PVH - Earnings Call - Q1 2012

Transcript

Speaker 0

Good day, everyone, and welcome to the PVH Corp. First Quarter 2011 Earnings Conference Call. This webcast and conference call is being recorded on behalf of PVH and consists of copyrighted material. It may not be recorded, reproduced, retransmitted, rebroadcast, downloaded, or otherwise used without PVH's express written permission. Your participation in the question and answer session constitutes your consent to having any comments or statements you make appear on any transcript or broadcast of this call. The information made available on this webcast and conference call contains certain forward-looking statements which reflect PVH's view of future events and financial performance as of May 31, 2011. Any such forward-looking statements are subject to risks and uncertainties indicated from time to time in the company's SEC filings. Therefore, the company's future results of operations could differ materially from historical results or current expectations, as more fully discussed in its SEC filings.

The company does not undertake any obligation to update publicly any forward-looking statement, including without limitation, any estimate regarding revenues or earnings. The information made available also includes certain non-GAAP financial measures as defined under SEC rules. A reconciliation of these measures is included in the company's earnings release, which can be found on the company's website, www.pvh.com, and in the company's current report on Form 8-K furnished to the SEC in advance of this webcast and call. At this time, I would like to turn the call over to Emanuel Chirico, Chairman and CEO of PVH Corp. Please go ahead.

Speaker 2

Thank you very much. Good morning, everyone. Joining me on the call this morning is Michael Shaffer, our Chief Financial Officer; Allen Sirkin, our President and Chief Operating Officer; Ken Duane, our Head of Wholesale Businesses; and Dana Perlman, our new Treasurer and Head of Investor Relations. In general, we are very pleased with the results we delivered for the first quarter. We beat both our sales and our earnings guidance that we delivered at the top end of our guidance. We beat our estimates by about $0.70 a share. The strong performance that we were able to deliver was clearly driven by our two growth engines, Calvin Klein and the Tommy Hilfiger businesses. Let me start with the Calvin Klein businesses first. We continue to see strong momentum in the Calvin Klein businesses.

Total revenues in the first quarter for the combined Calvin Klein businesses were up 17%, and our operating profits increased about 10% for the quarter, despite a planned advertising increase of $9 million relating to the CK One global marketing campaign. When you consider the $9 million investment we made in CK One, if you were to put that back, make it apples to oranges, operating profits would have been up in excess of 25%. On the businesses that we operate, our wholesale and retail businesses, we posted a 23% sales increase in the quarter. The strong performance was driven by our men's wholesale sportswear business, as well as a very strong performance in our own retail stores. Our Calvin Klein retail business posted a 14% comp store increase in the quarter.

That strong trend has continued into May, with comp stores posting a double-digit increase for the month of May in our retail store. Moving to our licensing segment, revenues were up overall about 10%, and I'm going to speak about some of our bigger businesses. On the fragrance side, our business with Coty business there had a very strong quarter, posting an 8% increase in revenue. Business has been very good across the board with Euphoria and CK One fragrance continuing their strong growth. The quarter also benefited from the strong performance of Calvin Klein Beauty, particularly in the international markets of Europe and South America. Moving to our U.S. women's apparel business, there we had another strong quarter. Our royalty revenues with our main women's licensee G-III were up about 23% for the quarter.

The growth is being fueled by strong selling of women's sportswear, performance apparel, and dresses, as well as continued good performance in the outerwear category. In addition, our new handbag and accessories business is off to a very strong start. G3 has seen excellent sales boosts both at Lord & Taylor and at Macy's, so we have a lot of optimism about that business as we go forward. Our watch and jewelry business with Swatch saw significant growth in the quarter, posting a 40% increase over last year's first quarter. The growth was driven by door expansions and considerable comp store growth both in Asia and in Europe. Our CK Bridge business in Asia continues to grow dramatically, posting a 40% increase in revenues for the quarter. The growth is being driven by the China, Hong Kong, and Korean markets, where we experienced significant door expansion and double-digit comp store growth.

