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Executives

Manny Chirico - Chairman and CEO

Mike Shaffer - Chief Financial Officer

Dana Perlman - Treasurer and Head, Investor Relationships

Ken Duane - CEO, Wholesale

Analysts

Jess Schoen - Barclays Capital

David Glick - Buckingham Research Group

Adrianne Shapira - Goldman Sachs

Christian Buss - Credit Suisse

Kate McShane - Citi Investment Research

Omar Saad - ISI Group

Evren Kopelman - Wells Fargo

John Kernan - Cowen & Company

Howard Tubin - RBC Capital Markets

Joseph Parkhill - Morgan Stanley

Diana Katz - Lazard Capital Markets

Matthew Boss - JP Morgan

Phillips-Van Heusen Corporation (PVH) Q2 2012 Results Earnings Call August 28, 2012 9:00 AM ET

Operator

Good day, everyone. And welcome to today’s PVH Corp. Second 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 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 as of August 27, 2012 of future events and financial performance. These statements are subject to risks and uncertainties indicated 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 right to change its strategies, objectives, expectations and intentions, 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, epidemics, war, terrorism, availability of raw materials and other factors. It’s reliance on the sales of its business partners and it’s exposure to the behavior of its associates, business partners and licensers.

Therefore, the company’s future results of operations could differ materially from historical results or current expectations. 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. Reconciliation of these measures are 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 to the SEC in advance of this webcast and call.

On the call with us today is, Mr. Manny Chirico, Chairman and CEO. Please go ahead, sir.

Manny Chirico

Thank you, Dana. Joining me on the call today is Mike Shaffer, our Chief Financial Officer; Dana Perlman, our Treasurer and Head of Investor Relationships; and Ken Duane, who runs, CEO and runs all of our Wholesale businesses in the United -- in North America.

In general, we’re very pleased with the results for the quarter. Just to summarize, we beat our top end of the second quarter earnings guidance by about $0.05 and given the momentum we’ve seen in our business, we’ve also increased the top end of our 2012 earnings guidance by $0.07 for the year to $6.25 to $6.32.

Getting into our major businesses, I’m going to start with the Tommy Hilfiger business. The Tommy Hilfiger business continued its strong performance during the quarter, posting a 4% revenue increase and a 28% increase in operating income.

When you take out the foreign currency headwinds, our operating performance was outstanding on a constant currency basis. Revenues were up 10% and operating income was up over 34% for the quarter.

Let me focus on the International business of Tommy. Revenues internationally were 9% local currency. Our retail comps in Europe posted a 15% increase for the quarter, while wholesale revenues were up 9%.

Geographically, we continue to see strong growth in Central and Northern Europe, with particular strength in France, Germany and Turkey, partially offset by softness in Southern European market with particular focus on Spain and Italy.

Moving to North American where we posted 11% revenue increase for the quarter, that was driven by 11% comp store increase in our retail businesses and high single-digit growth in our wholesale businesses. We continue to see momentum in North America and strongly believe that the significant investments we are making in product and in our marketing programs are paying dividends for us.

We have seen average unit retails increase about 10% over the last 12 months at both wholesale and retail. We continue to elevate product and gain additional four space at top doors in Macy’s, which is helping fuel the brand exposure.

We strongly feel that our in-store presentations and product initiatives will be fully in place in the second half of this year. And we believe we’re well positioned to continue to exceed our plans in North America 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 for the balance of the year more conservatively than current trends would indicate.

Moving to Calvin Klein, the Calvin Klein business continues to exceed our financial guidance and post strong results. Total revenues in the second quarter for our combined Calvin Klein businesses were up 5% despite overall softness in the global jeans and women’s underwear businesses.

This increase was driven by our Calvin Klein North American retail business, which posted a 5% comp store increase. For the year, we are planning our total North American Calvin Klein wholesale and retail businesses to grow about 10%. This will be driven by a mid-single digit comp store increase and growth in square footage at both wholesale and retail.

Moving to our licensing segment, royalty revenues were up 6% on a constant currency basis. This increase was driven by strong performance globally in fragrance, women’s sportswear, dresses, men’s and women’s footwear and handbags and accessories, all of which posted double-digit sales increases.

This positive performance was negatively impacted by 10% decline in Warnaco’s global Calvin Klein sales. The licensing business posted strong revenue increases across all geographic regions with the exception of Europe. Specifically by region, North America sales were up 5% with all product categories posting strong results with the exception of jeans and women’s underwear.

In Asia, sales were up 6% driven by double-digit growth in China, Hong Kong and India and partially offset by weak sales in Korea. Latin and South America sales were up 25% driven by the Brazilian market, which continue to post above 30% increases.

In Europe, sales overall were down 12% principally related to the poor performance of the Warnaco apparel and underwear businesses.

Let me put some color on some of our biggest licensed businesses, starting with jeans and underwear. As I mentioned, the overall business is down about 10% on a constant currency basis in the second quarter. Continued -- that’s being driven by continued weak performance in jeans and women’s underwear.

On a regional basis, looking at those business we saw strong sales in Asia and South America, which were more than offset by the poor sales with jeans and underwear in North America and Europe.

Moving to fragrance, 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 launch of CK ONE in spring.

Despite that timing issue, fragrance sales were up 11% for the quarter and well ahead of projections. We continue to see strong performance from our Euphoria, CK ONE and Sheer Beauty franchises.

For the second half of the year, we have two new product initiatives planned. The first is a new men’s fragrance called Encounter, which is just beginning to ship to key accounts throughout North America and the rest of the world.

