Good morning, everyone. Welcome to the PVH Corp. Third Quarter 2014 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, rebroadcasted or otherwise used without PVH's written permission. Your participation in the question and answer session constitutes your consent to having anything you say appear on any transcript or replay of this call. The information being made available includes forward looking statements that reflect PVH's view as of December 3, 2014, of future events and financial performance. These statements are subject to risks and uncertainties indicated in the company's SEC filings and the Safe Harbor statement included in the press release that is subject to this call. These risks and uncertainties include PVH's right to change its strategies, objectives, expectations and intentions and its need to use significant cash flow to serve with its debt obligations.
Therefore, company's future results of operations could differ materially from historical results or current expectations. PVH does not undertake any obligation to update publicly any forward looking statement, including without limitation, any estimate regarding revenue or earnings. Generally, the financial information and guidance provided is on a non GAAP basis as defined under SEC rules. Reconciliations to GAAP are included in the referenced earnings release, which can be found on ww w.pvh.com and in the company's current report on Form 8 ks furnished to the SEC in connection with the release. At this time, I'm pleased to turn the conference over to Mr.
Manny Chirico, Chairman and CEO of PVH. Please go ahead, sir.
Thank you. Good morning and thank everyone for joining me on the call. I'm joined on the call by Matt Schafer, our Chief Financial Officer Dana Perlman, our Treasurer and Senior Vice President of Investor Relations and Ken Duane, who runs all of our North American wholesale businesses. Overall, given the macro environment, we're quite pleased with our Q3 results, which exceeded the top end of our earnings guidance by $0.06 The earnings beat was driven by the continued strength of our Tommy Hilfiger business and an improvement in the performance of our Calvin Klein business. I could best describe the macro third quarter business trends in all channels of distribution as very volatile.
The quarter began in August with strong sales and margin trends. As we moved into September October, we and the whole industry experienced a significant slowdown in store traffic both in Europe and North America, driven by unseasonally warm weather and less promotional activity at our stores in Europe. Towards the end of the Q3 and into November, retail businesses rebounded with an improvement in store traffic driven by colder weather and a heightened level of promotional activity in all markets. Speaking directly about the Tommy Hilfiger business. On a local currency basis, revenues for the business increased 3%, while operating earnings grew by over 9%, driven by strong gross margin performance.
In North America, we posted a 1% comparable store sales increase and our operating income margins expanded by 130 basis points. As we moved into the 4th quarter, comp sales trends have basically continued at this level running about flat for the month of November. In Europe, comp store sales declined 5% in the Q3, driven by the aforementioned slowdown in traffic in September October due to the unseasonably warm weather and less promotional activity. Despite the soft sales, our European operating margins increased 100 basis points due to strong overall gross margin performance. As we ended the 3rd quarter, our European business bounced back with an improvement in traffic driven by colder weather and a higher level of promotions.
November comp store sales in Europe are running up low single digits for the Q4. Our European wholesale business continues to outpace the competition. As an indicator, our springsummer 2015 order book is up over 5% compared to levels in 2014. Moving to our Calvin Klein business. Revenues for the Calvin Klein business in the quarter on a local currency basis grew 3%, driven by a 5% increase in North America where we saw strong sales both at wholesale and at retail.
At retail, our North American stores posted a very strong 5% comp store increase for the quarter, while our international comp store business sales declined 2 due to continued softness in Europe with weakness in Korea offset by strong business in Europe. Moving into the Q4, Calvin Klein retail trends in November were on plan with North American comps up low single digits and international comps down low single digits. Let me put a little color on some of our new product deliveries for fall. I'm going to start with the Calvin Klein underwear business. From a product point of view, we've delivered new core product along with significantly improved and elevated packaging.
The new product features have been significantly enhanced from a quality point of view. We have significantly better fabrics, improved waistbands and enhanced styling. We have also invested in our point of sale presentation with new advertising graphics and fixtures throughout North America and Europe. In addition, we have upgraded and installed new shops in key markets in the U. S, in New York at the Herald Square location and at Lord and Taylor 5th Avenue in Florida at Aventura and in California at Beverly Center and South Coast Plaza.
Additionally, we have installed new shops and stores internationally in key markets. In particular, I'd call your attention to the Macy's Herald Square store where we have our largest department store shop in shop in the world at about 2,500 square feet. That shop was installed in the middle of Q3 of this fiscal year. We I think it would be well worth your while to go in and see that presentation and the dramatic representation of the Calvin Klein men's underwear business there and the Calvin Klein intimates business there. We are seeing sales at that location up over 50%.
