PVH Corp. (PVH) Q2 2011 Earnings Report, Transcript and Summary

Good day, everyone and welcome to this PVH Corp Second Quarter 2011 Earnings Conference Call. This webcast and conference call is being recorded on behalf of PVH and consist 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 transcripts or broadcast of this call. The information made available on this webcast and conference call contains certain forward-looking statements, which reflects PVH’s view of future events and financial performance as of August 30, 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 statements, 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 am pleased to turn the conference over to Mr. Manny Chirico, Chairman and CEO. Please go ahead sir. Manny Chirico – Chairman and Chief Executive Officer: Thank you very much. Good morning everyone. Joining me on the call this morning is Mike Shaffer, our Chief Financial Officer; Allen Sirkin, our President and Chief Operating Officer; Ken Duane, who runs all of our North American Wholesale businesses; and Dana Perlman who is our Treasurer and Head of Investor Relations. We’re very pleased with the results that we reported for the second quarter and our ability to take up the projections for the year 2011. I am going to start with the Calvin Klein businesses and more or less try to give you a little bit of update of the trends of business as we see them in the second quarter. Mike will then quantify the results in the second quarter and then I’ll come back and just talk about some of the trends we see in the early part of third quarter. Our Calvin Klein business continued its strong growth momentum in the quarter. Total revenues in the second quarter for the combined Calvin Klein business is up 19% and our operating profits increased over 20%. The CK apparel business wholesale and retail that we are running in North America, those businesses posted a 21% 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 in North America. Our Calvin Klein retail business has posted a 21% comp store increase in the quarter. In our licensing segment, royalty revenues were up 12%. I’ll put some color on some of the larger businesses. Our underwear business was ahead about 14% worldwide. All regions in the quarter, North Asia and the Americas posted double-digit sales increases. The growth was driven by the continued growth of international retail square footage and the extremely strong performance of CK One. CK One product has been supported by a significant marketing campaign and marketing investment through the first half of the year. CK One is the largest launch in the brand’s history and retail results have been strong in all markets. In men’s, CK One continues to exceed our plans and has helped us to grow and maintain our number one position within U.S. department stores. CK One is expected by the end of the year to represent about 10% of our total men’s underwear business. On the jeans side, our jeans-related businesses were up about 8% for the quarter fueled by the strong growth internationally, Latin America, Asia, and Europe. Overall, our international jeans business grew over 20% while our domestic jeans business was down about 8%. The jeans business in the United States continues to be under pressure overall and we see our men’s business outperforming our women’s business within the United States. Moving on to fragrance, our Coty fragrance business had a strong quarter posting a 10% increase in revenues. Business was very good across the board with our Euphoria Calvin Klein Beauty and CK One fragrances continuing their strong growth momentum. In the third quarter, we’ll have the major product launch with CK One shock. It will be supported by strong marketing campaign. It will be a global launch. Product has begun shipping in early August. We’ll see much more of a presence as we step into September and going into the full holiday selling season. So, we have very high expectations to CK One. We see excellent placement of the product. We think the marketing campaign, which started in the first half of the year around CK One will accelerate in fragrance in the second half of the year and we are very positive as we see that business going forward. In our North American women’s apparel and related accessory business, we had very strong performance in the quarter. Our revenues were up in excess of 15% for the quarter in those combined categories. On the apparel side, the growth is being fueled by strong selling of women’s sportswear and dresses as well as good performance in the outerwear category and we’ll get a better view into the outerwear category as we really get into the third quarter this year. We have very strong placement across the board. In footwear in North America, revenues are running over 25% ahead. In addition, our new handbag and accessory business is off to a very strong start exceeding our expectations and our plans. G3 has seen excellent placement and sell-through both at Lord & Taylor’s and at Macy’s and we think the footwear accessory area will continue to be a growth area for Calvin Klein. The balance of this year into the next couple of years, we see real opportunity there. Our watch and jewelry business with Swatch saw significant growth in the quarter posting a 35% increase over last year. The growth was driven by door expansion and significant comp store sales growth in both Asia and in Europe. On our CK Bridge business in Asia, that business continues to grow very strongly with Club 21. We posted a 40% increase in revenues for the quarter. The growth is being driven by China, Hong Kong, and Korean markets, where we are experiencing door expansion and double-digit comp store growth. Moving on to Tommy Hilfiger, from a brand marketing perspective, we are just introducing the third chapter in our very successful Meet The Hilfigers’ marketing campaign, as we continue to invest and broaden the reach of the Tommy Hilfiger brand worldwide. We have just recently increased our fourth quarter marketing spend by about $10 million. Our global fall holiday campaign will have significant exposure in major markets throughout North America and Europe. The fourth quarter marketing campaign calls were significant. Television and cinema component for our marketing exposure in Europe and in Asia and the United States, excuse me. So, we are very excited about that campaign as we go forward and we think it will just continue the momentum in the brand. Overall, all of the Tommy businesses had this very strong quarter and significantly exceeded our expectations. Total revenues in the quarter were up over 30% and operating earnings increased 34%. The brand’s performance involved North America and Europe was particularly strong. Let me start with the European wholesale business, the full holiday, we have seen sales growth of over 15% over their prior year. On a product category basis, we are seeing double-digit growth in men’s and women’s sportswear, denim, and in footwear. We are also seeing strong growth in accessories and handbags as that business is just really starting to ramp up. We have seen strong growth across all of Europe falling for the fall holiday season. Business in our largest market Germany is running ahead about 15%. Our second largest market, which is Spain and Spanish market, as you know, is under significant pressure. We have seen very healthy growth in Spain of about 5% really focused on our El Corte Ingles, where we continue to grow our presence and our market position in the store. Our key growth markets of Italy, France, Russia and the UK are all growing at over 15% and also in the second quarter we saw about $20 million increase in early fall shipments as major customers accelerated deliveries forward in order to meet the consumer demand we saw for our product in early fall that was very exciting (indiscernible) products being pushed forward by our customers. Moving to Tommy financial retail business, in the second quarter comp store sales were up 12% driven by the strong performance of all European markets across the board. They are all posted double-digit sales increases in all the major markets that we are operating. Our North American retail business posted a very strong comp store growth in the quarter of plus 30%. We see strength in all regions of the country with particularly strong performance in the geographic areas that cater the international tourists. The Tommy retail results very consistent with the strong sales performance we have seen in our Calvin Klein retail business throughout North America. The Tommy Hilfiger wholesales business continues to perform ahead of plan at Macys. We are seeing in the second quarter averaging retail increases in excess of 5% and we are seeing sell-throughs they are exceeding our sales expectation in the sportswear area. Moving on to our Heritage business, revenues increased about 9% in the quarter driven by 20% increase in dress furnishings and an 8% increase in wholesale sportswear sales. Our Heritage retail business has posted a healthy 2% comp store increase, which is right on plan. Operating earnings in quarter were relatively flat as the strong dress furnishings earnings performance was more than offset by gross margin decline in our IZOD sportswear business due to increased promotional selling. We wanted to significantly to get ahead of the current clear goods as went back into the fall selling season and as we head into back-to-school, we feel very good about the position we are in from an