And the second is a new global marketing and advertising campaign for Euphoria, our largest fragrance franchise. The Euphoria marketing campaign will begin in October and intensify in the all-important holiday selling season.

Both of these initiatives will be supported by significant marketing and advertising spends, as well as new celebrity talent, which should fuel significant growth in the second half of the year.

Moving to women’s apparel, our North American U.S. women’s apparel and footwear businesses were very strong this quarter. Our royalty revenues with our licensees, G3 and Jimlar were up about 15% for the quarter.

On the apparel side, the growth is being fueled by strong selling of women’s sportswear, women’s performance, dresses and suits. In addition, on the footwear side of the house, we’re seeing strong performance in men’s, as well as in women’s.

Moving to handbag and accessories, that business continues its strong performance. G3 has seen excellent sell-through at department store accounts. We are targeting a 25% growth for these product categories in 2012 and/or on track to exceed that.

Our CK Bridge business in Asia continues to grow, posting a 10% increase in revenues for the quarter. We expect this business to grow 20% for the balance of the year. The growth is being driven by China, Hong Kong and Indian market, where we experienced significant door expansion and comp store sales growth.

For 2012 as we previously discussed with you, we are planning our Calvin Klein royalty revenue growth more conservatively than in prior years, due to the uncertainty in Europe and the weakness we see in our global jeans business.

In order to take the financial risk out of our finance -- out of our guidance, we have -- we are currently projected all of the European jeans wear and apparel businesses that Warnaco operates a contractual minimums for fiscal 2012.

As such, our CK European royalties are being planned down about 10% for the balance of 2012. Overall, we continue to plan royalty revenues on a consolidated basis -- on a constant currency basis to grow about 3% to 4% for the year.

Moving on to our Heritage business, excluding the impact of the exited businesses IZOD women’s and Timberland, ongoing revenues for the Heritage business decreased 6%. Comp store sales in the Heritage business -- retail businesses were relatively flat, while our ongoing wholesale businesses experienced 10% sales declined due entirely to a reduction in dress furnishings sales to J. C. Penney.

Given the overall weak second quarter performance at J. C. Penney and a significant decline in customer traffic, our replenishment EVI businesses, particularly dress shirts and ties which are driven by customer traffic have been negatively impacted. We have right sized all the inventories levels at J. C. Penney and readjusted our sales estimates for the balance of the year. All of this is factored into our plans in our guidance.

Clearly, the Heritage business is in the midst of a major turnaround. We are very confident and we feel we are very well-positioned in this business for the balance of the year.

Our four orders are on plan. Inventory levels are in line with retail sales plans. Our average unit retails are currently up 5% to 7%, second half product course are decreasing 5% to 7% and our in-shop store presentations are being enhanced and expanded with key customers.

The IZOD’s J. C. Penney shop openings are on target to open the first week of September. All of this gives us a high degree of confidence that we will see a dramatic improvement in this business beginning in the third quarter of 2012.

To give you a sense of some of the third quarter trends that we are seeing in the first month of August. Again, the Calvin Klein and Tommy businesses are off to a very strong performance and continued to outperform our guidance.

Comps in our Calvin and Tommy Hilfiger business are running up 8% to 9% against the mid single-digit comp planned. Comps for our Heritage business are running up low single digits in line with plan.

At wholesale in the United States both Calvin Klein and Tommy continued to perform ahead of sales plans and we continue to see increases in our out the door retails. Our Heritage business is well-positioned for its financial turnaround and we feel we are well on target with J. C. Penney to implement all the shops at first week of September.

Moving to Europe, our Tommy retail business in Europe, we are seeing comps in Europe to continue to post low teens increases against the 5% comp store plan, so very strong performance continues at retail in Europe. Our Tommy wholesale business, which represents about 70% of the total Tommy business in Europe, continues its strong momentum.

For the fall holiday 2012 season, our order book is up 4% to 5% and our fall shipments are running on time. We are seeing no indication of slowdown or cancellation with any major European customers and feel very good about our current European sell-throughs. The fall selling season is off to a strong start.

Given our strong European sales trends, we clearly are continuing to grow market share in all key countries. Looking at the spring 2013, our order book is not complete but we’d indicate our wholesale sales increase for the first half of the year of 4% to 5%.

Looking at our -- finally, looking at our guidance, we have been very prudent with our estimates. We believe we have taken a significant portion of the risk out of the Calvin Klein European royalties by planning the Warnaco jeans and apparel royalties a contractual guaranteed minimum royalty levels. We feel we have put together sales and operating margin projections that we cannot only meet but if business trends continue we can exceed as we go forward.

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

With that, I will turn it over to Mike to quantify some of these results.

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 second quarter results.

For the second quarter, we met our revenue guidance and delivered earnings per share of $1.25, which was $0.05 above the top end of our guidance and 17% greater than the prior year. Our $0.05 earnings per share guidance is reflected in EBIT improvement of $0.03, and taxes and interest improvement of $0.02.

Our total revenues while relatively flat to the prior year, when negatively impacted by currency translation and discontinued businesses. Excluding these items our revenues were up 4% to last year.

Our Tommy Hilfiger revenues, which were ahead of guidance was strong in both Europe and North America. On a constant currency basis, Tommy Hilfiger revenues were up 10%. Our Calvin Klein revenues for the quarter were plus 5% to last year, slightly better than our guidance.

Moving to our guidance for 2012, we’ve raised our full year earnings per share guidance to a range of $6.25 to $6.32, or an increase of 16% to 17% over the prior year. We raise the top end of our full year earnings per share guidance for $0.05 second quarter a bit, plus an additional $0.02 for the second half.