In the Calvin Klein Jeans area, new product has been delivered and we are seeing good reaction from the consumer, particularly where we have installed our new jeans shops. In North America, we've installed 180 shops in the 3rd quarter, 115 men shops and 75 women shops. Since we have installed these shops, we have experienced a 40% sales increase over last year. Season to date, our AU laws are running up between 10% 15% over the prior year. We are scheduled to open an additional 25 new shops in January and are targeting 150 new jeans shops installations for fiscal 2015.
In Europe, we are in the first inning of our turnaround in jeans. We've installed over 80 new jeans shops throughout Europe. We have significantly improved the quality level of our European jeans lines with better fabrics and trims. We have begun to see an improvement in AURs and our springsummer 2015 order book for Calvin Klein is up 10% over 2014 orders. As we have mentioned before, we believe our Calvin Klein Jeans men's product is further ahead relative to our women's product, but we believe we are seeing some nice improvements in sales trends for both genders.
Moving on to our heritage business. Heritage revenues increased 3% in the quarter, driven by a 6% increase in wholesale sales, offset by a 6 percent comp store sales decline in our heritage retail business, which continues to perform at weak levels. We have seen strong performance in our heritage wholesale sportswear business with our IZOD and Van Nuysen brands. In particular, our launch at Kohl's with IZOD has been very successful and we are exceeding our initial sales projections. Overall, earnings for our heritage brand businesses in the quarter was down 15%, as our North American moderate brands were most severely impacted by the heightened promotional activity, particularly in our own retail stores.
Heritage retail continues to be a major area of underperformance for us. Finally, I'd just like to speak a little bit about our guidance before I turn it over to Mike. We revised our guidance for 20.14 to $7.25 to $7.30 per share. The takedown was solely related to an $0.08 impact relating to the strengthening of the U. S.
Dollar against major currencies. We believe we are well positioned to successfully navigate through the expected volatile and highly competitive environment in the Q4 holiday selling season. As a reminder, in the second half of December and through all January, our sales comparisons particularly in North America become much easier relative to last year. And with that, I'd like to turn it over to Mike to quantify some of those results.
Thanks, Manny. The comments I'm about to make are based on non GAAP results and are reconciled in our press release. Revenues for the Q3 were $2,230,000,000 a 2% increase over the prior year when excluding the BaaS business, which we sold to G III last year. The impact of the strengthening U. S.
Dollar was felt across all of our non U. S. Businesses. Excluding this FX impact, our revenues were up 3 percent. On a constant currency basis, our Calvin Klein and Tommy Hilfiger businesses were each up 3% and our heritage revenues were also up 3% excluding BaaS.
Our earnings per share for the Q3 was $2.56 a $0.06 beat to the top end of our previous guidance and an 11% improvement over last year. The beat was primarily driven by better performance in Calvin Klein due in part to an earlier than time shipment of holiday product and a shift of marketing expense into the Q4. Also impacting the quarter was a favorable tax rate as a result of timing, but this was offset by the impact of the strengthening dollar and continued underperformance in our North American heritage business, which fell short on gross margin due to heavy promotional environment. For the Q4, we are projecting earnings per share of $1.71 to $1.76 or an increase of 20% to 23% over the prior year. Earnings per share and revenues for the quarter will be negatively impacted by the continued strengthening of the U.
S. Dollar. Revenues for the quarter are projected to be about $2,100,000,000 or an increase of 3%. On a constant currency basis, projected revenues for the quarter are approximately 6% greater than the prior year. Our earnings per share for the full year 2014 is now planned at $7.25 to $7.30 We have revised our guidance down as a result of the impacts of the strengthening U.
S. Dollar and corresponding FX impact, which negatively impacted our earnings by approximately 0 point 0 $8 Our revenues for the full year 2014 are projected at $8,300,000,000 or a 3% increase over the prior year excluding BaaS. Tommy Hilfiger and Calvin Klein are planned to have revenue increases of 5% 2% respectively. Our heritage revenues are planned to be flat to the prior year excluding BaaS. A downward revision to revenue guidance reflects the negative impact of FX, primarily due to a weaker euro on our Tommy and Calvin Klein businesses as well as the impact of weaker 4th quarter sales in our heritage division.