inventory point of view on the floor and we think we will position for the IZOD sportswear business that we move into the third quarter. With that, I am going to turn it over to Mike and ask him to quantify some of the results of the quarter. Mike Shaffer – Chief Financial Officer: Thanks, Manny. The comments about to make based on non-GAAP results and a reconciled most second quarter press release. Our revenues for the second quarter were $1.334 billion. Revenues for the quarter were greater than our previous guidance as significantly greater than the prior year, driving the higher revenues with strong performance in our Tommy Hilfiger and Calvin Klein businesses. Gross margins for the quarter were 54.4% of sale and we are ahead of plan and down 120 basis points for the prior year. The rate decline was predominately driven by product cost increases, which our Heritage business did not offset with AUR increases coupled with promotional selling in our IZOD wholesale sportswear business. Our Calvin Klein and Tommy Hilfiger businesses had a lower gross margin rate decline in the quarter as we sold four products with cost increases in the latter part of the second quarter. In addition, Tommy Hilfiger and Calvin Klein variable to same AUR increases of about 5% on product. SG&A for the quarter was 43.1% of sales, a 140 basis point decline versus the prior year. Our SG&A expenses continued to show improvement as a result of synergies that we attained through the Tommy Hilfiger acquisition coupled with our ability to leverage our large revenue increase for the quarter. In addition, our SG&A for the quarter included approximately $10 million of higher marketing expenses from the prior year. Operating income for the second quarter was $151 million, a 24% improvement with $29 million increase over the prior year. Driving the increase was Tommy Hilfiger and Calvin Klein businesses, which had earnings increases of 34% and 24% respectively and were driven large by the revenue increase as mentioned previously. Inventories for the quarter were $877 million about 26% greater than the prior year. Our inventory increase reflects the higher level of core product inventories primarily in the dress furnishings business. In addition, cost increases as well as continued early purchasing to take advantage of downtime production were also factors. Our inventories were on plan and very clean. As a reminder and as we called on in the previous quarter, we will continue to see higher inventory levels as we will continue to take advantage of the downtime production. Inventories will come more in line with last year in the fourth quarter. And lastly, on the second quarter we made debt repayments of about approximately $100 million. Moving to our guidance for the year, our revenues are planned at $5.78 billion to $5.82 billion, an increase of about 26% over the last year. Tommy Hilfiger revenues are planned at $2.94 billion to $2.97 billion and compared to $1.95 billion for the nine-month period last year. Our Calvin Klein revenues have planned at between 12% and 13%, and Heritage revenues plan to grow about 2%. We are planning our gross margins down about 150 to 180 basis points as a result of product cost increases. Our expenses are also still plan to be down about 100 to 150 basis points reflecting expense reduction and SG&A leverage. Operating margins are now planned at 11.3% to 11.5% of sales. We have raised our earnings per share guidance for the year to $5.00 to $5.12, a 17% to 20% increase over the prior year. This increase reflects the $0.12 actual beat over the high end of our second quarter guidance as well as $10 million increase in the fourth quarter market expense for Tommy Hilfiger. For the third quarter, we are planning revenues at $1.61 billion to $1.63 billion, an increase of 6% to 7% over the prior year. Driving this increase is Tommy Hilfiger business, which is planned at 9% to 12% increase over the last year as well as our Calvin Klein business is just planned to increase 8% to 9%. Our Heritage Brands are expected to increase 1% in the third quarter over the last year. For the third quarter, we are planning our gross margin down about 250 to 270 basis points as a result of product cost increases. Our SG&A expenses are planned to be down at about 190 to 200 basis points reflecting the expense reductions and SG&A leverage. Operating margins are planned at about 13.5% of sales. We are projecting the third quarter earnings per share to be $1.75 to $1.81, an increase of 5% to 8% over the prior year. Our tax rate for the third quarter is projected at 30.5% to 32.5% and our guidance for the year limit is a 30% to 31%. In the second quarter, our taxes were higher than planned as a result of the timing of recording certain discreet items. The recording of these items is originally planned for the fourth quarter of this year, but it was booked in the second quarter. Finally, we are projecting debt repayments of about $200 million during the remainder of 2011, which will bring our total repayments since the Tommy acquisition due about $700 million. And with that, we will go back to Manny. Manny Chirico – Chairman and Chief Executive Officer: I just want to take a moment, I know besides our results for the second quarter everyone has some focus on what the trends in the business has been for the first month of our third quarter and our trends overall has been very strong, our back-to-school selling has been continues to be very strong, just to put some flush on that. In our U.S. retail businesses, our Calvin Klein and Tommy Hilfiger businesses, prior to the hurricane and I will put some flush on that in a moment. Prior to the hurricane, to Thursday before the storm, we are running up double-digit with 10% to 12% on a comp store basis. Those businesses in the second half have planned up in the mid single-digit range. Our Heritage business is running up about 3% for August. We would plan to increase for the second half between 1% and 2%. The hurricane on Friday, Saturday and Sunday, we had with our business being so East Coast-focused. We saw about an impact about $3 million in sales due to closed stores or stores that were really impacted by traffic because of the storms. It was worth throughout for the month of August about 300 basis points of comp. So, business on following the weekend early reads Monday and Tuesday has been very strong following the hurricane. So, we feel really good about the trend of business in our retail stores. All the stores are running ahead of our plans for the second half of the year. On the wholesale side of the business, both the Calvin Klein and Tommy businesses continue to perform head of sales plan and although it still very early, we have not seen any customer resistance to our fall retail price increases at all. So, (events in) those businesses continued. In dress furnishing, we have had excellent success passing along the cost increases and the retail price increases that we have seen in the business. We are seeing a significant increase in AURs out-the-door in our dress furnishings business at the wholesale level. On the Heritage sportswear business, it’s too early to tell the August business is very much, particularly on the main floor and going up against private label in August is very much driven by – continue to be driven by spring clearance and summer clearance. So, it’s too early to really get a strong handle there as we would expect we think that’s the area, where we will be most challenged trying to raise prices in there and will update you further on that as we move into the third quarter going forward. That business represents less than 20% of our total volume. So, 80% of our volume really we are seeing good response to our higher price tickets in North America. Moving to Europe, our wholesale business really continues to see strong momentum. Wholesale represents about 70% of our total European business. Our spring 2012 order book, which will start shipping in the fourth quarter, is running ahead about 13% and we are planning that business up about 9%. So, we are running significantly ahead. As I said in my previous comments, we have seen our customers accelerate deliveries forward to really get three-fold in early, so no lack of momentum that we are seeing in Europe on the wholesale side of the business. As moving to our European retail comps, the comps in the month of August are up about 3% against the second half plan of about plus 4%. That business seems to be running on plan. Margins there are strong. We have raised prices in our European retail businesses at the customer level. We are getting a good response to that. We feel good about that how that business has been. So, on our overall guidance, I think Mike did a really good job of quantifying that to you. We have tried to be prudent with our estimates. We haven’t changed any of our estimates really for the second half of the year, all of our operating assumptions about gross margins, how much of the sales ease retail price increases that we will ultimately be able to pass along to the consumers. We haven’t changed any of our assumptions there although the results have been significantly ahead of where we are planning in right now. We believe we continue to have momentum in the Calvin Klein and Tommy Hilfiger’s business, which will continue to drive our growth and should allow us if trends continue to exceed the projections that are out there. And with that, I’ll open it up for any questions that you might have.