Revenues for the year 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 are expecting revenues to be up 1% and 2%.

Total Tommy Hilfiger revenues are planned to be up 7% to 8% on a constant currency basis, with Tommy Hilfiger North America increase 7% to 8% and Tommy Hilfiger international increasing 7% to 8% on a constant currency basis.

Including the negative impact of foreign exchange, we are 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 our planning revenues up 1% to 2%, excluding the impact of our exiting IZOD and -- our Timberland and IZOD women’s businesses. Our total Heritage revenues are planned to decline 4% to 5%, including the negative impact of 6% related exited businesses.

Gross margin for the year is planned up about 150 basis points with expenses for the year planned up about 80 basis points, due in large part 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 in our higher gross margin and higher expense Tommy Hilfiger and Calvin Klein businesses. Operating margins for 2012 are planned to increase about 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.

For the third quarter of 2012, earnings per share is planned to $2.20 to $2.25 or an increase of 16% to 19% over the prior year. We are planning our revenues to increase about 3% to 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 down about 2% to 3%.

Our gross margins for the third quarter will be up about 250 to 275 basis points, all businesses are plan to show gross margin improvement as we sell four product to showing cost decreases of about 5% to 7%.

Overall, operating margins for the third quarter are planned up about 150 basis points influence by mix of business and gross margin improvement. Tax rate for the third quarter is planned to 23% to 23.5%.

And lastly, we’re continuing to project term loan repayments for full year 2012 of about $300 million. This will bring our total term loan repayments since the date of the Tommy Hilfiger acquisition to about $1 billion.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we’ll take our first question from Bob Drbul with Barclays Capital.

Jess Schoen - Barclays Capital

[Jess Schoen] for Bob today. So, I guess, starting off, when you look at the European business for Tommy, in this very sort of strong comp trend quarter to date and last quarter also? What do you think drove that lift in that comp acceleration throughout the quarter?

Manny Chirico

Well, I think, I guess, what I would say is, compared to this time last year we’re in significantly better inventory position. Last year we were chasing business constant throughout the year. There was very little spring/summer to clear it all last year. So we had more spring/summer goods as we positioned ourselves based on the strong sales trends that have being going on in Europe for the last 15 to 18 months. So we’ve really bought into that sales plan. So we take advantage of that. And we’ve also seen just very strong initial sellings of fall product as we’ve come out of the gate. So we are really seeing come together.

Like everything else product is key. I think from all indications from the market, the fall product assortment has been very well received, consumers are really reacting strongly to it and we are seeing strong sell-throughs both at department store accounts and their own retail stores. So, I think, clearly, it’s the product that’s driving the business.

Jess Schoen - Barclays Capital

Okay. Great. And then in terms of the China business and the China JV, what have you seen over there in terms of performance and the brand positioning specifically and then, are there any sort of updated plans around taking direct control of that business?

Manny Chirico

Well, I think, we are few years away from that. Clearly, China is a big opportunity for Tommy. Sales this year will be somewhere in the neighbor to $75 million, which is well ahead where we projected it to be.

We are seeing strong double-digit sales growth there, continued improvement and profitability there, and we are running well ahead of our projection there, but we are still very early and any thoughts of bringing it in-house at this point are pre-mature and I think we are still looking at somewhere between two to four years from that, as that business matures and develops.

Jess Schoen - Barclays Capital

Okay. Great. Thank you.

Operator

And we’ll take our next question from David Glick with Buckingham Research Group.

David Glick - Buckingham Research Group

Thank you. Manny, just wanted to touch a little bit on Hilfiger and Calvin Klein. Clearly, the Tommy Hilfiger acquisition has created significant value for your shareholders. I was wondering if you could kind of walk us through what you guys did right and maybe somethings you did wrong in terms of how you manage that acquisition and the transition, which is obviously reflecting the results you are seeing?

And secondly, can you sustain this double-digit growth in Tommy going forward and can you get Calvin Klein back to double-digit growth. I’m not asking you to pre-view your Investor Day, but if you can kind of give us some outlines here that would be helpful?

Manny Chirico

Okay. Dave, I’ll try to put a little bit of color on. From the acquisition point of view, I think is the best thing we did is we allowed the Tommy management teams in Europe and North America to really operate their businesses and run their businesses.

We saw the growth potential of the Tommy business and we saw the operating platform that existed, and we’re able to really get behind it and invest in the marketing of the brand which was under invested in the, I think, under its ownership, under with private equity ownership.

So clearly, we’ve added about 100 to 120 basis points of additional marketing which we think is really helped us gain more market share, increase our AURs. And in North America raise the perception of the brand as we continue to get better shelf space at Macy’s shop-- shop exposure at Macy’s and lift the marketing of the overall -- perception of the overall brand.

What you’ve done, so you know, on net -- on the flip side of that, look, there’s always things you can do better, but I think, on balance, I’m really happy the way we’ve come together, the way we’ve integrated the back office. So if we could execute at this level all of our acquisitions in future, I’d be very happy with that kind of performance.

Look, I think, the Calvin business is really hitting on just about every cylinder and the key for us is really to get the Calvin jeans business back on track, both in North America and in Europe in particular.

To get back to double-digit growth, when you have that bigger business that’s been under such pressure and I think, Warnaco has talked about all of their initiatives. Clearly, I think the topline growth will come, but I think, it’s really a second half of next issue with some of the great design talent that they brought in.