Moving to our underwear category, the underwear business overall with Warnaco was ahead by about 20% in the quarter, with all regions, Europe, Asia, and the Americas posting double-digit sales gains. This growth was driven by continued growth of international retail square footage and the extremely strong performance of CK One. CK One is the largest launch in the brand's history, and retail results have been very strong in all markets. In men's, CK One is exceeding the strong performance of X in the prior year and has helped us maintain our number one share within U.S. department stores. CK One is expected to represent about 10% of our annual underwear business by the end of the year. Moving to jeans, our jeans business was up about 10% for the quarter, fueled by strong growth in the Latin America, Asia, and European markets.

Overall, our international jeans business grew about 15%, while our domestic business grew in the mid-single-digit range. I'm going to move now to our Tommy Hilfiger business. Let me start by saying the North American integration is complete with all systems converted and all systems appropriately operating at this time. We are on target to deliver all the cost savings that we've talked about, and Michael Shaffer will quantify some of that in his remarks. From a brand marketing perspective, we introduced the second chapter in our successful Meet the Hilfigers marketing campaign as we continue to invest in and broaden the Tommy Hilfiger reach around the world. Our spring campaign was a truly global campaign with significant exposure in major markets throughout the United States, Europe, and Asia. From a business perspective, all of our Tommy business had a very strong quarter.

We exceeded our revenue guidance by about $15 million and our operating income guidance by about $10 million. The brand's performance in both Europe and North America has been particularly strong. I'll start with our European wholesale business. For the spring season, we have seen sales growth of about 15% over the prior year. On a product category basis, we have seen double-digit growth in menswear, denim, bodywear, and footwear. All of our European countries are experiencing growth in spring, with the biggest turnaround occurring in Spain, where spring sales are up over 10%. Our business in Germany continues to grow and expand, posting a 12% sales increase. Our key growth markets of France, the UK, Italy, and Russia are all seeing growth in the 20% range. As we look out, you are seeing growth in our orders for the fall holiday season.

Our order book is running ahead over 15% for the second half of the year. We are seeing strong double-digit sales growth in almost all countries. By product category, the strongest growth is coming out of footwear, bodywear, men's sportswear, and women's sportswear. Moving to our Tommy European retail business, sales were very strong in the first quarter, with comp store sales exceeding 10%. That strong sales trend has continued into May, with comps up in the high single-digit range. In our North American business, I'll talk first about our larger business, the North American retail business. There, we posted comps in the first quarter of over 10%, and that sales trend of plus 10% has continued into May.

We are seeing strength in all regions of the country, with particularly strong performance in the geographic areas that cater to international tourists, such as New York, Las Vegas, Miami, and on the West Coast. The Tommy retail businesses are very consistent with the strong sales performance we see in our own Calvin Klein retail business in the United States. On the wholesale side of the Tommy business, our Macy's business continues to do very well in both men's and women's sportswear. Sales ran ahead of last year, and sell-throughs in retail were on plan. Our average unit retails at Macy's are up over 5% over the prior year's first quarter. Moving to our Heritage business, here, we saw a softening of business. Our dress furnishings business continued to perform, delivering both sales and operating income growth.

Our Heritage wholesale and retail sportswear business did see softness in their business trends for the first quarter, recording a 2% decline in sales and a $9 million decline in operating income. The earnings decrease was driven by pressure on gross margin due to higher product costs and increased promotional selling, particularly at Bath, Izod, and at our Timberland businesses. On the positive side, as the weather broke in early May, we have seen a marked improvement in sales trends in both our retail and wholesale sportswear businesses. Moving to the guidance overall, we've tried to be prudent concerning our estimates. Clearly, our outperformance is being driven by the Calvin and Tommy business. We've tried to put sales and operating margin projections together that we believe we can beat and truly contemplate the increased cost environment that we see going coming forward for the second half of the year.

We believe that the momentum we see in our Calvin and Tommy businesses will continue to drive our growth and should allow us to outperform our current projections. With that, I'd like to turn it over to Mike, and we'll try to quantify some of what I said. Thanks, Manny. We're very happy with our first quarter results. As a reminder, the comments I'm about to make are based on non-GAAP results in our press release. Our revenues for the first quarter were $1.369 billion. Revenues for the quarter were greater than our previous guidance and significantly greater than the prior year. The primary drivers for our revenue increase were strong performance in our Tommy Hilfiger businesses, both domestically and internationally, as well as strong performance of all our CK businesses. Our Tommy Hilfiger business delivered revenues of $715 million.