Thank you, sir. (Operator Instructions) And our first question will come from Kate McShane with Citi Investment Research. Kate McShane – Citi Investment Research: Thank you. Good morning.

Hi, Kate. Kate McShane – Citi Investment Research: Manny, I heard you speak about sportswear and I wondered if you could just go into little bit more detail when it came to price increases, I know in the first quarter, you had seen a little bit of inversion in share because you can see a lot of other competitors raising price in the sportswear category. So, I wondered if you could tell us what you saw in the second quarter when you expect for the back half in that category?

I guess, sportswear in general, on the collection side of the floor, the Calvin and Tommy business for us specifically we saw continued price retail out-the-door increases of about 5% in the second quarter, very healthy. On the more moderate businesses, particularly in the IZOD business, we needed to move through some excess inventory that was on the floor. We need clear product. So, clearly, there we saw no increases in retail prices interacting IZOD. Our retail price out-the-door was down as we were very aggressive about moving product to get ourselves positioned for back-to-school. So, again on the main floor, I think this continue to see some pressure and it’s just too early to give you a read. Clearly, on the floor, ticket prices have been raised across the board be it private label, collections, branded main floor business as well. All of those have seen price ticket increases of anywhere from 10% to 20%. How the consumer reacts to that? The amount of promotions that will go after that, I think would clearly be determined over the next four to five weeks as we go forward as we really get into department store selling of back-to-school. So, we’ll keep you posted on it, but that’s – I think it’s still an open book at this point, particularly for the main floor. Kate McShane – Citi Investment Research: Okay, great. And then Mike, I was wondering if you could breakdown the inventory increase into a little bit more detail as how much is coming from higher cost in terms of bringing some products forward?

We have talked about our cost increases being up somewhere between 10% and 20%, so, we used 15% for cost increases. The dress shirt increase we’ve talked about, we’ve added core product. It’s all – we have added core products for dress shirts and then the early sourcing piece is the biggest factor. We are utilizing downtime production. We are seeing the benefit in our cost and that is the largest component of the increase and that will continue through the third quarter. We will see inventories get back in line for the quarter. Kate McShane – Citi Investment Research: Okay, thanks very much.