The investments they are making in their infrastructure and merchandising, but given pipelines and replenishment, and I’m sure they are making some changes for spring of this year and get some positive reads on some business. But really I think the benefits will really start to see beginning next year.

So we continue to be, we look at our business model, we look at how we would continue to see the three businesses moving forward. We notice no reason that we feel that we would be able to continue to grow, grow something in the range on long-term basis next three to four years at a 15% compounded annual growth rate our earnings per share, so no reason to back off for that now and more to come at our Analyst Day in October in Europe.

David Glick - Buckingham Research Group

Okay. Great. Thanks for the color. Good luck.

Operator

And we’ll take our next question from Adrianne Shapira with Goldman Sachs.

Adrianne Shapira - Goldman Sachs

Okay. Thank you, Manny. Congratulations on another great quarter. I’m just wondering, you touch the customer at a lot of different distribution points across retail, wholesale, outlet, a lot of geographies and also demographic? I’m just wondering, perhaps give us your assessment of what you are seeing in terms of consumer spending, appetite for this back-to-school season and as you think about the holiday season?

Manny Chirico

Well, look, again, my crystal ball is a little foggy, but I think overall, the North America, I feel pretty confident about trends right now, not just from our business, but I think the back-to-school season from everyday, I could see with our major retail partners who are off to a strong start.

I can’t speak for any one else but clearly our biggest accounts continue to perform. The one area that’s under pressure I talked about is the J. C. Penney business. And I’m there going through a major transformation repositioning and we’ll start to see how the new shops there begin to perform and hopefully we’ll benefit their business as they go forward.

That’s clearly just a business in transition. Absent that, the department store channel is very healthy that I can see. The outlet channel, I notice been some talk, maybe brand specific or couple of specific points but we’ve really not seen any real blip in output at all. It just continue to perform and as we timed into August and back-to-school selling season, as I said, just continued to intensify and the kind of trends we’re seeing are very positive.

Moving to Europe, we continue to see more of the same. North and Central Europe consumer continue to react, the Tommy business continuing to perform. Southern Europe, tremendous amount of pressure, cautiousness about selling into accounts, particularly in Italy, real concerned about how we take the exposure there from a credit point of view.

In Spain also, the El Corte Ingles business, very healthy retails that has historically performed but that business given the economy is under pressure. So those two markets are clearly pulling down the overall market in Europe. Asia, China, India continues very strong.

Latin America, Brazil are just, besides the currency headwinds, we haven’t seen any real pressure there on a local currency basis with the business. So that’s an overall assessment that’s going on.

Adrianne Shapira - Goldman Sachs

Great. And then just two other questions, you’re very helpful last year when we talked about rising commodity cost and you are incredibly pressing and talking about how retailers have pulled back on unit. Now, as we’re seeing those commodity cost for a loss and you’re seeing some benefits in terms of margin obviously, you’ve provided in the back half. How do you see people flowing through the opportunity on commodity cost? Would you expect much more aggressive investment in price or should we see healthier margins across the board?

Manny Chirico

I think is -- I think we’ll see pressure on price. I don’t know if you’ll see back-to-school which may see as holiday more so. It’s going to be more like the opening price point on the main floor. I think the collection brands clearly are able -- there is no reason that there should be a movement in price. We haven’t seen any pressure there to move price in the Calvin/Tommy business and some of our competitors haven’t moved price at all. So I don’t see it there.

But I think when you get into some of the opening price point businesses, I think there you might see some price pressure there more so. Inventories -- right now, inventories are in a terrific shape. It really helped that it would come out of spring summers so clean. So we’re getting an early read on poor selling which has been very positive. I think we’ve done -- I give the merchandising teams in all of our businesses high marks for transitioning summer to fall with appropriate product wear now but fall appropriate. So I think we’re really benefiting from all of that in our product mix and see how it goes forward.

So I think price pressure will be on the opening price point brands and that’s the area where you could see some pull back 2% to 3% in AUR.

Adrianne Shapira - Goldman Sachs

Great. And then lastly, just on the guidance, obviously you’re going to beat by $0.05, you raise your guidance by $0.07 speaks to your excitement, enthusiasm in the back half and since the beginning of the year, you’ve always talked about the back half being better than the first half.

So I’m wondering in light of the fact that it sounds like you’ve taken lot of the risk out assuming slowing in Europe that you’re not really seeing and CK at contractual minimum. So I’m just wondering if and fact trends maintain the outperformance we’ve seen, should we see a better flow through to the bottom line in the back half versus what we saw in the first half?

Manny Chirico

I don’t know if it will be better. I mean, the first half was pretty strong, just a reminder, we started this year out, we’re talking about flat first half of the year. And I think if you add first and second quarter, we’re up -- I’m doing math in my head right now about 12%, 13%. So I think is we’ve really outperformed and put that through on the bottom line.

I think you could potentially see similar type of performance if the business trends continue because of the same time that we are increasing our bottom line. We’ll probably be also increasing our marketing spend as we go forward appropriate with the sales increases that we’ll be coming through. So I think hopefully it’s just more of the same that continues.

Adrianne Shapira - Goldman Sachs

Great. Best of luck.

Operator

We’ll take our next question from Christian Buss with Credit Suisse.

Christian Buss - Credit Suisse

Thank you. Congratulations on the nice quarter. I was wondering if you could talk a little bit about your inventory planning and your ability, the chases we had into the back half of the year. How are you thinking about the overall level of inventories that you want to see at retail?

Manny Chirico

I think the risk reward on Calvin inventory right now is more risk than reward. And I think if you look at the way the second half comes together, given the course decline that are in the product offering particularly for holiday. It’s much more important than inventories are controlled and we maximize every potential sales opportunity.