These revenues were all incremental as the Tommy acquisition was completed in the second quarter of 2010. Our Calvin Klein business also had a strong quarter, with revenues growing 17%. Both the Tommy Hilfiger and Calvin Klein businesses exceeded our revenue plans for the first quarter. Our Heritage revenues for the quarter were flat for the prior year and down about $10 million to our plan. The decline was primarily attributable to Izod and Timberland wholesale, as well as Bath retail. The cold weather in the Northeast and Midwest and heavy reliance on spring knits at Izod and sandals at Bass was a factor in our growth. Operating income for the first quarter was $167 million, which was an increase of $86 million from the prior year's $81 million.

Primary drivers for the increase were our Tommy Hilfiger division, which delivered operating income of $91 million, and our Calvin Klein business, which delivered operating earnings of 9% greater than the prior year. Included in the Calvin Klein operating income is an increase in advertising expense of $9 million associated with the global launch of the CK One campaign. Operating margins for the Heritage business were down to the prior year, resulting in sales shortfall and resulting in gross margin pressure as we cleared product. To our guidance, Tommy Hilfiger and Calvin Klein earnings increases more than offset our first quarter Heritage business shortfall. Overall, operating margins were 12.2% and were ahead of our guidance. Our inventories for the first quarter were $685 million versus last year at $285 million. Our inventories at the end of the first quarter last year did not include Tommy Hilfiger.

The Tommy Hilfiger inventories at acquisition were $289 million. Adjusting for these, the Tommy Hilfiger inventories were in line with our quarter two sales projection of 15% to 17%. As a reminder, our inventory continues to reflect longer lead times in order to take advantage of off-cycle production and opportunities to reduce product costs, and we do expect to bring goods in earlier as we progress through the year. Moving to our guidance for the year, our revenues are planned at $5.7 to $5.75 billion, an increase of 23% to 24%. The Tommy Hilfiger business is planned at $2.91 to $2.94 billion and compares to $1.95 billion for the partial year 2010. Our Calvin Klein revenues are planned up between 9% and 10%. The Heritage business revenues are planned up 1% to 2%.

We continue to plan our gross margins down about 150 to 200 basis points for the year as a result of product cost increases. Our expenses are still planned to be down about 100 to 150 basis points, reflecting expense reductions in SG&A leverage. Operating margins are planned to be at 11% to 11.5% for the year. We have raised our earnings per share guidance to $4.80 to $5, a 13% to 17% increase over last year's earnings per share. Our new guidance also reflects an increase of $0.10 and $0.05 on the low end and high end of our previous guidance respectively. For the second quarter, we are planning our revenues at $1.27 to $1.29 billion, or 15% to 17% greater than last year.

Driving the increase is our Tommy Hilfiger business, which is planned at 23% to 26% over the prior year, and our Calvin Klein business, which is planned at 9% to 10% over the prior year. Our Heritage businesses are also planned to increase 5% to 6% over the prior year's second quarter. We are projecting earnings per share for the second quarter at $0.93 to $0.95, an increase of about 30% over the prior year. As Manny talked about, we continue to invest in marketing. In the second quarter, we are planning a shift in Tommy Hilfiger marketing of about $8 to $10 million from the second half into the second quarter. As a result of this shift, we're planning the total operating margins for the company down about 70 to 80 basis points for the second quarter.

Our tax rate for the second quarter is expected to be 31% to 32%. Our tax rate for the year remains unchanged at 29% to 31%. We're continuing to project debt repayments for the remainder of the year of about $300 million. With that, operator, we will open it up to the questions.

Speaker 0

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit one on your touch-tone telephone. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is star one for questions. First, we'll go to Bob Turnbull with Barclays Capital.

Speaker 1

Hi, good morning.

Speaker 2

Good morning, Bob.

Speaker 1

Manny, I guess there's a couple of topics I'd like to hit on. The first one is, in the Heritage business, when you look at the experience that you had in the first quarter with your price increases, what did you learn about it, and will it affect any change in terms of your plans for the fall in terms of the larger price increases and cost increases going forward?

