of trouble on seasonal goods, but we’re also very liquid and we’ve been chasing and I feel confident that as sales hopefully materialize above our plan then we’ll be in a position to capture that.

So I think we’ve really been able to balance that particularly in some of our quick response in our EVI businesses dress shirts and in particular neckwear, we’ve been really able to be very liquid and stay on top of that in order to drive that business. So I think that will continue.

Howard Tubin – RBC Capital Markets Equity Research

Great, thanks.

Operator

(Operator Instructions) We’ll go next to Robbie Ohmes at Bank of America/Merrill Lynch.

Robert F. Ohmes – Bank of America/Merrill Lynch

Hello. Hey, Manny, good morning.

Emanuel Chirico

Good morning, Rob.

Robert F. Ohmes – Bank of America/Merrill Lynch

Hey, two questions for you. The first question was just the strength of the AUR, the Tommy Hilfiger AUR up by 10%. Can you walk us through the timing of when the AUR, tailwind began and when you anniversary that in? Does that mean if I look at Tommy’s comps in North America up 12%, the 10 points to that is AUR and, sort of if so how you’re thinking about AUR in the, I think the fall season, I think you start to lap that?

And then second question on Heritage, so IZOD I think you’re doing the shop and shops with JCPenney and then you mentioned ARROW going into JCPenney. I was just, I remember historically there was sort of a desire for some exclusivity from Macy’s versus Kohl’s and Penney and Kohl’s versus Penney, and it sounds like ARROW and IZOD are sort of broadening distribution and maybe being less exclusive. Can you just sort of walk me through what’s changing there with your partners? Thanks.

Emanuel Chirico

Sure. I guess, there’s a couple of questions there. On the Tommy AUR, we’ve experienced AURs improvement in Tommy and Calvin really starting in the last year, so we have already anniversary some of that. Last year’s AUR increases first half of the year were close to 4% or 5%, that was in spring and summer, we moved to fall holiday, it kind of went to high single-digits and now we’re seeing about a 10% increase. I think I guess driven by a couple of things and we’re looking at like-to-like products, so mix plays into this. So, it’s not just everything. It’s not just that overall everything is 10%.

But when we like-to-like product, we’re seeing 10% out the door retail increases. So, it really is being driven by combination of a couple of things, AUR is the key component. It’s not quite as the percentage that you described, but it’s probably 50% of the increase is being driven by AUR and 50% of the increase is being driven by units conversion some of the other metrics at retail.

On the exclusivity question for some of our Heritage brands, first, let me take it in pieces. ARROW is the basically a Kohl’s, JCPenney brand. It’s not at Macy’s at all. The IZOD brand is that JCPenney, it’s historically always been a JCPenney, it’s been there since our acquisition back in 1993. It is always been the halo brand for JCPenney and I think what hurt that business is when American Living went into that business and attempted to be the halo brand and then couldn’t transact at the prices that IZOD transact having and we’re selling at, in our reality 50% below the IZOD price point. And that basically to the big piece of that business, that business began to shrink.

With new management team at JCPenney, they’ve really taken a different focus, taking the American Living brand out of Penney’s and they’re really focusing on IZOD as the halo preppy traditional brand at the store. For Macy’s, we’re a main floor of brand. We compete with Levis and some of their private labels; so it’s a somewhat different strategy at Macy’s it’s more of a category business as opposed to a lifestyle business.

And it’s based on historical performance Macy’s has continued to have the IZOD business on the men’s side of the floor in a big way, where Penney’s is at it across multiple categories. So that’s the best, I can give you a sense of it, and we believe that distribution will continue, because the brand works within the strategies of both of those retailers.

Robert F. Ohmes – Bank of America/Merrill Lynch

No, that’s really helpful. And just really quickly meaning, so lot of your confidence in the turnaround in Heritages, it sounds like you’re picking up the American Living business in your fall shipments into JCPenney. So I assume JCPenney is going to be on a year-over-year basis are strong as Heritage wholesale customer in the back half, is that right?