Next, we will hear from David Glick with Buckingham Research Group. David Glick – Buckingham Research Group: Yes, good morning. Congrats on the quarter. Just wanted to touch on Europe for a moment, if I missed I apologize, can you kind of walk us through Manny what your comparisons are Q2 through Q4. In European retail, I know it’s only 30% of your business, but that sounds like you had a very strong second quarter results on plan so far for Q3, but just remind us on the comparisons? And then secondly, what gives you the confidence on the wholesale side, I mean, the bookings are really strong kind of in line with the strength in the first half that hasn’t moderated at all, but is there any risk to the European wholesale bookings for fall holiday and spring in Europe where trends seem to be moderating?

Okay. Let me take it and try to pick those in pieces. I guess, on the European retail business, to remind everyone, last year second quarter, our comps ran about flat to plus 1% and we’ve put on a – internationally, we’ve put on an increase of about 12% against that. As we went into the third quarter, our comps significantly improved depending on the market of 10% to 12%. So, we saw a real improvement in comps third and fourth quarter in the 2010 fiscal year. So, we are up against much tougher comp store comparisons about paying full percentage points increase in the second half of the year versus our first half comparisons. I think that is part of why we see our comps really moderate about plus 3%. I think it’s still very healthy. So, that’s European retail and hopefully and that puts it in some perspective. On the wholesale side, based on the trends, based on the way business is done in Europe, I don’t see any risk to shipments for fall goods – fall and holiday goods are really – much of the selling season at this point is really being shipped in the month of August, early September. We see no pullback. In fact, as I mentioned, if anything we have seen customers really accelerate the pullout of goods. The spring orders absent a catastrophe, of course Europe, I don’t see any real risks at all. Those are hard orders. Those orders are placed. Again, you don’t want to force goods at any channel, but I’ll read of business and how the time parameters performing against all the competitors, of course, Europe. We continue to outperform at retail and I think that’s clear from the results. So, I think if anybody is going to be pulled back, it’s tough it’s not going to be the Tommy business. So, I see very little risk in our wholesale business for the balance of 2011. And I think just the way we have planned the business given the fact that we have planned in spring only up 9% from the financial point of view and bookings are running 13 plus percent at this point, I think is just the indication of the conservatism, that’s felt into the wholesale plan. David Glick – Buckingham Research Group: Okay, great, thanks. And just one follow-up on North America, can you help us understand the strength in dress furnishings, is there a fit or a fashion trend going on there and does that give you a bit of a buffer against your risks that you might see in the sportswear business on the margin side?

Sure. Look our dress furnishings business represents about a little bit on an annual basis represents about 33% of our overall wholesale business. And then the balance is between retail direct and our wholesale sportswear. But the very big piece of our business on Heritage side, very stable and we see very significant AUR increases in dress shirts. I think that’s a combination of the significant position that we hold on the floor in each of our major customers that we have been able to very thoughtfully raise retail prices across the board, continue to promote off of the higher retail prices, but in the first month of August we have seen AUR increases I guess if you look across the board of 10% and more as we have gone forward. So, very healthy AUR increases we think it’s a category that given its dynamic is one that really AURs are going to stick as long as the inventories controlled and at this point the inventories very well controlled. From a fashion point of view, I think dress-up is clearly an area that is in cycle at this point, even on sportswear side, more refined sportswear were doing much better. We are seeing real good performance there. Slim-fit is a real significant fashion cycle not really plays is the strength of a number of brands particularly Calvin Klein and lot of those really factor in to give us an ability of raise price across the board there. So, the dress furnishings there is an area that we're really feeling good, very good about us we go in to second half of the year. David Glick – Buckingham Research Group: Great. Thank you very much. Good luck.

Next we will hear from Bob Drbul with Barclays. Bob Drbul – Barclays: Hi, good morning.

Hey Bob. Bob Drbul – Barclays: I guess the first question I have is when you go back to the hurricane impact on your sales, how much of the business do you think you lost. How much do you the think you can get back this weekend or how are you approaching it from the business standpoint?

Yes, I guess look, which we are looking at it day by day. I think I mentioned to quantify we believe it was about $3 million sales in our own retail stores and I think if the first two days of this month are any indication is a good chance we could get a lot of that back in the next 10 days as we sell into the labor day weekend, which is a huge weekend for us and we are seeing very, very strong comp store performance Monday, Tuesday now. In order to tell, what’s driving that, what was that and clearly there seems to be some pent-up demand, people are looking to shop. We continue to be appropriately aggressive from a promotional point of view, but not overly aggressive. So, I don’t think its going to close to anything significant from the margin point of view and we will get a better read on that in the next 10 days. But I’m optimistic about some of that coming back to us in September. Bob Drbul – Barclays: Okay, great. And then I guess I just have a question on the pullback in cotton. Can you give us an update in terms of where you are from a lead time perspective and sort of how far out you guys are bought and sort of how soon some of the lower-priced product can flow through the income statement?