Speaker 2

Bob, I think the one thing we really learned is weather impacts the first quarter. I just don't think it's a fair comparison to call out, particularly our business in the month of April, which is dramatically driven by short-sleeved knits, sandals in the bath business. That business really took it on the chin and was impacted and clearly forced us to be more promotional than we had planned to be. I think you can't ignore it. I hate talking about weather, but it did have an impact. I think as we move to the second half, look, the consumer, when the product is right, when it's competitively priced in the market against our competitors' space, we get good sell-throughs. I think we'll see how it all plays out for the second half of the year.

I think we're giving ourselves plenty of room in the second half to deal with a promotional environment. If we catch a break, I think we have an opportunity to outperform against the estimates that we're giving ourselves right now. Clearly, we're planning gross margins down 150 to 200 basis points overall. I think we've given ourselves room and built in more than enough promotions into the projections going forward.

Speaker 1

Got it. The second question is on the Tommy business. When you look at the fall backlog and the order book for the fall and you look at your sort of second quarter guidance, have there been any sort of surprises to you over the last several months as you sort of look into the back half of the year as you lap the anniversary of the acquisition?

Speaker 2

By the way, when it comes to the Tommy Hilfiger business, the only surprise has been positive. The strength of the business, clearly we were not planning the business to grow 15% to 18% coming out of the box. We were more planning the business in the 8% to 10% range in Europe. We've been pleasantly surprised with that. Also, in the United States, having an 11% to 12% comp store increases, clearly that wasn't planned as well. The strength of the brand continues to surprise us. We've been able to catch most of that and gain market share as we've gone forward. I think that portends well for the second half of the year as we go into the fall, both from a margin point of view and a potential sales upside point of view.

I think that same upside is available for Calvin Klein as well, because the same dynamic is at play. Clearly, the consumer is voting and those two brands are winning both the market share gain and being able to deliver higher AUR.

Speaker 1

Great. Thank you very much.

Speaker 0

Next, we'll go to Adrian Shapiro with Goldman Sachs.

Speaker 6

Hey, this is Scott Kaufman Ross on for Adrian. I just wanted to ask a quick question on the advertising shifts. It seems you shifted some into, you had the $9 million from CK in the first quarter, and now you're shifting some at Tommy into the second quarter. I believe you're also lapping a $10 million shift in Izod last year. Could you just kind of break down the advertising cadence and the expense guidance, maybe by quarter? Obviously, we know the 100 to 150 basis point leverage for the year, but just how to think about that quarterly given all these shifts in advertising.

Speaker 2

I guess what I would say is let's talk about Tommy's first. Last year, we acquired the business to Macy's. We made a decision early on that we wanted to, with the acquisition, that we wanted to make investments in the new marketing campaign. We clearly shifted last year. We weren't up against that comparison, but we heavied up, very much heavied up, our third and fourth quarter spend overall. What we did this year is going from nine months of Tommy business last year to 12 months this year, we annualized that increase and then spread it in a more rational basis between spring and fall. That's what you're seeing in the second quarter and a shift on the Tommy side.

The only other shift is what we spoke about, which was the Calvin shift, which was $9 million of Calvin spending into the first quarter to support the marketing of CK One. I think you'll see that coming out of the fourth quarter. Simply stated, I think you'll see second quarter advertising up in the $8 to $10 million range on a company basis, and you'll see fourth quarter advertising down in the $10 to $15 million range when it's all done.

Speaker 6

Great. Then.

Speaker 2

Sorry.

Speaker 6

Thank you. Anything on the Izod from last year? I think you had shifted from 4Q into 2Q on the Izod sponsorship. Just anything on that? Is that repeating the same quarter?

Speaker 2

Yeah, that'll 2010 to 2011, that's end of the consistent year over year.

Speaker 6

Okay. The only real shift we're dealing with in the rest of the year is Tommy, you know, out of the back half and moving that out.

Speaker 2

That's correct.

Speaker 6

Okay, thank you.

Speaker 0

will now go to David Glick with Buckingham Research Group.

Speaker 1

Good morning and congrats on the quarter.

Speaker 2

Thanks.

Speaker 1

Manny, I just wondered if you could get a little more detail. It sounds like you're being pretty reasonable about your gross margin outlook. Could you walk us through what you're seeing in cost increases and how that compares on an aggregate basis versus the ticket increases, and then what your underlying assumptions are for what the consumer ultimately is going to pay in terms of higher AURs?