Our full year operating margins continue to be planned down 60 basis points versus the prior year. The 60 basis point decrease reflects an increase in gross margin that will be more than offset by an increase in SG and A expense due in large part to the increased Calvin Klein Investments. We have not reduced our Calvin Klein investment spending from our initial budget and will continue to make all the necessary investments to grow Calvin Klein for the future. For the full year, we are projecting our Tommy Hilfiger operating margins to increase 20 to 30 basis points. Our Heritage Brands operating margins will decrease 60 to 70 basis points and our Calvin Klein operating margins are planned to decrease 170 to 180 basis points.
Finally, we continue to pay debt we continue to plan a debt pay down at $400,000,000 for the year. And with that, we'll open it up for questions.
Thank you, Thank you, sir. First, we'll go to Bob Drbul with Nomura Securities.
Hi, good morning.
Good morning, Bob.
Hi, Manny. I guess the first question I have Manny, on the Calvin Klein jeans AUR increases, was that for both men's and women's?
Yes. We're seeing significant improvement beginning in September on all AURs between both genders. And it's really being driven 1st and foremost by significant increase in our opening price of denim basic denim jean product in both genders where we've moved the opening price point from 49.50 to 69.50. We've been able to put a better product on the floor, better piece goods on the floor to go that the consumer could really touch and feel and we seem to be and we're getting paid for that as we go forward. And we think that's a much more appropriate price point for the Calvin Klein brand to open up with on the denim floor.
Okay. And I have a question on currency and gross margin. As you look sort of for the rest of this year but also into next year, can the gross margins be positive next year with the euro being at 124? How should we think about it given the transactional nature?
I think on the transactional side, I think for the first half of the year margin specifically, since we hedge out currency, we're probably we're secure against that for that piece of the fiscal year as we go forward. The exposure would be on lower translation rates for the second half of the year as we go forward from a transaction point of view that could impact gross margin. On a translation basis, top line and then just translating the bottom line, obviously, we're exposed for the full year as we don't hedge translation. So that's going to be a headwind for 2015 as we go forward.
Okay. And then just one last question, Manny. So you guys I think are one of the first to talk post Black Friday and post last week. Can you just talk about the surprises or the trends both on your wholesale business, but also in your retail and sort of how you're sitting with the inventories at this point in time?
Sure. I guess, I would say is how I describe November. Business bounced back in November coming off of particularly soft October on seasonally warm weather both here in North America and in Europe. The Q3 as we finished up was particularly weak. As weather got cooler business did bounce back.
Also promotions clearly got pushed pulled forward as the Black Friday frenzy really expanded at a minimum 1 week and in some cases with some key retailers really went all the way through the whole month of November. So the selling was strong at the beginning of November through mid November. And then as we got into Black Friday, look you've heard all the reports, business softened. We got some excitement on Thanksgiving, the Black Friday and then the weekend was soft, relatively speaking. So I really think it's important that we look at November in its totality.
In November in its totality, the best I could that I see, my visibility outside of our company and looking at some of our key customers is they're running on plan. Started stronger, Black Friday week was okay, but not great in that weekend softened. And now it's really about how the process moves as we go forward. Our inventory position coming into the Q3 and back to school was very clean. And I think you clearly saw the benefits of that in the Q3 on the gross margin line in all of our business, but in particular the Tommy Hilfiger business and the Calvin Klein business where we really saw expanded gross margins and we didn't jump into the promotional frenzy that began in October.
We just didn't participate in a full way there. But given the competitive pressures right now, we need to meet the competition as we go forward. So where I see risk is really on the gross profit line just driven by the promotional level. Now last year December January were very promotional as well. So I think as we've gotten through November that's been the toughest comparison both from a margin and sales point of view and I feel good how we've come through that.
But I think now coming ahead of us particularly beginning December 14 or so we're up against some winter storms. We're up against some really tough business for a while. So I think those comparisons get easier and I'm expecting and anticipating an acceleration of comp sales going into the back half of the fourth quarter.
Great. Thank you, Manny. Good luck.
Thank you.
And next we'll go to David Glick with Buckingham Research.
Thank you. Good morning. Two questions. One for Manny. Could you size up kind of where you are on the Calvin Klein Jeans business in global revenues and where you are in terms of getting past some of the decreases in distribution to the off price channel and the club channel?