Sure, I think we are bottom spring as we speak. Have been buying it spring one, spring two, we bought February, March at this point and we are basically a flow through on the lower course that we are anticipating in spring really won’t be seen until we get in to the first quarter of next year and really the second part of the first quarter of next year. I think the way I look at it Bob, is right now we are seeing in general, when you factor all the course, we are seeing a pullback in costs from fall holiday prices of about 8% to 10%, when you compare that spring to spring we will probably looking at an increase spring ‘11 to spring ‘12 of somewhere in the 9% to 10% range, which is significantly under the kind of increases we saw in fall. If those trends would continue, we could actually see decline in cost as we go into the second half of next year. But that again is all on the come, so indications are that there should be some margin recovery if we are able to hold the retail prices into the second quarter of next year into third and fourth quarter of next year as well. So, just looking much better as cottons really pulled back and it’s not just cotton sort of raw material components. They go in to our products. Bob Drbul – Barclays: Okay, great. My last question is on the Tommy Hilfiger, the advertising spending and then the additional $10 million in the fourth quarter. With the increases that you have invested into the business last year and then this additional $10 million, does that put you at a level that you think is the new ongoing run rate or do you believe there's still opportunities to continue to invest in the advertising over time?

On a percentage of sales, I think we will continue to invest in marketing as we go forward. So, as a business grows, and as we really expanding into new markets, particularly Asia, which is a significant growth area for the Tommy branding on a relative basis compared to North America and Europe were significantly under develop there. I think we will continue to make major investments in marketing as we go forward, but in line with the growth of that business. So, I think from a operating margin point of view, we should actually start to see continues to see improvement in the operating margin percentage of the business, as we leverage the growth, but we will continue to make those marketing investments proportion to the growth in the business. So, hope that answer the question now looking at going forward. Bob Drbul – Barclays: Okay, thanks. Thanks very much.

And now we will hear from Adrianne Shapira with Goldman Sachs. Adrianne Shapira – Goldman Sachs: Thank you. Manny, just a few questions. First if we could spend a little bit of time on the gross margin as it relates to the guidance, the first path clearly above plan, Q1 up 200 basis points, Q2 down only 120. It sounds as if while Heritage remains a wild card as it relates to pricing, but now that you have cleaned up that IZOD inventory, help us think about the 150 to 180 basis point gross margin guidance. It would seem to suggest sort of the worst case or perhaps declines from here. How would you have us think about to get to the 150 to 180, given how the first half was well above plan?

I think we try to adjust the annual gross margin some level of improvement against that, but I think look at there is opportunity. I think the opportunity clearly is in dress furnishings area and in the Calvin Klein and Tommy Hilfiger businesses to outperform our plan. At this point, when you look at the macro environment that we are dealing with and some of the volatility that we just saw in the month of August from a geographic point of view politically all of that chaos it’s out there it just doesn’t seem prudent for us at this point to start changing our plans, our financial plans going forward. I think given the strength of the businesses, those particularly three businesses dress furnishings, Calvin and Tommy it makes us more optimistic about what we see for the second half of the year, but wouldn’t quote I don’t feel anything worst case, but I think its conservative case. I think it’s an opportunity to outperform against that. But again we will deal with that as it unwinds and as we have laid it out there. So, I think your observation all appropriate, but given the macro environment I don’t think at this point in time we won’t change any of our future projections. Adrianne Shapira – Goldman Sachs: Great, makes sense. And then speaking to the chaos that we saw in August, we appreciate the hurricane clarity that you gave us. But maybe spend a little time on how you saw given August trends given the market volatility we have seen, this kind of roller coaster, how you have seen the consumer respond. Do you see trends intra-month similarly be quite volatile or did you not see much change at all intra-month?

Not really any dramatic changes in to month. There is a couple of crazy days with given the market went down 900 points I think there was the people who are nervous. But after a period of time, about a week in the middle of August it was nice to see then business really bounce back very strongly last two weeks of August. So, I can’t tell you if that just a vacation pattern if that’s the consumer very hard thing to read it at this moment in time. But overall August trends are very positive when we look at them overall. Adrianne Shapira – Goldman Sachs: Great and then my last question as it relates to the domestic jeans business that you cited, some weakness down 8%, maybe shed light on that weakness especially as we are in the back-to-school season and clearly looking for some steeper price increases. How should we be thinking about that business and what sort of plans to see some recovery there?

I guess I would first say on a direct basis, we have got the limited visibility on the jeans business and by that I mean is the biggest business we have obviously is the Calvin Klein jeans business worldwide and that’s a license business. So, we see our results and we understand what’s going on in that business. We don’t look at it day-to-day as we would it was an operating business. But I don’t think so from that point of view I think that business is under pressure. I think women’s jeans business is under significantly more pressure than the men’s jeans business. In our Tommy business, from a European point of view, that business continues to be very strong for us is growing in the high single-digit range for us in both the retail and the wholesale performance level. So, we’ve really seen not a lot of impact there and I was really talking about the Calvin Klein jeans business what I said was down 8%. That was a function of – a big function of the women’s jeans component. And I think when you are running a overall brand like Calvin or Tommy, and you have a sportswear business, that sportswear business is I think is benefiting from the lack of jeans business. We are selling a lot of dress pants. We are selling a lot of khakis. We are selling a lot of non-denim product, which is really benefiting both the Calvin U.S. business and the Tommy U.S. businesses that are much more focused on those areas. Adrianne Shapira – Goldman Sachs: Great, thank you. Best of luck.

And next we will hear from Jeff Klinefelter with Piper Jaffray. Jeff Klinefelter – Piper Jaffray: Thank you and congratulations everyone. Great quarter. Just wanted to follow-up on something, Manny and Mike, on the Tommy Hilfiger business, in terms of the operating margins, I think someone referenced this earlier in terms of the leverage potential going forward. But given the very strong top line trends this quarter, modest op margin expansion, how should we think about sort of charting this leverage path going forward? I know you are going to continue to put dollars and marketing dollars as you have effectively with your other brands, but where are the leverage points and how much higher can these op margins go for Tommy over the next call it four to six quarters?