So the gross margin benefits for us and our retail partners are so significant. I think in the third and fourth quarters, we’ll all be better off managing inventories. So we’ll chase, we’re chasing though. We’re able to chase very easily in replenishment businesses both dress shirts and neckwear given our back up stocks and our raw material positioning. Obviously in sportswear and in fashion, we can but we’ve always been able to advance deliveries 30 to 45 days, catch some transits that go and drop that to the bottom line.

So I think, similar to what’s happened in the first half of this year and all of the last two years, I think we’ll able to capture portion of it. But I think the risk-reward function is against you this year to really get too far ahead of it.

Operator

And we’ll go next to Kate McShane with Citi Investment Research.

Kate McShane - Citi Investment Research

Thank you. Good morning. I was wondering if you had any detail or further detail on Europe and can discuss how much of your wholesale business is to major customers versus specialty customers and how that might change going forward?

Manny Chirico

I think 25% to 30% is what I would call major customers. So the top 20 accounts in Europe represent, probably 25% of the business wherein North America, the top 20 accounts represents about 99% of the business, so just to put in perspective. So by its nature, Europe is a very decentralized business. There is no pan-European retailer anywhere.

It usually goes country by country and then a number of major countries are really driven by more of a specialty store than a department store business like Italy and especially when you move into the Middle East and Turkey, it’s more of a retail model. So the long answer is I think it’s about 25% to 30% is what we would classify as major account and 75% of the business is done with specialty store accounts.

Kate McShane - Citi Investment Research

Okay. And then with regards to the specialty store counts, obviously, the outlook and the backlog that you have stated today is very strong. Are you seeing any credit restrictions on some of the maybe the smaller specialty accounts that could be a longer term threat.

Manny Chirico

I think Mike will talk about that?

Mike Shaffer

Kate, we do -- we have a credit monitoring procedure in Europe, just internationally just as we do in the U.S. We also do ensure a good portion of our receivables in Europe. So right now, we’re on top of it and we delivering up to credit limits that we’ve approved internally and that we feel adequately covered by insurance. So we feel very comfortable.

Manny Chirico

But yeah -- but I would say, Kate, is just to amplify what Mike said, if we wanted to chase business, we could book another 2% or 3% but we’ve definitely made the judgment is that the risk reward is not there particularly in Southern Europe where in lot of cases, it is much more specialty store driven.

We made judgments based on long-term relationships with key customers to go above credit limits that are there with the insurance but clearly all right on annual basis have been minimal. So we think we’ve got very strong controls in place but it has dampened some of the growth potential that two years ago we would have been having no problem, selling some of these key accounts. We really backed off on some of the sales there.

Kate McShane - Citi Investment Research

Okay. Great. Thank you. And then, my only other question again the back-to-school commentary has been very positive but you have any incremental color on the Tommy Hilfiger children’s introduction for fall?

Manny Chirico

Well, I guess is -- I would say the Tommy business has been there in kids for a long time both at Macy’s and our own stores. So it’s really I wouldn’t classify as introduction. We have a strong business that continues to grow. We’re seeing significantly strong business at Macy’s that they’ve intensified the Tommy presentation on the boy’s side and we’re talking about future grow in the girls business there as well.

In our own stores, kids have been a key driver of some of our growth and is comping for last three months, well over double-digit growth pattern in the stores. So kids continues to be a great performer. We thinks it a great time of the year to be well positioned in kids and is an advantage for Tommy in those stores to drive the mom in, who buys for the kids and then we hopefully will convert her to customer as well.

Kate McShane - Citi Investment Research

Thank you.

Operator

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

Omar Saad - ISI Group

Thanks. Good morning. Great job, guys.

Manny Chirico

Thanks.

Mike Shaffer

Thanks Omar.

Omar Saad - ISI Group

Wanted to ask about some of your prepared remarks, Manny, on the Heritage business. You sounded very confident about the inflection point coming. I know it sounds like its more on the margin side and our inventories are clean but our situation is getting a little bit easier. How are you thinking about that business from a revenue growth standpoint? Are we nearing a point where you could see a reacceleration of business? How do you think about the consumer with the Heritage brands or is that consumer still a pretty tough player?

Manny Chirico

I think that the story there is -- I think as we get through the third quarter into the fourth quarter and we have behind us more or less the IZOD and Timberland businesses that we’re anniversarying. I think you’ll start to see sales increases there based on some of the new initiatives with some of the key programs we have in place.

But I think overall when you think about that business, I think 2013 and beyond, I think it’s still going to be single digit, low-single digit, 2% to 4%, kind of, growth business. But ahead of us, I think right now, we’re projecting annual 2013 -- 2012 operating margins in the Heritage business to be up slightly from last year but -- and then last year, it was about a little bit over 7% margins.

Historically, that business has operated at 10% margin. We really think over the next 18 to 24 months. We bring that business back to something close to 10% and if that would happen, when you consider it $1.8 billion to $2 billion business, that’s a significant recovery of profitability and earnings per share growth in this market.

So that’s what I think you really have to look at that business to perform and I think it’s really going to be -- it’s really going to start to become in the third quarter of this year into all of ‘13 a significant driver of our profitability improvement year-over-year for the next 18 months.

Omar Saad - ISI Group

Got you. Thanks. And then on the Tommy business, I mean, the performance in Europe, it’s really amazing. I have been able to manage through this environment. What’s the key -- what is some of the key elements that replicate even a fraction of the performance for that brand in Europe, here in the States. Is it elevating the product quality? Do you have to think about the channels of distribution, I think you’re agreeing with Macy’s and the outlet business but maybe you’re layering in some full priced retail. I know it’s been lot more marketing which is important.