And just how to think about the revenue and profitability of that business and what kind of improvement you can expect going forward? And then secondly for Mike, the implied SG and A growth in Q4, certainly greater than Q3. You've anniversaried a lot of the Calvin Klein investments. I'm just wondering if you can walk us through what's driving the SG and A increase in the Q4?
Okay. Let me just deal with the genes. Michael will deal with the SG and A question. I'll focus on genes. On the genes side, I guess I would describe it this way is the cleanup of the distribution in Europe, Asia and North America will be completely behind us like in 2014.
So we the benefits that we'll start to see is we won't be up against a lot of that cleanup and elimination of that off price sales as we've gone forward. As we've talked about, the jeans business round numbers worldwide is about $1,000,000,000 in sales, the wholesale retail all categories. The challenge for us is the weakness in the business and where the margins are significantly underperforming is 1st and foremost Europe where the business on an operating margin basis is actually losing money. Overall, the European Calvin Klein business is at best a breakeven business with underwear being profitable and $250,000,000 of jeans and related apparel being sold into the market at operating margins that are negative. So the opportunity there over time is to take that business, grow it substantially and to get it our first goal would be over the next 4 years to get it to about a 10% operating margin.
In North America, it's a profitable business, but
it's below our benchmark levels for Calvin Klein. I describe it as a mid single digit operating margin overall, men's being more profitable than women's. And I think the opportunity clearly there is to as we increase our presence on the retail floor, as AURs continue to improve and we get the benefits of less vendor markdown support for our retail partners, the opportunity is to bring that to where our men's sports operating margins are, which is in excess of 10%. So I think those are the opportunities that are ahead of us. We are on a level playing field today that we are not dealing with the headwinds that we had in front of us from a distribution point of view and cleanup of off price.
And now it's improved the business, it's blocking and tackling, continuing to install new shops as we go forward. And I think the onus is on us to really see that performance start to improve 2015 and beyond. On the SG and A question, I guess I'll turn it
over to Mike. Yes, Dan. When we look at the Q4, we're thinking about SG and A as a percent of sales being fairly flat to the prior year. The dollar growth there is just normal dollar growth. It's 2% to 3%.
And then it's also got a slight impact because we did shift some marketing out of the Q3 into the Q4. So I don't it is pretty flat on a percent of sales basis.
Okay. Thank you. Good luck in the holiday quarter.
Thank you.
We'll next go to Erinn Murphy with Piper Jaffray.
Great. Thank you. Good morning. I was hoping you could spend a little bit more time speaking about the Calvin Klein International trends quarter to date. Could you just maybe parse out what you're seeing both in Europe and Asia in that business?
Sure. I guess, I would say is the comps right now are running flattish in Europe. And in Asia, they're running down 2% to 3%. The softness in the Asia business continues for us to be the Korean market. If we're disappointed in anything on the Asia business, it's the volatility in China.
Truly that truly from our perspective is a market dynamic that we're seeing particularly in the 2 major cities Shanghai and Beijing where we've just seen pressure on traffic with that domestic consumer in particular. Our Southeast Asia, Hong Kong, Macau, Taiwan business major markets there continues very strong as we go as we see that. And I would say from a Calvin Klein performance by product area, the underwear performance just continues to be outstanding for us. We've seen strong performance perfectly fit for us in the Calvin Klein Intimates business in Asia. It's depending on country, it's the number 1 and number 2 collection country by country.
So the strength of that business just continues. And I think one of the challenges we're dealing with is the malaise that's going on particularly in China and some of the Asian markets that are being impacted by a lack of Chinese tourism and spending in that market. So we've overcome all of that, continued to deliver. Asia for us continues to be with the exception of Brazil our highest profit margin business globally for any of our brands. So it continues to be a stellar performer for us.
We'd just like to see more growth in that market. If you go back 2 years, obviously, that market was growing double digits for us. We'd like to get back to that trend. But right now, the macro environment doesn't seem to be supporting that.
That's helpful. And then just in Europe, if you think about that order book for Calvin Klein for next year, can you just remind us kind of the key markets that you'll be expanding that line into?
I think the 2 biggest markets where you'll see significant expansion are the U. K. And Germany. And Calvin's always had a big position in Italy. And in the Italian market, we're actually pulling back as we clean up distribution there.