I think there is a long-term answer to that and a short-term answer to that. I think the clearly when you think about the Tommy business, particularly internationally, we’ve been very specifically talked about that we raised AURs in the area of 6% to 8% internationally with cost increases of about 15%. So, I think when you look at the sales, you will see significant leverage on the SG&A line and you will see gross margin pressure for the next two quarters. And then I think you will see a relief to that in first and second quarter, but still planned down because spring will be over that. Once that margin situation balances itself, I think given the kind of growth we are anticipating, which is not 30% growth, but more like a low double-digit increase for the international component, Tommy Hilfiger, we should be able to grow our operating margins in that business about 100 basis points a year ongoing. We’ve been consistently doing that in the Calvin Klein business each year since our acquisition. I think with the kind of growth opportunities that we have with Tommy business with high single-digit increase in Europe and a double-digit kind of increase throughout Asia or in South America that we should be able to get leverage on that business, where we could look at a 100 basis point improvement each year going forward in that business. So, just directionally without a lot of analysis – without taking you through all the nuts and bolts, I think that’s the way you should think about it. Jeff Klinefelter – Piper Jaffray: Okay. And then that doesn’t assume much of a change in mix between wholesale and retail, if we think about that kind of year two or three out? And then just one other question on the inventory, Mike, you mentioned taking advantage of some kind of off-cycle manufacturing and production to get some cost savings. Is there any way to estimate what kind of a benefit you are receiving from that and what kind of an offset it is to the natural inflation?

Yeah. I guess when you go out there you start hearing about what people talking about in price increases. I think we are towards the lower end of the range at 14% to 15%. I couldn’t give you much more definitive than that, but we are measuring it, we are watching it, we are very happy with the way it’s going right now to getting reduced cost being that private.

We are probably carrying about 30 days more inventory in between the second and third quarters of this year all the way through. And that’s really, it’s really twofold, it’s my set to take advantage of the cost benefit of taking some goods are only taking advantage of the downtime production, but it’s also given the chaos that we believe is in the market, it was trying to be prudent about making sure we have the goods and the availability of goods, but for the important back-to-school selling season to have them positioned, take advantage of the sales. And I don’t think if we didn’t have those goods, let’s be directly honest, we wouldn’t have been able to fuel this 20% sales increase that we had in the second quarter. So, we are really trying to do it prudently, thoughtfully. We are not taking in high, high fashion goods and taking a risk on them. We are carrying 30 days of inventory which we think is maximizing itself in higher sales potential and higher earlier sales in the season with a better gross margin. So, we think we are better positioned at retail in both our long stores and in important stores. And I think those things are benefiting us as we go forward. The seasonal buy is no different. We are just accelerating some of the buy. I think it’s been thoughtfully done and prudently done. On the second part of the question, was there a second part? I am sorry. No, I think that’s it. So, that’s really as a summary obviously with the inventory. Jeff Klinefelter – Piper Jaffray: Well, Manny, the other part of it was just the retail versus wholesale mix in the Tommy business?

Yeah, thank you Jeff. I don’t – I think wholesale continues to grow internationally. Retail continues to grow. Market-by-market, we look at this, but we don’t – I would not see us having a significant change in the mix of our international business going forward. It will stay somewhere in Europe about 30% and overall internationally about 35%. So, I think we’ll continue to invest in that, but I think given the growth in market, I think it will stay in that channel area. Jeff Klinefelter – Piper Jaffray: Okay, thank you very much. Good luck.

We’ll now hear from Robby Ohmes with Bank of America/Merrill Lynch. Robby Ohmes – Bank of America/Merrill Lynch: Hey Manny, how are you?

Good Robby. Robby Ohmes – Bank of America/Merrill Lynch: Hey, just a few quick follow-up questions. On your North American double-digit comps that you were seeing before the storm, was there a meaningful change in the AUR component to that versus what you were seeing, meaning, did the price increases kick in and is that driving comps or supporting comps in your own stores?

I think across the board, short answer, yes. I think across the board for fall as we planned the business, we’ve really planned the business on a retail dollar basis. We haven’t planned them on a unit basis except a little bit in dress shirts, which is such a side driven business. But for the majority of businesses, we really looked at it from a retail dollar point of view. So, clearly, AUR is making up a big component of that increase as well as selling additional units in Calvin and Tommy. In our own Heritage businesses, we are selling at higher AURs and actually selling slightly lower units at the time just as we would have planned. Robby Ohmes – Bank of America/Merrill Lynch: And can you – do you have a rough number on the AUR benefit? Is the AUR up something in the neighborhood of 10% at the Tommy and Calvin Klein outlet stores, would you say right now?

Jeff, for the second quarter, where I think Mike was very explicit, we said we were up about 5% and that has improved in August, but I don’t have an exact amount. Robby Ohmes – Bank of America/Merrill Lynch: And the other question was just as you look into next year and you are out of the Timberland sportswear business, are you expecting to pick up that floor space with either Hilfiger or something else you guys do?

You could be sure that Ken and his team are fighting for every inch of square footage on the floor and trying to take advantage with the portfolio of brands we have what will be appropriate for each store to fill that in, be it Tommy, at Macy’s, or Calvin or be it IZOD to take advantage of that as well. So, again, I am not going to be able to give you much more color on that right now, but in general, yes. Robby Ohmes – Bank of America/Merrill Lynch: Great. Thanks a lot, Manny.