Emanuel Chirico

No. Macy’s will still be larger than JCPenney, overall the Macy’s and the IZOD business. The IZOD business will be a strong business at Penney’s and it will grow as it performs and gets to a certain level. The improvement in Heritage is all about gross margin, and it’s all about the significant clearance and promotional activity that we are on the third and fourth quarter of last year. Our margins in the third and fourth quarter combined were also down between 400 and 500 basis points. We are anticipating getting half of that back. We could do better than that and we’re in a strong position to really do that. So it’s much more margin that itself.

Robert F. Ohmes – Bank of America/Merrill Lynch

Got it. Thanks so much, Manny.

Emanuel Chirico

You’re welcome.

Operator

Now, we’ll go next to Jeff Klinefelter with Piper Jaffray.

Jeff P. Klinefelter – Piper Jaffray, Inc.

Yes, thank you. Manny, I was just curious if you could share a little bit of perspective on comparing contrasting maybe the Calvin Klein business in Europe, the Tommy business in Europe. I mean clearly, there are more challenges in the apparel side for the Warnaco Calvin Klein business. And do you see that as the regional, more exposure to the South, are there issues in pricing, product maybe just a little bit more context around that; given the relative outperformance for Tommy? And then also that very strong op income growth in Tommy in the first quarter, and your success in driving marketing dollars to that brand, maybe a little bit more color on what your expectations are for profitability in Tommy for the year?

Emanuel Chirico

Sure, I guess, I’m going to give the second part of that question to Mike. I’ll deal with the first part about the comparison between Calvin Europe and Tommy Europe. I think you hit on one of the key factors, one of the key factors is the strength of the Calvin business, has historically been Southern Europe, where the Tommy business Southern Europe, Spain and Italy represent probably 20%, 25% of the business, where represents 65% of the Calvin business.

So I think how the brands developed, Tommy is much more geographically balanced than Calvin particularly on the apparel side of the equation. And I think the real issue we’re having in Calvin in Europe, if you really focus on product category is really on the apparel side, and it really is the sportswear and bridge apparel which hasn’t been successful, since its launch. And the jeans business, which Warnaco talked about in great length and I’m not going to speak for them, but clearly they are putting initiatives in place.

The nearest some of our design focused how they are focused on design, how they centralizing it, at the same time trying to localize it to get a benefit out of that, we report all those initiatives. We think they’ll start to pay dividends in 2013, probably not going to really be able to see that much in the business this year given lead times and cycles.

So I think, those are really some of the key drivers that are going on, we’d like to see better presentation of products and we’d like to see a better product offering, but I think the regional focus on the Calvin business versus the Tommy business is the biggest change. And then I will just I make Mike put a little bit of color on the Tommy profitability for the balance of the year.

Mike Shaffer

Jeff Manny really talked about it, but just in general, operating margins for the first quarter were slightly down about a 125 basis points. As we look to the second quarter they are flat and for the year they are up a 100 up about 60 to 70 basis points. So obviously the bulk of our improvement for the company is coming in the second half of the year as we’ve talked about and driving that in particular our gross margin and costs. So as we look to Tommy, they will also have a significant improvement in the second half due to that product, the cost of product decreases and the gross margin improvements.

Emanuel Chirico

And I guess Jeff if you’re asking when we see the Tommy business, I guess, we see the Tommy profitability somewhere between 12.5% and 13% operating margins for the year and then directionally looking out we really think those operating margins start to move between 13% to 14%, 13% and beyond. So I think just getting that cost dynamic back in balance and taking advantage of the growth that we’re seeing and leveraging SG&A line, I think it will drive the overall profitability.

Jeff P. Klinefelter – Piper Jaffray, Inc.

Okay, thank you, that’s helpful Manny. One of the follow-up on the Tommy business, given this kind of unprecedented volatility and as you said kind of headline risk to confidence. What is your management team, the Tommy management team in particular, any changes and how they are kind of approaching the wholesale customers, they’re utilizing systems to maintain visibility into the booking profile. Just curious how these management teams are attempting to deal with this uncertainty?