Speaker 2

Okay. Yeah. Look, I'll give you some general facts, but I think it's really there are two distinct stories going on here. There's Calvin and Tommy, and then there's the Heritage business. Calvin and Tommy business represent about 75% of our profits. The Heritage business is clearly on the more precious since most of those businesses were opening price for it. Generally speaking, let's talk costs first. The spring costs were up 5% to 6%. The second half, we're seeing costs depending on the product category up 10% to 20%. On average, something between 15% to 16% cost increases that we're dealing with in the second half of the year. In the second half of the year, we are raising ticket prices somewhere in the 12% to 14% range. From a financial point of view, we're assuming that half of that sticks from an AUR point of view.

We're planning AURs up 5% to 7%. That should more or less give you a sense of where we're coming out and give you a sense of what the potential opportunity would be if we outperform the financial plan more and more closely aligned with our sales ladder plans that we have both at wholesale and at retail. I think it also gives you a strong sense of minimizing the risk in the second half of the year, at least against our projections that I believe we've taken most of the risk out of there unless it just becomes a, you know, a disaster. We're clearly getting AUR increases in Calvin. Even though most of the competitors have not raised ticket prices, we're seeing higher AURs out the door in the 5% to 6% range, and we're seeing similar results with Tommy Hilfiger.

I think it gives us a strong feeling with those two brands, but clearly, the opportunity to raise prices in the second half are there, given the strength of those brands and the positioning that they have on the market.

Speaker 1

Great. Thanks for that detail. Just one other question. Now that you've owned Tommy for about a year and you've had a chance to see firsthand what the opportunities are and the strength in the business, when you look at your overall business and you look at the continued growth of Calvin, the opportunities in Tommy, and when you factor in your Heritage business, what does the long-term top-line model look like? Once we get through this second half on the product cost side, can you deliver earnings growth faster than sales growth? I mean, what's your current thought on kind of what the long-term model looks like now?

Speaker 2

You know, David, I guess both, I think both brands, Calvin and Tommy, have demonstrated over the last five years the opportunity to grow the top lines somewhere. The Calvin business has grown on average 13% over the last five years if you take out the 12 months of the global recession. Even there, it was up slightly. I think in a normal environment, that business should continue to grow top-line growth of between 8% and 10%, even for such a large brand, given the international growth opportunities that exist. I believe the Tommy business should also be able to grow its top line somewhere in the 8% to 10% range. Both businesses, absent this gross margin craziness, this cost price situation that we're dealing with for the second half of this year, have also demonstrated an ability to consistently grow their operating margins.

A combination of better gross margins, but also leveraging the SG&A line. I think both brands should be able to grow their operating income somewhere in the 50 to 100 basis points a year, beginning in 2012 and beyond, as hopefully the global cost environment product gets more balanced, more under control. I don't foresee, at least what we're seeing right now, next year being anything like this year from a costing. I think it will be more rational. It will be product cost inflation, but much more manageable from a timing point of view as it flows for us.

Speaker 1

It sounds like overall, if you figure the Heritage business is kind of flattish double-0 singles, that you've got a model that can put up high single-digit revenues from a planning perspective and grow earnings in the double digits.

Speaker 2

Yeah. Look, nothing has changed. We've been, I think we've consistently said since the acquisition that we felt we can grow the top line when you blend everything together in the mid-single-digit range, and we can grow the bottom line in excess of 15% on an EPS. Given the leverage that we get on the SG&A side, the paydown of debt associated with the cash flow nature of all of the businesses, clearly we're very comfortable that we can grow EPS at a 15%, at least for the next three to five years.

Speaker 1

Thank you very much, Manny. Good luck.

Speaker 0

We will now go to Robbie Owens with Bank of America Merrill Lynch.

Speaker 1

Oh, hey, Manny. How are you?

Speaker 5

Good. How are you?

Speaker 1

Good, thanks. Hey, a couple of follow-ups on Tommy Hilfiger. Apologize if I missed this on the call. On the backlog for the back half, I think you guys said 15% plus. Did you break out domestic versus Europe on that?

Speaker 2

No, I was only talking about Europe. The European business, I'd isolate. Let's remember the U.S. business is 75% retail, 25% wholesale, and the Macy's business is being planned in the mid-single-digit range of 4% to 6% growth.