We’ll now hear from Evren Kopelman with Wells Fargo. Evren Kopelman – Wells Fargo: Great, thanks. Good morning. I wanted to ask about Europe, that’s one of the biggest fears we hear from investors. So, on the Tommy business, the spring orders seem to be holding in pretty well. Maybe talk about when during the last recession before you even owned Tommy, did they see cancellations of orders, because you said it’s typically unlikely in Europe to see cancellations compared to the U.S? And also thinking about the downside, are there cost-cutting opportunities in that business? They were a private business during the last recession; did they not cut as much maybe as you guys did as a public company? What’s the inventory kind of on the downside, how to manage that? If you could give us the color on managing the downside there, that would be great?

Yeah, Evren. It’s really hard to talk about downsize when the business is growing 30% in just coming off of a sales increase that’s probably closer to 30%. So, it’s really hard for me to deal with that. Obviously, the Tommy business weathered the great recession of 2009 very well. A lot of the business that they kind of heightened on was more driven from a credit point of view than it was driven from a cancellation of goods and not wanting to put more goods into the market. So, I think clearly during that period of time just like and particularly with the Calvin business it was a tough period of time, sales were kind of flat to them, but they grew significantly their market share and as they came out of the recession, they came out very strong. So, I think they clearly it has been a brand has weathered the storm as well as anyone if it is that case, we just don't see again there is no down season like. We just don’t see that kind of pressure in Europe at all particularly the order book being up 13% and retail comp being up 3% in August. We don’t see that kind of pullback of double-digit negative comps that might have happened post the great recession in 2009. So there are obviously, they are all levers to push from a expense point of view and we will do what was appropriate given the volume, but I can tell you the business was an efficiently run business it wasn’t a privately-owned business by entrepreneurs that didn’t have a owner, it was owned by the private equity firm. So, clearly they were driving the profitability of business as well. So, I think its obviously giving the operating margin of the business delivers very efficiently operated business. They would be place if we look at from a expense point of view, marketing will be one area of sale came down we would move the percentage of sales with it, in a marketing point of view that we would expend, but again I think we continue to view it as a growth vehicle not, downsizing. Evren Kopelman – Wells Fargo: Great. That is very helpful. The other question I had was on IZOD for the second half. What does your gross margin guidance assume for margins there? You said you cleared, so you are entering the second half in a good position. But does your guidance assume a better margin performance for IZOD in the back half because of maybe entering more cleanly relative to the first half?

I think we have been pretty pleased just to remind as part of the Heritage business and as we look to the fall season that going to have for the year; our gross margins will be more under pressure on the Heritage business. So, when you look at the declines for the second half of the year, our operating margins I would have set the Heritage business and IZOD to be under more pressure obviously Calvin and Tommy.

I think we are dealing with 15% cost increases in the second half and 5% in the first half just to remind you. So, clearly I think gross margin will be has been planned down, will be down in the second half of the year there. But I think what you will see is higher AURs there. I think we are very clean in inventory and I think we have a good opportunity particularly in the fourth quarter, where a significant amount of the AUR deterioration is on clearance goods, significantly less units in the pipeline that’s the real opportunity to improve the AURs out the door and that we feel we are in excellent position to capitalize on. Evren Kopelman – Wells Fargo: That’s great. Thank you.

And next we will hear from Howard Tubin with RBC Capital Markets. Howard Tubin – RBC Capital Markets: Thanks guys. As you continue to pay off debt related to the Tommy Hilfiger acquisition, any thoughts you may be starting to repurchase some shares, particularly given the valuation of the stock?

At $67 somebody just held up a significantly I don’t know that stock is that cheap I mean at a moment of time 10 days ago it was $51. But I guess the short answer is absolutely not. We have been very clear strategically about where we are moving and heading de-levering the balance sheet continues to be highest priority. We have paid down $500 million of debt since acquisition. We plan to pay down another $200 million in the second half of the year. I think strategically that position us for future acquisition and I think clearly given the business plan, strategy and most important thing we can do is to pay down the debt. So, maybe it wasn’t such a short answer, but that is where we are focused and there has been no change on that. Howard Tubin – RBC Capital Markets: Got it. Thanks.

And next we will hear from Eric Beder with Brean Murray. Eric Beder – Brean Murray: Good morning. Congratulations on really solid quarter.

Thanks. Eric Beder – Brean Murray: I want to follow-up on that debt question. What is kind of the ideal debt leverage or ratio that’s you want to have for the company before you days start to think of really start to think about acquisitions or anything other pieces there?

2 to 2.5 times EBITDA leverage from an EBITDA point of view I think we are on track to deliver that by next if things continue and we deliver and pay down the debt we are on attract be in that position to deliver that next year. Eric Beder – Brean Murray: Okay and in terms of the U.S. retail stores is there of increasing maybe rolling out more Calvin or Tommy stores to tourist areas are not in right now?

You could find some we will open them. We are aggressive about opening in those locations, but we are also clear about balancing the number of regular priced stores we have versus outlet stores that we have and I think that’s clearly where we are look at it. I think Calvin and Tommy will continue to see good growth in the retail component of the business with the focus on tourist destination areas, lifestyle centers, really where the brands very, very strongly. So, again, we will continue to make investments in those areas, but in the very balanced way again saw wholesale distribution in North America. Eric Beder – Brean Murray: Great thank you. Again congratulations on the solid quarter.

We will now hear from Omar Saad with ISI Group. Omar Saad – ISI Group: Hey guys, good morning.

Good morning, Omar. Omar Saad – ISI Group: Quick question on IZOD, Manny, do you think what is going on there, is it brand-specific or product-specific? Or do you really think it is more that that consumer's in a tough spot right now? Just help us understand what is structural versus company-specific?