Emanuel Chirico

I guess a couple of things on the, I think as we’re constantly investing on supply chain and focusing on getting good data from our retails both in North America and Internationally, I think that continues. I think those things are ongoing, but I think it’s also how you manage the business intuitively. I think when we were in a cycle where the brand was growing and had an order book that was flowing at 12% to 15% increases, and feeling that there was so much momentum in the business, we were being more aggressive on our inventory buys and really feeding it.

So if you have an order book that was the 100, you might be buying a 110% of that inventory with a strong belief that you’d be able to sell in season and really manage the business. In an environment we’re in now, I think we’re very cautious about that. So we have orders that are a 100 again. I think we’re buying something close to 98 right now, and really not the risk reward is just not there to go chasing business that may or may not materialize, and if it doesn’t materialize, you could be left with inventory that really could create risk for you.

So we have the visibility in that, European wholesale business is much greater than the U.S. visibility just by the nature of how retail has done there, or is it given, or is stick or you don’t have the cancellation issues that you do in the United States, it’s just more easily manage business from that perspective.

And given that visibility, we are being very cautious on the inventory buy not to get ourselves in trouble on with excess inventory at the end of the season. So just the mindset about how to manage that inventory going forward.

Jeff P. Klinefelter – Piper Jaffray, Inc.

Thank you very much. It’s very helpful.

Operator

We’ll go next to David Weiner at Deutsche Bank.

David Weiner – Deutsche Bank Securities, Inc.

Yeah, good morning, everyone. Can you hear me okay.

Emanuel Chirico

Yes, I can.

David Weiner – Deutsche Bank Securities, Inc.

Okay, perfect, thanks. So, just I was wondering if you could maybe give a little bit of an update on your plans in China. You did go through some of the numbers in Asia for the quarter, but I mean, I guess any update there in terms of how you’re planning for that business for the back half of the year and into 2013?

Mike Shaffer

I guess, on the Calvin Klein China business…

David Weiner – Deutsche Bank Securities, Inc.

Yeah.

Mike Shaffer

The business is, it continues to be very strong, continue to make investments in square footage there, strong jeans and underwear business are very strong. CK Bridge business, and strong accessories fragrance business as well. So, really haven’t seen anything to slow us down in China from a royalty point of view on Calvin.

On Tommy businesses is significantly smaller than the overall Calvin brand and, but it’s growing dramatically. We’re really now operating, we’ve been operating the business as a joint venture for about nine months now. And for the first time, I think we’re actually breaking out the joint venture income and you’d be able to track that as we go forward.

So that business is very healthy. We’re seeing 15% to 20% kind of growth in that business that we we’re projecting for the year, it’s actually stronger than that, haven’t slowed it through yet. We continue to, just to remind everyone, we continue to collect royalties like a normal licensing relationship and then we owned 45% of the China business.

So that growth continues to happen and it’s a franchise distributor model, we’ll operate some, the joint venture will operate some owned flagship stores, basically selling more of a wholesale model into partners, and it seems like a very good model for us and its off to a very strong start, and the infrastructure is being built, the investments are being made and that’s all included in joint venture income that you see reported in our numbers.

David Weiner – Deutsche Bank Securities, Inc.

On the Tommy side in China, is the product, I mean are there any major differences and kind of how the product looks there like for local pay some things like that are pretty similar to what you’d see kind of otherwise in other countries?

Emanuel Chirico

I think if you go to everyone of our key markets, there is always localization from a merchandising point of view that takes place sizing and all the issues that go on with that. So clearly that goes on local purchases will go on for a percentage of business. But if you walk into those stores, and if we are doing our job right, I think we are right now, do going to those stores, those stores should look very much like our European stores.

David Weiner – Deutsche Bank Securities, Inc.

Yeah.