What do you see as the key element, really kind of replicating the way you balance that brand in Europe and what the team had done with the brand Europe here in the states?

Manny Chirico

Look, I think is, when you look at the Tommy business this year, operating margins in North America will be north of 12%. Operating margins internationally overall are about 30%. Europe is probably 100 basis -- 100, 150 basis points higher than that, so somewhere around 14% operating margins in Europe.

I think is the Tommy business in North America has just continued to really show extraordinary growth. So in the first and second quarter of this year, I think the business is up 11% to 12% top line. I think there is -- we have a plan in the second half for mid single digit. I think there is an opportunity to outperform that projection and be more in line with that type of growth.

And I think if that would happen, it clearly would enhance the overall profitability of the business. So I think in fairness, I think like most brands businesses North America given the nature of the business, the department store environment there, North America was always going to be well executed -- even if its well executed against the well executed European business will be 100 to 150 basis points lower than the European model. I think that’s nature of its gross margin profitability and to be honest, some of the margin support, structure that we have in the United States that doesn’t really exist in many European countries.

So that piece I think is one piece. Well, what could be exciting in the United States more is the continued growth, you really have focus on growing our retail footprints in the United States and that’s where our focus really will continue both regular price and in the outlet channel where we’ve seen tremendous growth there.

So I don’t think it’s really a wholesale story in North America. It will continue to be a retail story. We’re clearly meeting the consumer demand. There’s geographic areas like the south east portion of the United States. We know we’re not fully meeting all of our consumers’ demands there given some of the markets in where we see opportunities and we’re clearly starting to fill that back in, extending our footprints in existing stores where we -- the store is just comping so strongly. We just need more square footage to really continue to grow.

So those investments are being made behind the brand. And I think our continuation as we go forward. So I think when you look at Tommy North America business, I don’t think really has to take second place position against any one so. I think the growth there could continue in the mid to high single digit range for the next 24 months.

Omar Saad - ISI Group

Great. Thanks guys.

Operator

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

Manny Chirico

Hello. I think we lost Evren. Operator?

Operator

Sir, please check your mute button. Your line is open.

Evren Kopelman - Wells Fargo

Can you hear me now?

Manny Chirico

Yeah.

Evren Kopelman - Wells Fargo

All right. So, I wanted to ask about if you have an updated thoughts on the timeline of an acquisition as you’re paying down the debt nicely on the balance sheet and again any thoughts on whether more likely it’s a new brand or an acquisition of a licensee?

Manny Chirico

Well, look -- I think it still depends on what market conditions are. I think clearly, we haven’t been shy about talking that acquisitions will continue to be a part of our growth story. But I think clearly for next 18 months in order to meet our financial targets, we don’t need an acquisition and I think if one doesn’t come, it doesn’t come. We’ve got a lot of Calvin and Tommy initiatives going on with take back of licenses in Europe on with Calvin Klein, our furnishings and suit business in Europe, some of our license business by geographic areas that we’re investing and joint venture relationship in.

So I think we’ll talk about more of those things in the future as we go forward. So I think it will be a combination of both. It will be terrific to get a new brand. And a real focus of us from an acquisition point of view. It’s been a focus on the new brand. Given the operating platform, we have in Europe that could really take advantage of potentially taking a brand and expanding it in that market.

I think so looking for a brand that would both work in North America and Europe and to do what we’ve done with Calvin and Tommy again would be very exciting for us.

Evren Kopelman - Wells Fargo

Thanks. And then on Tommy, some of the comp growth has been driven by price. When do you begin to lap some of the price increases and the benefit from the average unit retail and at that point, how are you planning the business and the inventory? Thanks.

Manny Chirico

Okay. We’re planning in Tommy and in Calvin since last year’s second half. We saw significant AUR increase last year second half, this year’s first half. We’re really planning AURs to grow less significantly in the second half of this year into next year and our retail price points are actually flat to slightly up in Tommy and in Calvin.

We believe we can raise AURs because we’re selling good so much quicker that we’re getting more regular price good at regular price in first mark down that the average unit retail buy out the door will actually increase. But our price points, our ticket prices, really we’re not planning much increases in North America at all and slightly in Europe some AUR increase based on ticket price.

So that’s how it’s planned. I think units will be in line with sales increases and not skewed one way or another because of retail price points at the department stores here in North America or in Europe. So I think there is less chance for confusion about how units are being planned versus sales plans. And I think that’s much more inline than it was say 12 to 18 months ago.

Evren Kopelman - Wells Fargo

And lastly, do you have any thoughts or any contingency plans on this potential East Coast port strike? To what percent of your goods, I don’t know, comes from the East Coast port?

Manny Chirico

I’m going to turn that over to Mike to talk about. He is on top of all of our logistics.

Mike Shaffer

We are monitoring this -- we’re monitoring what’s going on with this strike. We do have contingency plans. We do have ports on the -- we have different ports of entry and different warehouses we can utilize if there is a strike. So, we are absolutely looking and monitoring closely.

Evren Kopelman - Wells Fargo

Great. Thank you.

Operator

And we’ll take our next question from John Kernan with Cowen & Company.

John Kernan - Cowen & Company

Hi. Good morning, guys. Thanks for taking my question. I wanted to talk about some of the things you are going to be doing next year particularly with Tommy Hilfiger European men’s tailored apparel, the CK Calvin Klein European apparel on the accessories business that you are going to bring in-house. Can you quantify what those businesses may do next year? Thanks.