And as the just the difficulty that that market has experienced, we haven't seen out of all the markets in Europe, when we look at our Tommy Hilfiger business, the Italian market is the one that just continues to suffer. And unfortunately, the business we acquired, our biggest market in Europe was the Italian market. So that's been a real challenge for us as well. And then I have to add, the 2nd largest market for Calvin Klein is Russia and that related Middle East area. And although that business has remained nicely profitable, clearly, we've seen some drag on the sales there and a very careful buying for 2015 as we go forward.
So the 10% growth, if you look at Germany, again, we were very small in Germany. So on a percentage basis, the numbers sound spectacular, but it's on a very low base. And if you look at the growth we're seeing in the U. K, it's very healthy France and Spain, very healthy growth. But 2 markets that are holding that down significantly are the is the impact of Russia and the whole Italian market where Calvin had its biggest position.
I hope that helps.
No, it's very helpful. And just the last question on the Tommy Hilfiger business, the revenue guidance in the Q4, if I was just to adjust for the currency headwinds, it is up a very nice 10%, which is a good acceleration in the Q3. Can you just help us think about some of those key drivers that's driving that reacceleration as we get into this final quarter of the year? Thank you.
Okay. So there's a significant year over year square footage expansion in our retail business that continues to drive that in the Tom Hilsinger business both in Europe and in North America. And in addition, our wholesale shipping timing, we've if you look at the wholesale business in the Q3, it was relatively flat. We're seeing significant increase in sales trends and that really just has a that's really much more related to delivery of product as we go forward and the timing of shipments. And really to get a real sense of that business, you should put the 2 quarters together.
And you wouldn't you'd see it's probably worth about 2 50 basis points of the increase for the Q1. I guess the final point Mike just mentioned to me is we are planning the Tommy Hilfiger comps both in Europe and North America at about a 3% growth for the quarter overall and a substantial amount of that is coming out of December January as we anniversary some very soft business driven by a lot of weather implications last year. So Christmas business is almost as big as our Christmas business. Given the nature of our North America business, which is tourist destination locations throughout the United States that business is very strong post Christmas. And last year that business was really negatively impacted by a significant amount of weather issues.
So we think there's some real opportunity for us as we go forward and that's yet to come, but that's part of what we're counting on as we go forward.
Great. Thank you guys and best of luck this holiday season.
Thank you.
Now we'll move to Michael Binetti with UBS. Hey guys. Thanks. Good morning. Mike, I just wanted to follow-up with you on the comments for the SG and A in the Q4 being up think dollars 2% to 3% and flattish that I just want to make sure I understand if we calibrate to where you guys are headed for the operating margin for the year that that has the gross margin the year over year gross margin improvement decelerating quite a bit in the Q4?
And if I'm right on that, could you maybe help us speak to some of the components there again?
Yes, sure. A couple of things. It's I agree with what you said. So we are pretty much flat on expense margin. Gross margins are fairly flat as we look at the Q4.
And the biggest driver there is mix. We're seeing in particular that the European business while growing the FX and the impact there and just the mix between the businesses are performing fine, but it is mix.
With that retail what happens also is with the retail expansion in square footage that we have really going on and it's a big impact in the Q4 as prior year stores coming on and current year stores coming on. The operating margins in wholesale and retail are very comparable, but the mix of SG and A to gross margin is significantly different, 1,000 basis point different higher gross margins in our retail businesses overall. That really changes the mix as we go forward. So you really see that in the Tommy business and to some extent in the Calvin Klein business. So some of what you're seeing is just mix of business as we go forward into the Q4.
And just to say, I mean, we do lap that Calvin Klein investment expense and that's why you're not seeing any more deleveraging
on the SG and A. We just
we level off in the Q4.
Got it. And then if we just step back and look at just a couple of strategy questions really quickly. As you look at Manny, as you look at heritage retail, you voiced your displeasure with that for a while. And maybe just think ahead of like what the strategy is as you look to 2015 and what you think you could do to fix that or rightsize the business if that's the direction? And then where maybe like if we look at the license that are outside the company for Calvin and Tommy that you've talked about perhaps someday being businesses that you'd like to operate, maybe how we can think about those businesses where you think you need your net debt to be to start going on offense and saying it might be time to start bringing some
of that? Heritage Retail question first. Heritage Retail overall is about represents about 4%, 4.5% of our total volume. Two divisions Izod and Van Eusen. Clearly, we've been for the last two years, we've been significantly contracting that business.