Emanuel Chirico

We’re position at premium level there and there should be a consistency globally how the Tommy brand is positioned. So localization from a merchandising point of view, but the brand DNA stands always as a key focus point. So…

David Weiner – Deutsche Bank Securities, Inc.

Great, that’s very helpful.

Emanuel Chirico

We’re executing, really well against that.

David Weiner – Deutsche Bank Securities, Inc.

Great and just a last question. How many stores roughly do you have in China, or run in China?

Emanuel Chirico

I think, operated directly a handful.

David Weiner – Deutsche Bank Securities, Inc.

Yeah.

Emanuel Chirico

The point of sale, I think right now we are just under a 100, somewhere in that area.

David Weiner – Deutsche Bank Securities, Inc.

All right, okay. Perfect, thanks very much.

Operator

We will go next to Carla Casella at JPMorgan.

Carla Casella – JPMorgan Securities LLC

Hi, I was wondering if you could talk a bit more on the jeans business on the weakness. Is it that you’re losing distribution or losing share or do you think we could be seeing a slowdown in the denim cycle?

Emanuel Chirico

Carl, I think on the specificity on some of the Calvin Klein Jeans business. I think some of these questions should just go to Warnaco. And I think they’ve been raised ad nauseum with them, so I’ll defer on that side. I will say that the jean side, we’ve been in a 12-month jeans cycle that has been tough, but we’re now starting to anniversary that and we are starting to see growth in North America on the jean side of the business.

And we are starting internationally where we should start to see some growth in that business as well, a lot of initiatives going on, on the Calvin side with color denim and I think a lot of those have been worked very well. But at this point especially for spring, there is still too smaller piece of the overall jeans business to change the direction of what’s going on there. So I can’t get much more color than that, that you really need to speak to Warnaco.

Carla Casella – JPMorgan Securities LLC

Okay, that’s great. Then one follow-up on the acquisition front, can you just talk about your views of either diversifying into more women’s to balance the assortment more or would you prefer on the acquisition front to look at men’s business and how important is an international component when you’re looking at acquisition opportunities?

Emanuel Chirico

I think, look, at this point in time, it’s less about women’s and it’s more about whatever we decided to get involved in strength of the brand. Our choice would be a brand that is both men’s and women’s focused. Our choice would be depending on the expertise that comes with the brand and a potential acquisition, it will be determination whether we run a woman’s business ourselves or license it out as Tommy business, because of the in-house expertise that we have and how it’s been developed, we directly operate most of the woman’s businesses we’re in.

On the Calvin side, where it’s been where the brand has grown from a licensing model, we obviously operate we don’t operate in any of those business and use licensing model. So I think it will depend on the circumstances from that point of view.

Our first choice from an acquisition component, we’d be continue to do more Calvin and more Tommy and grow those franchises either by product categories like we are doing in Europe with the sportswear businesses there, and what we are doing with Tommy taking back tailored clothing, dress shirts and neckwear in Europe and Asia to run those in-house directly till 2013, those are 2013, 2014 initiatives. But, clearly they will be big growth drivers for us as we go forward. So I think that would be our first priority more Calvin and more Tommy.

Carla Casella – JPMorgan Securities LLC

Okay, great. Thanks a lot.

Operator

We will take our next question from John Kernan at Cowen.

John D. Kernan – Cowen & Co.

Hi guys thanks for squeezing me in and taking my question. I went back in September of 2010 your Analyst Day in Amsterdam for Tommy Hilfiger, you laid out some pretty ambitious door growth plans both in the wholesale side of things and the own retail. Where are we in that cycle? What type of door growth I guess year-over-year in each of those businesses that we are looking at going forward?

Mike Shaffer

Okay I guess based on anything that we presented in September 2010; we are dramatically ahead of plans. We clearly opened internationally significantly more retail stores and flagship stores reopened the Lord’s, London store; Tokyo, second in Osaka, we’ve opened a new store in Paris on Champs-Elysees, a new Hamburg store in Germany. So just those are just the examples of not only opening stores, but also opening stores at a profitable and at the same time significantly brand enhancing, giving the global feel.