Speaker 1

Gotcha. I think you guys brought back in-house handbags and accessories for Europe. Can you give us an update on when that is, is that hitting the backlog already as an in-house run business?

Speaker 2

Yeah. That business really has started up to some degree, but really, second half and into 2012, it is in the backlog numbers, but it's still a relatively small business. To put it in perspective, our footwear business is approaching a €100 million business this year. We believe the same opportunity exists for handbags over a four to five-year period. The handbag business is closer to €25 million today.

Speaker 1

Gotcha. The last question, again, sorry if I missed this. CK One jeans launch U.S., I think, hit in April. Any update on how that's been performing? You know.

Speaker 2

I don't have anything specific except in our own stores, which has been performing very well. I think if you look at the jeans launch, it's a much bigger launch as you'd expect. We're back to school, much more focused there. I think it'll be much more meaningful to really speak about the results when we get into the second and third. It's really been the focus has really been much more on the underwear side of the business. There, we're seeing sell-throughs in the 5% to 7% range and seeing very good placement and feeling very positive about that.

Speaker 1

Great. Hey, thanks a lot, Manny.

Speaker 2

Thank you.

Speaker 0

As a reminder, if you have a question, please press star one at this time. We'll now go to Kate McShane with Citi Investment Research.

Speaker 4

Thank you. Good morning. I was wondering if you could go into a little bit more detail as to what you saw in the sportswear category during the quarter, what you saw from your competitors in terms of their pricing strategy, and what you're seeing that has improved in May.

Speaker 2

Okay. I guess I would say is for spring, basically, what we saw is it continued to be a very promotional environment. All clearance into the first part of the first quarter was very aggressive, and the actual clearance prices that were going out were significantly lower than they were this time last year. As we got into April, where we were expecting to see more sell-through of spring product, the weather did impact it. Everyone across the board really reported there was more promotion going on, driving prices down in the month of April. What we did see in May as the weather broke, we were aggressive to keep the inventories clean, and we saw a strong reaction to the product and the sell-throughs through the month of May. The last two weeks in particular, with the weather really coming on, have been very, very strong.

We're getting our inventories back in line, back on plan, and we feel much better than we did three or four weeks ago with the Heritage business. What I will say is the Calvin and Tommy businesses, both in the United States and internationally, clearly did not have those issues in their sportswear. From the Calvin business that we operate directly, we saw AURs that were up 5% to 7%. That's continued through May. We saw strong selling. As I said, we're mid-season increase in sales, and that trend just hasn't slowed down. That's more or less the tale. I think what we're seeing is some buildup of inventory towards the end of the first quarter, clearing out from a competitive stack through the month of May, things settling in.

What I'm hopeful about is as we get to fall, spring inventories will be at an appropriate level that they will not necessarily impact the pricing strategies that are on the floor for the back-to-school season. We're hoping if this trend were to continue for the next couple of weeks, that overall inventories in department stores across America will be in very good shape so that we could start fall and back to school clean.

Speaker 4

Okay. Great. It sounds like dress furnishings did extremely well despite the increase in price during the season. I just wondered if you could help us better understand some of the dynamics that drove the strength in the categories during the quarter and what your thought is on pricing for that category specifically.

Speaker 2

I think in general, when you control 50% to 60% of the floor in most of our competitors, it's helpful. We've been able to raise ticket prices, be less promotional. What we're clearly seeing is higher AURs and slightly lower units going out the door. I think that formula works very well for us, particularly as we move into the fall season. We've been able to stay in inventory, react to the business, keep the business flowing, and not have any issues from a clearance point of view, which has kept the retail prices up. I think that's one of the big differences on the dress furnishings.

Speaker 4

Okay. Great. My last question is, can you attribute what the inflection, the positive inflection was in Spain during the quarter?

Speaker 2

I think the inflection is the strength of the Tommy Hilfiger brand, particularly at El Corte Inglés and in that market in general. We were able to attain more market share and shelf space on the floor. I don't believe that anything dramatic has happened to the Spanish retail economy, with the exception that I think it's bottoming and we're coming off of a bottoming. I think the Tommy brand is very strong in that market. We're gaining market share in a difficult market.

Speaker 4

Thank you.

Speaker 0

We'll now go to Jeff Kleinfelter with Piper Jaffray.