Last year, we sold off the Bath business, which was almost 45% of the total heritage business. And I think as we go forward, you'll continue to see more contraction in that business. The business model doesn't just doesn't work any longer for moderate priced brands in the outlet channel in North America. The outlet channel in North America has become a designer showcase brands with the like of Ralph Lauren, Tommy Hilfiger, Calvin Klein, Coach, Michael Kors. Those are the big players there.
And I don't believe moderate brands can continue to compete in that environment as we go forward. So where we are given the leases and how we're moving is very in a very disciplined fashion continuing to contract and shrink that base as we go forward. And I think that will be a direction that will be going on for the next 24 to 36 months as we go forward. On our growth initiatives really with the 2 big brands Calvin Klein and Tommy Hilfiger that represent about 75% of our 75% of our volume and 85% of our profitability. We think we're at a point now where we are starting to think about and strategize what businesses should come in.
The integration of the Wanaco businesses are clearly behind us now. We have some small systems integrations going forward that will be complete by mid-twenty 15. But the majority of that is behind us. And I think it's 1st and foremost internationally Asia, both China and Southeast Asia markets, the Hong Kong market, Macau, Taiwan. Those are areas that are very interesting to us that we'd like to look at potentially being more actively involved in the direct operation of those business when comes to Tommy Health Air, particularly since we have such strong operating platforms in Asia with the Calvin Klein businesses today.
In a similar fashion, when we look at Latin America, Brazil and Mexico, I think maybe just a little bit longer out view there, maybe looking out maybe 24 to 36 months, looking at those businesses and also looking at the Tommy businesses and trying to make a decision about what businesses there we should be operating directly given our very successful Calvin Klein businesses in those markets. And then on a category basis, we are always looking at some of the men's categories here in North America like tailored clothing and the women's opportunity, which G III has just done a spectacular job in growing that business from levels continues to put up substantial sales increases with the Calvin product doing it in a quality way as we go forward. So they're a great strategic partner and we look for more ways to work with them together to grow that business and to look at some maybe some creative ways of doing it together.
Thank you.
Okay. And now we'll go to Christian Voss with Credit Suisse.
Yes. Hello. I was wondering if you could talk a little bit more about how the new shop in shop rollout is going and what the plans may be as you look towards 2015 for that?
Sure. I guess I'll speak there. I touched on it, but I'll just say is we install in the we will install through the second half of twenty fourteen in total over 200 shops, both men's and women's, probably 60% men's, 40% women's. Those shops have performed exceedingly well. We're seeing sales increases in those shops of in excess of 40% over prior year levels where we have the ability to control the space, present the Calvin Klein denim product in a fashion that the brand deserves in a manner that is consistent with what we do across the store in all other categories men's sportswear, tailored clothing, moving to the women's dress side, women's suit side, women's sportswear side, our accessory businesses.
We've got major presentations in the stores that the consumer can see, shop, where we are able to put our marketing and graphics in to really attract the consumer to the space and then have the right product for them to find. We really didn't we did not want to make those investments in fixtures and then disappoint the consumer with inferior product and we felt the product wasn't up to the level of the shops that we were looking to invest until we got to fall 20 14. We've put those in. We've seen a significant increase in that sales and in AU bars. And so that's where we are.
We feel really good about that. I think the for the I think we're looking at approximately 150 new shops that we're targeting for 2015 in North America solely in major doors both Macy's, Lauren Taylor, Dillard's, our key retail partners. We will be investing significant fixture and presentation. And with the new product, we think that product will see strong sell through. So that just continues.
We're still not in all the key doors that we need to be. Even in Herald Square where we have a nice presentation, we haven't really installed the new shop as they're going through their whole remodeling of that Herald Square store. 2015, there'll be a major Calvin Klein jeans shop going in both for men's and women's. So I think that trend will just continue. The product is evolving and I think we'll start that we'll be paid for that as we go forward.
Denim is a challenge category as we all know particularly on the women's side much more than the men's side. So we're dealing with that headwind. But even with that, we're starting to see some good sell throughs and some improvement in AURs as we go forward.
That's very helpful. And could I ask how many shop in shops do you currently have for Calvin Klein Jeanswear in North America?
A little bit over 200 shops. I would describe everything else that's out there. We're in about 700 to 800 doors. I would describe that as pulled together fixtures that we are not necessarily the most proud of the way those look. Those are leftover from the Wanaco days.