We can always do better job on product. We can always do a better job on marketing, all those things. I don’t want to say, we can’t improve, obviously we can. But I think realistically I think it also that consumer at the opening price point in the department stores competing against private label I think is clearly an areas that under the most pressure right now. From an economic point of view, when you look at the how the consumers being impacted clearly as we go up the distribution channel, we are seeing stronger and stronger sales there and as we work our lay down potentially the distribution channel of that consumer, that consumer that less discretionary income and is dealing less secure maybe about their jobs. So, I think there is a reality there, but we have to playing. So, I think when you on a portfolio company you get the benefits of running that portfolio of the company, the strength of the market against the weakness in the market and that’s component of our businesses is on the more pleasure because of that. It’s clearly IZOD is by far the biggest, the largest Heritage brand we have it is probably on the same store the largest sportswear brand on the main floor. So, I think its only at some degree of the pressures that are going on. Omar Saad – ISI Group: Got it, thanks. And then I also wanted to ask about accessories I heard you mentioned it in your prepared remarks several times shoes, bags, I know those categories are doing really well right now, watches and other weather goods? Can you talk about Calvin and Tommy, Tommy is more historically a sportswear brand, Calvin is Van Heusen, jeans, and the underwear and the fragrances. What is the accessories opportunity for these brands it’s kind of where the stand in that curve and how do you put that in the context relative to long-term opportunity?

Sure. I think the accessory area is clearly a big opportunity for us. Our own stores like both Calvin and Tommy, we do about 10% of the volume in the stores what characterize in the 10% to 12% of (indiscernible) in that accessory area. So, clearly there is an opportunity to grow that. If you just focus on North America, the Calvin North American opportunity we size it some around $200 million, on a wholesale sales basis as we would hope to accomplish maybe in a five year period of time that would be luggage, small level of accessories and handbag. Today, our business is projected to do less than $20 million. It’s off to a very strong start, but still a very small business in a very hot category we will think Calvin plays extremely well in. So, we think that’s a real opportunity for continued growth in the brand at very good exposure for the brand in a category that carries high margins and also high price points that we think is good for the brand overall. So, clearly there is an opportunity there. In Tommy, we think there is also a significant opportunity, in our own North American retail suppose we have a great in bag business that does extremely well. We are just starting to roll that out in North America from a wholesale point of view we think there is great opportunity. And to remind everyone we bought back in 2010, the handbag and accessory license from our licensed partner and bought that in-house in Europe and internationally. Our footwear business is over a €100 million in Europe. Our handbag business is about €20 million. So, clearly we think handbags at least be as big as our European footwear business. So, both I think have significant growth opportunities at high margins and as a product category, we think those product categories a very brand enhancing. Omar Saad – ISI Group: Thanks Manny, great job. Good luck.

(Operator Instructions) We will now move on to the question from Carla Casella with JPMorgan. Carla Casella – JPMorgan: Hi, most of my questions have been answered, but I guess to clarify going forward now that you will annualize the Tommy Hilfiger purchase in the next quarter. We no longer see the acquisition related charges and the inventory liquidation cost, so should we still see more in the coming quarters?

We will not see the inventory liquidation cost, but again some of the severance payments since the Tommy acquired due to expense those as they are being encouraged you will continue to see those through the balance of this fiscal year. Carla Casella – JPMorgan: Okay, great. That’s all I have.

We will take a question from Dave Weiner with Deutsche Bank. Dave Weiner – Deutsche Bank: Hi good morning and very nice quarter. A lot of my questions have been asked, but just a quick one. I don’t think you have discussed China at all. Could you just talk a little bit about and you made some recent hires there and in terms of just long running that business and just kind of what the roadmap is for that business over the next four to six quarters? Thanks.

Yes, I guess it in context, I'd rather just speak about Asia. I think really talking about the Tommy Hilfiger business. We made a major hire in the Tommy business with the CEO of Asia John Ermatinger. He came out of The Gap and has a long background and lot of history and experience in that region of the world and we think he is going to be terrific to lead our growth throughout Asia there and we will continue to make investments in that market. China specifically for us the brand is underdeveloped there. The brand is very well-known there. We have about $40 million to $50 million business today. To remind everyone, it is a business that we received full royalty score and we own a 45% interest in the joint venture that operates the business there along with our partners. We think it’s clearly a market. We have talked about China, everyone talks about billions, but it’s clearly a market that we could see very accelerated growth and we’ll be looking at it. John is really into it significantly and we’ll start to report the results for China beginning in the third quarter this year. So, we’ll start to update you about what we see in that business as we go forward. On a relative basis, it’s still immaterial to us, but could be very material to us for the growth especially as we look 2012, ‘13, and beyond. So, that whole Tommy business, Asia represents if you gross up the sales both we have license and we operate the businesses, these are under joint venture or directly Asia represents about 50% of the brand’s total volume. And we think over time, it should represent closer to 30% of the volume over the next five to six years as we grow. So, it’s a significant growth area for us. And I think we are building the infrastructure there similar to what we have in Europe and what we have in North America to really take advantage of that growth both from the logistics point of view, back office, senior management capability, and we are very happy with the progress we are making and the kind of growth that we’ve seen so far since we have owned the business. Dave Weiner – Deutsche Bank: Great. Thanks Manny. That’s very helpful.

And at this time, we have no further questions in the queue. I’d like to turn the conference back over to today’s speakers for any additional or closing remarks. Manny Chirico – Chairman and Chief Executive Officer: Thank you for your attention this morning. We appreciate all your support and we look forward to reporting to you in November on our third quarter results. Have a great day. Bye-bye.

Thank you, sir. That does conclude today’s teleconference. We do thank you all for your participation.