Speaker 1

Yes, thank you. Just a couple of questions, Manny. First, on the Tommy Hilfiger business, with respect to the Asian strategy, could you just give us a little bit more detail there and update on where you stand on potential catalysts here for the balance of this year and next year?

Speaker 2

Sure. I guess I would start, and we are going to speak about Asia. Let me start with Japan. I guess we've been pleasantly surprised with the resiliency of that business. We continue to plan it and have not changed any of our projections from our initial guidance at the beginning of the year, planning the profitability down about 25% this year. What we've seen is post the earthquake crisis, the tsunami, and the settling in of the nuclear situation there, business the last three to four weeks has really popped back strongly there. The month of May, we're seeing business that's flat to up slightly, which has been positive for us. There, and margins have been good. I think more needs to be played out there. In Asia or in Japan, that business seems to have stabilized. Hopefully, if the trends were to continue, we can outperform our projections.

On the overall Asian environment, we are actively supervising and managing the China business. It's a joint venture. We own 45% of that joint venture, and we are managing that business. We continue to see China as a significant growth vehicle for the brand. It's about a $35 million business today in China. We think the opportunity in the next four to five years is if we're to approach $150 to $200 million. We have the logistics, the team in place. We're working through it. We will open a few stores in the second half of the year. I think we're on a good track with the Tommy business in Asia, and I'm focused on that. The rest of Asia today continues to be run as a licensed business, and we are looking at some of the opportunities there to bring some of those businesses in-house.

Probably when I say in-house, more in line with the joint venture model that we have in China, meaning teaming up with a local partner, owning probably a significant portion of that joint venture, but less than a majority, and giving us the ability to operate in those businesses, make the investments in there, and then have the option in the next four to five years to buy those businesses and bring them totally in-house once the business is up and running at a level that we think it will deliver appropriate levels of profitability. Jeff, I really don't have much more to talk about. The brand continues in each of the local markets, continues to exceed its business plans from a sales point of view and an operating point of view. We are undeveloped there compared to the rest of how developed we are in Europe and North America.

It's a real opportunity given the strength of the brand, and we continue to work through that. We're in the early phases of that, and I think you'll start to see the benefits of that in 2012 and beyond.

Speaker 1

Okay. Two other quick questions. Thank you, Manny, for that insight. On the Tommy Hilfiger Europe business, I know one of the major changes, one of the major advantages of you owning that business as part of a strategic acquisition is that you've been able to allocate more marketing dollars, more advertising dollars, get more into a brand-building campaign for that business, particularly in Europe. In terms of the growth that you're experiencing there right now, I know it's always difficult to say it's the cart or the horse first, but the growth that you're experiencing, do you think it has to do with the advertising you've put up and demonstrated to your partners over there, therefore, they're giving you more shelf space, or is it a gradual step function of sell-throughs that are giving you more shelf space over time?

Just a little color on that, and then one more on Calvin Klein.

Speaker 2

Sure. Jeff, I think you did a good job of asking me and answering the question. I think it was a perfect setup. I think we've been able to demonstrate to our major customers and to the consumer that we are serious about investing behind the brand, and that's given them more confidence. That's given our retail partners much more confidence to step up. We've clearly seen a consumer reaction to the marketing campaign. It was terrific that when we walked in the door, when we were doing our due diligence, we were able to see the campaign in its infancy and really just were excited about it, felt it had tremendous legs, and made a decision early on with the Tommy management team to really invest behind that marketing campaign. It's paid dividends for us in the United States.

I know we talk about Europe because it's such a growth market for us. In the U.S., I can tell you that at point of sale and at retail, it's clearly helped us in our own retail stores with the kind of comp store increases that we've seen. I think we have a built-in proving case with Calvin Klein. We have a great brand. We invest behind it. Consumer responds to it. I think that formula has worked so well at Calvin Klein and will work for Tommy. It's demonstrating that it is working. I think it is a combination of the operating platform that we have and the expertise that are present throughout Europe and the relationships that are built there, coupled with that investment that is really paying the dividends and putting up this 14% to 15% growth quarter by quarter.

Speaker 1

That's great. Just a clarification on that. Are you getting that sell-through from more space, more product on the floor, or do you feel like it's truly just organic turns of existing floor space? Of Calvin Klein, just quickly, the CK One, anything at all that you would change in hindsight with the way the global launch went for that campaign?