Manny Chirico

Well, I guess -- look I will do it this way. I’ll say that the tailored business is about €50 million business today. To remind everyone, we will lose probably about $5 million -- $4 million to $5 million of royalty income revenue from the tailored business and replace that with a full operating margin business. Next year, we start shipping late fourth quarter of this year into next year.

So we think that will be a nice additive business for us that we can control better in-house and incrementally be more profitable for us as we go forward. The Calvin business is just too early. It’s a total repositioning of where the product was. It’s really -- we’re not going to be using the ck logo. So it’s not going to be ck Calvin Klein, it’s going to be Calvin Klein products and from sportswear point of view, it will be going into the market. So it’s a total repositioning. Sitting now with the retails, a lot of enthusiasm we are going to start with men’s next year and -- fall of next year and then go into women’s in fall of 2014.

As I said, this is a real investment in the brand. We are leaving behind $10 million of royalty income associated with that business that contractual minimums that we have been collecting from Warnaco. So we’re giving that up and we will have start-up course next year that will have to deal with us well.

All of that will be factored into the guidance we give next year but it’s something we have to consider. But when you think about it, if we are going out to buy a $500 million business opportunity in a business that we know very well and we really believe we can execute again.

We will be paying hundreds of millions of dollars for that opportunity. This is the brand that we know we got it back at no cost. We’re taking it in, where we build at the way we think it’s appropriate within operating platform and management team we have -- that we have tremendous confidence in. That’s clearly delivered on the Tommy side that we are setting up a Calvin on with that business than to leverage off of their infrastructure.

So, there is no guarantees in life in anything but this seems like one that is something that we really could deliver against and get to 2014 and beyond and really start to put up some significant sales and operating profits as we go out two to three years.

John Kernan - Cowen & Company

Excellent. That’s very helpful. I guess, the one region where Tommy Hilfiger might not be living up to your expectations right now is Japan. What -- how big is that Japanese business and what are you doing there to kind of turn that around? Thanks.

Mike Shaffer

The business in Japan is about $250 million. It’s a business that historically is operated at 8% to 10% operating margin. It’s about half that today and it’s clearly hurting us on a comparative basis. It’s hurting as a comparative basis last two years. So, we believe it’s at a low point now.

One of the challenges, when you talk about the Tommy brand globally, two markets that have had their challenges from the positioning point of view have been North America. And we’ve talked about the progress we’ve made there, but also Japan. The Japan positioning was not -- we took a license business and brought it in-house about four years ago. It was not positioned the way rest of the international Tommy business is positioned.

And for us to grow our Asian platform of Tommy, so it’s full potential, we recognized early on. We had to reposition the brand in Japan. So, that’s really been the focal point. We’ve opened two flagship stores beginning at this year, made those investments, that’s factored all into the guidance. And we’re really starting to move to consumer in Japan up trying to raise the brand perception in Japan.

And since so many Chinese stores in particular travel to Tokyo. In a lot of ways, Japan is the fashion capital of Asia. It’s really critical with Tommy looks as strong as it needs to look there. So this was a year for us to make investments in Japan to really reposition and that’s what’s going on there.

I think that’s the positioning story. The good news there is I think we are at the profitability level that we are projecting the numbers that is at such a low point that the only way to go from this point is up. And I think over the next two to three years, we can bring this business back to at 8% to 10% operating margin business from now that it’s at a probably 3% to 4% operating margin business, all included in our international business. So hope that helped.

John Kernan - Cowen & Company

Very helpful. Thanks.

Operator

And we’ll go next to Howard Tubin with RBC Capital Markets.

Howard Tubin - RBC Capital Markets

Thanks a lot. Manny, give me your commentary on acquisition, if you -- let’s say you were to find one in the next year, year and half, would you continue to pay down debt, would you consider maybe starting to repurchase stock?

Manny Chirico

I think that’s clearly not an issue for this year because we are committed to pay down about -- as you said about $300 million in debt this year. Probably next year if there was really nothing on the horizon, we’d start to look at a combination of debt pay down and potentially we’re buying back some stock and looking at it from that perspective.

So, I think we will cross that bridge when we will get there. Clearly, our first priority would be to do an acquisition, continue to invest in the Tommy and Calvin businesses and then potentially look at our capital structure and where we are.

By the end of this year, I think our debt-to-EBITDA kind of leverage will be -- about two times. So we’re in a very strong financial position. So again, that combination of paying down debt and buying back stocks is something we start to think about to fiscal 2013 and beyond.

Howard Tubin - RBC Capital Markets

Got it. Thanks.

Operator

We’ll take our next question from Joseph Parkhill with Morgan Stanley.

Joseph Parkhill - Morgan Stanley

Hi. Good morning. So Tommy continues to be really strong in Germany despite being your largest region, I was hoping maybe you could give us little more details on what’s driving the growth there, and how long you think you can have healthy growth within the region. You are frequently good at sizing opportunities. I thought if you could put some context around that, that would be helpful? Thanks.

Manny Chirico

Sure. For the German market, the Tommy brands one is very strong there. We are well-positioned in all key accounts. Retail continues to be a significant driver of growth there. We are -- if you were to -- just as a benchmark, if you will look at Hugo Boss tailored business, it’s probably 10 times our size.

We don’t believe -- given the dynamics of the two brands. We don’t believe we will be as large as Hugo Boss overtime. But we think we should be 50% of their size in tailored and dress furnishing.