Our plan, I guess from a store opening point of view, globally for the Tommy brand is probably owned and operated stores to add between 50 and 60 stores a year in North America, and the rest of the world. And then probably another 25 to 30 franchise partner stores around the world.

For Calvin, we are adding in excess of 150,000 square feet a year. We probably will add in excess of a 100 stores doors internationally with significant focus on Asia, China being the biggest market there, but also Korea with our sportswear, with our CK business. And then Southeast, South America, Latin America, Brazil being a real focal point, continuing to open square footage throughout Latin America. So that gives you a sense of the two big brands and the kind of growth we are looking for and clearly it’s accelerated over the last two years.

John D. Kernan – Cowen & Co.

Great, that’s helpful. And then the Tommy Hilfiger flagships in Japan that you announced, Tommy has been in Japan for a long time? What do you see in that market, what do you see the long-term potential there for Tommy?

Emanuel Chirico

Well, that business is about a $275 million business depending on currency bouncing around, but about a $275 million business, 10% operating margin business. The brand position there, we are really in an elevation mode for the last two years of continuing to try to lift the brand presentation. It became much more of a jeans plus Tommy, a little bit too urban brand for us in Japan, really the only market outside the states that really had that issue. And we have been really on a mission there, to upgrade our positioning there and really are focusing on the Tommy sportswear on men’s and women’s product as the anchor. And have opened as I said the flagship store in Tokyo, one in Osaka and continue to open full price stores, a lift of perception of the brand there.

We don’t view in all of our growth models, we don’t view Japan as a huge market. We believe that the brand could be twice its size, but our financial plans call for it to continue to grow in the low-single digit kind of range with the economy in Japan. But, clearly there is an opportunity if we breakthrough to really get some momentum and acceleration typical to what we see in the United States where we never would have planned double digit kind of growth and that’s what we’ve been experiencing in the last 27 months.

John D. Kernan – Cowen & Co.

Okay great, thank you and good luck.

Emanuel Chirico

Okay operator, we are supposed to be at another Investor Meeting. So we are going to take one more question and then end the call.

Operator

Okay. And next question comes from Christian Buss at Credit Suisse.

Christian Buss – Credit Suisse Securities (USA) LLC (Broker)

Thank you very much for squeezing me in. I was wondering if you could provide some perspective on the game plan and the timing for the Bridge business in Europe, an update there would be very helpful?

Emanuel Chirico

Sure, we are still in a lot of discussions and a lot of planning with our retail partners. The plan right now is to launch with men’s before 2013. We are working very closely with the key department stores account in our largest markets in Europe right now. So the plan is to launch in men’s probably 12 months later to follow that with women’s, it will be apparel and accessories.

And I think we’ll have a lot more to talk about in the next three to six months, then we really put some flesh on it for you. We’ve sized the market and it’s just a guesstimate over the next five years that we really believe it’s a $500 million business for us long-term men’s and women’s, sportswear, apparel and accessories there.

So I guess at this moment in time, that’s about as far as I’m willing to go with talking about the positioning of brand, how we’re going to market it. We’ll clearly give a lot of color and transparency on that as we get to the fall of this year. But be assured that start up costs are all accounted for, we had everything placed in our guidance in our budget and we feel confident about it that we have what we need and the resources both financial and people wise to really make this a success in Europe.

And with that we’re going to end the today’s call. We really appreciate your attention. We look forward to our second quarter call and I guess I’d be remiss if I didn’t Allen Sirkin.

Allen Sirkin is our President and Chief Operating Officer. I know all of you know him. Allen will officially be retiring on June 21, at our annual meeting. We will have some nice things to say about him then, but just with this group I know has had a lot of interaction with Allen, we all wish him all the good luck in the world in his new phase of his life and congratulations.

So with that thank you for your attention and we’ll see you in August. Take care, bye, bye.

Operator

And that does conclude today’s conference. Again thank you for your participation.

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