Speaker 2

On the Tommy piece, look, we are gaining also shelf space with some of the new product categories. It's hard for me to tell you what that percentage is, but clearly in our own stores, where we have an added square footage, throughout Europe and the United States, putting up comp store increases that are well over 10%, I think we are clearly getting it both from a square footage being added basis and from a comp store growth on a like-by-like square footage basis. On the CK One campaign, look, I think we're very happy with the results of the campaign. We really taught the campaign to remind everyone was directed towards a much younger consumer. It is at a different, it's significantly different than anything we've done at Calvin Klein. It's got a significant digital component, social media component that we've really invested behind.

We have new measurement tools to measure the reaction we're getting from that consumer. I guess the proof is in the pudding on the sales growth. I think, look, I think there's more to learn about this. This campaign continues to have legs, and it will go on through the second, third, and fourth quarter of this year, and we'll learn more as we go forward. It's a little too early to say anything that we would change. Anything that we do see that we would tweak, I think we'll put those in place for the second half of the year. On balance, we're very happy with the campaign, and we really do think we're targeting a new consumer for Calvin Klein and getting that consumer involved in our brand earlier than they've been involved before.

Speaker 1

Great. Thank you. Congratulations.

Speaker 2

All right.

Speaker 0

Next, we'll go to Avery Baker with Wells Fargo.

Speaker 3

Great. Thank you. Good morning. I had a question on product cost, any visibility you have into the next year in light of some of the declines of cotton prices. Maybe if you had any visibility into the first half of next year, if you expect costs to still be up year over year. Would we see maybe a softening in the back half of next year?

Speaker 2

You know, Avery, I think everything you said, I believe directionally, it seems to be where things are hopefully shaping up. At this point in time, we have not placed any goods, and I don't think anyone has actually bought goods yet. There is a lot of discussion going on. I think there's some jockeying. I would expect that spring to from fall holidays, the prices to spring will hopefully be going to see some pullback in prices. Spring to spring costs will be up. They won't be as dramatic as we hopefully as we saw in the second half of this year. It's still too early to really, for me, to say that with any authority other than we see the trends in the markets, we understand what's going on. My focus now is really on the second half of this year.

Our sourcing people are on the ground operating throughout the Far East, the Caribbean, and the Middle East. We are down and into all of that tactically, but we're not ready to really talk about cost yet, except for some of the directional things that you mentioned.

Speaker 3

Okay. The other question is on your Tommy Hilfiger guidance for the second quarter. If I heard you right on the U.S., it sounds like maybe in Europe, then you expect the revenue to be up in the maybe 30% range. Is there a shift in revenue into the second quarter somehow? Because it just sounds like a lot higher than some of the bookings you've mentioned.

Speaker 2

I think you have to be careful. It's a couple of things. It's been the second quarter, the Tommy business. We made the acquisition in the quarter, but we basically lost. Since it was May 6, it's going to be 12 weeks last year versus 13 weeks this year. There's an extra week in there when we talk about the business. You have to be careful with the comparisons for what's being shown. I'm not sure where you're getting your numbers of up 30%. I think you know, and we don't really get into that level of guidance. We're focused. I don't believe we're not seeing anything from the shift basis that should impact the business. I'm not aware of anything, Michelle.

Speaker 3

Okay. Okay. Great. Thanks. Lastly, in the second half last year, your Heritage sportswear business was up really strong, I think 20%, 30% or so. How should we think about when we're modeling lapping that? Are you modeling that this down against the compares, or that's just not a concern? Thank you.

Speaker 2

I think in general, when you think about, look, when we talked about the guidance, we said the Heritage business for the year would be up about 2%. We said that for the second quarter, it would be up about 5%. I think just a pure math, if you put together, I think the second half of the year, overall Heritage would be up somewhere in the neighborhood of 1% to 3%. I don't think there's not much to talk about there. The business was very strong last year. We did gain a significant amount of market share, particularly with our Izod business and our Van Heusen businesses. I think we'll continue to maintain that market share, but clearly not have that kind of growth that we had last year. I think given that it's now after 10:00 A.M., I'm going to close the call.

I appreciate all your attention and look for.