So, clearly, that’s a huge opportunity for us and when we look at the Germany and surrounding markets all in, we really continue to think we could over the next five years continue to double the size of that German surrounding markets and dramatic countries there.

Probably more focused on the retail expansion than just wholesale, and continue to look at the potential store performance there and by far our most profitable current country in Europe is Germany.

Joseph Parkhill - Morgan Stanley

That’s helpful. Thanks. And then just quickly as far as the acceleration in retail in Europe. Did you see that both broad based between outlets and full price?

Manny Chirico

Look, both are comping positively. But the outlet store environment is stronger than the full price environment. Just given the economic condition where the consumer is really continues as everywhere looking from value. So there could be a 500 basis points difference between the two or more, but both continuing to comp positively as we go forward.

Joseph Parkhill - Morgan Stanley

Okay. Great. Thanks. Good luck.

Operator

And we’ll take our next question from Diana Katz with Lazard Capital Markets.

Diana Katz - Lazard Capital Markets

Hi. Congratulations on another great quarter. Manny, you commented you haven’t seen any blip in the North American outlet business. But I was hoping you could elaborate a little bit more on the business? Perhaps you can talk about the components of the domestic comp, its sounds like AURs is driving it, but maybe you could talk about traffic and conversion there in the channel and what you’re seeing in August?

And then if you could also, sorry, talk about the tourist customer and then finally, with Calvin as you look?

Manny Chirico

Well, let me answer the question, we seem to have lost. The first part of question, the component, I guess, traffic for us in general in second quarter was up 1% to 2%. So really was AUR and conversion is really will drove business overall. Traffic patterns have actually improved in August and we’re seeing traffic up slightly higher than that.

And I think part of that might be what you alluded to was the international consumer. I think the combination of the Olympics, the Soccer Championships and whatever. I think, there was some softness during that period of time from an international point of view, particularly European consumer in the United States.

But, clearly, that’s back -- it’s bounced back dramatically in August -- in the second half of August in particular. So all of that put into your mix master, the outlet channel is very robust, traffic patterns up 1% to 2%, conversion in AUR really driving. I think operator we will take one more call it’s after 10 o’clock.

Operator

And we’ll take our final question from Matthew Boss with JP Morgan.

Manny Chirico

Hello?

Matthew Boss - JP Morgan

Yeah. Yeah. Given your early comments, it seems like you’re seeing an improving level of underlying strength in women’s apparel. What do you think driving the change and can you speak to some initiatives to -- for us to follow in the fall?

Manny Chirico

Well, it’s a good callout, though, I think, if you think about both of our lead brands Calvin and Tommy. The women’s business is always one that we’ve looked at that we felt should be bigger and have bigger opportunities. If you look at the women’s potential in the market, the women’s business is much bigger than the men’s business.

And when you look at all breakout in business, a Calvin, its 45% women, 55% men and a Tommy, it’s probably 40%, 60% men’s to women’s, some both having bigger men’s components.

So we’ve always view that the women’s component had big opportunities for us. We’re starting to really see that click in a significant way. Both brands I think have strong following with women and I think both are, I think if we falling down anywhere brand level, our execution has just been stronger on men’s product than it has been on the women side of it.

I think some of the initiatives both with our licensing partners on Calvin and internally with our Tommy product both in North America and Europe being -- we believe is significantly been improved and the positioning there is significant improved. The women’s component on the apparel side is clearly been driven.

Calvin, the accessories business on women has just been outstanding, handbags, footwear even women -- even when you look at some of the other women’s categories, as I said dresses and suits, just off to start strong, the performance component, G3 is just executing at a very high level, so those categories are really being fulling growth.

I think when you look at the brand there and when we look at the growth we think that two-thirds of the growth in the future should come from women’s versus one-third from men’s. Even though the business is more balance the other way. And that just because the opportunity exist for those businesses just outperform and I think its going to be a continual story that you’ll hear over the next three years.

Matthew Boss - JP Morgan

That’s great. And then last question on the promotional front. You think what you’ve seen during back-to-school as a gauge particularly at wholesale. How are you thinking about holiday from a margin perspective?

Manny Chirico

I really think, well, look, I think, when I -- when we look at the promotions -- what’s going out promotionally right now, it doesn’t feel heavy at all. In fact, I -- again, there will be some study that will show, I mean, I’m wrong, but based on intuitively. I don’t have thought backs to support this, but based on what I have seen, what we are feeling, we just don’t feel that the promotional agenda as significant as it was time last year or if you go back.

I think the key there or but when you cut through it all as we get into October and beyond, is going to inventory position. If you watch the inventories, the inventories are under control. If we get any kind of break on weather compared to last year. I mean, we -- everybody suffered through, probably one of the warmest winters on record and it really hurt late third quarter into fourth quarter sales performance.

If we get any kind of break there on just the normal pattern to winter weather, I think it could bode very well for fourth quarter and holiday selling. So, again, a lot to do, but I think, inventories is going to be the critical focal point there and if they are under control, the gross margin should really just flow to the bottom line.

Matthew Boss - JP Morgan

That’s great. Thanks guys.

Manny Chirico

Okay. With that, we thank you all for your attention. We thank you for your time and we look forward to updating you on our next call, which will be our third quarter sometime in November. Have a great day and speak to you soon.

Operator

Thank you. We understand that there were some problems for the first 10 minutes of the call for those of you listening to the webcast. You can listen to what you missed by listening to the replay, when it becomes available. Replay information is included in the company’s press release. We apologize for any inconvenience. That does conclude today’s presentation and we thank you for your participation.

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