We've tried to at least get better fixtures on the floor in those markets and also try to improve the merchandise presentation with new graphics, fresh graphics, changing out the graphics on a quarterly basis rather than once a year. So we're doing things in those markets, but working with the stores to get the proper presentations in those stores. We don't want to just open shops in stores if it's not the right location and if we're not getting the appropriate support at the store level. So we're making those decisions door by door working very closely with our key retail partners.
That's very helpful. Thank you so much and best of luck.
Thank you.
Now we'll go to Joan Pason with Barclays.
Hi, good morning.
Good morning, Joan.
Just touching on Tommy, I think a couple of years ago, you'd laid out a target of 14.3% for operating margins. And just given that those margins are outperforming the way they have been this year, has the target changed at all?
Okay. So we are operating today the Tommy Hilfiger business about 14%. I think given okay, I have to answer this in 2 ways. Given the current licensing structure meaning that our Asia business today is 100% licensed basically and our Latin America South America business is also 100% licensed. We believe there's 50 to 75 basis points of improvement on that structure.
Going forward, if we were to take back in the Asia business or the Latin America business, we believe those businesses should be operating at 15% operating margins. But I do have to remind you that we would at the same time we those 15% operating margins, we'd have to eliminate the licensing margins that come through at 100% gross profit and we are. So I think from an incremental profit point of view and a return on investment taking those businesses back in house would be a home run. But it does it has the potential to impact slightly the operating margin. So I think there is I think conservatively speaking, we think we should be approaching about 15% operating margins for the Thomas Builtinger business over the next 3 years.
Okay, great. Thank you. And also as we wind down the debt repayments for this year, what are the plans for that going forward and paying down the rest of the balance?
I'm going to make Mike handle that and I'll jump in.
Look, we're going to continue to use free cash flow to pay down debt. It's our top priority right now for cash. So that is our goal is to pay down the debt and continue it about the same kind of capacity we're paying down this year.
Yes. And I think as you know Mike, I Dana, we've been really along with our Board, we've been looking at this as we go forward. As you know, as restructuring with the Wanaco transaction is behind us and as some of that cash flow that is behind us and as some of that cash flow that we need to put back into that business in the form of capital and restructuring expenses is behind us, our businesses aren't just inherently cash flow very positive. So last year in a year which I would describe as very capital intensive from an investment point of view and from a continuation of the restructuring costs associated with Wannaco, we generated $500,000,000 we paid down debt of about $400,000,000 I think that number starts to really significantly grow $500,000,000 to $600,000,000 each year as we go forward. And the real question comes down to we want to continue to pay down debt, but we also want to look at these strategic acquisitions related to both Calvin and Tommy of bringing back some of our licensed businesses in house.
And secondarily, I think as the debt level gets to a point that we're very comfortable with next year, we'll start to look back should we be buying back some stock and return some of this cash flow to our shareholders in the form of a stock buyback or whatever. So all those things will be on the table once we get through 2014, really see what 2015 cash flow looks like. Our Board along with the senior management team will be looking at how best to use that free cash flow.
Okay, great. Thank you.
And next we'll take a question from Matthew Boss with JPMorgan.
Good morning. It's actually Annie on for Matt. Piggybacking on the Calvin margin question, should we still be thinking about 13% EBIT margins for total company over time? And how should we be thinking about the time frame for that?
I think no. I think is we've clearly talked about that we think the Calvin Klein margin opportunity, which this year will be about 13.5%. We think that has at least 150 basis points of opportunity as we go forward over time. So I think that business is historically for us prior to the Wanaco acquisition operated substantially higher than that. But as we pro form a Wanaco, the jeans and underwear business into that business model, getting that to a reasonable return level, we think 15% is a very appropriate interim target for us as we go forward.
And we think that's incitement for us over the next 3 years.
Okay. And then for total consolidated company, should we still be thinking about 13%?
Well, I think you got the way I think you have to look at that is, you have to look at I think is our goal on heritage is 10%. Our goal on Tommy and Calvin is at this point about 15%. So a lot a substantial amount of what our margin will be, will be driven by what each of those components of those businesses represent and how that changes over time given contraction of some of the heritage businesses as we go forward and some of the growth opportunities both organic and from an acquisition point of view happen with Calvin Klein. So I think giving us a company target is not necessarily the best way to look at it. I think it should be a model that's constantly updated based on where we are with those three businesses because those businesses are just so different.
Great. Thank you so much.
Now we'll take a question from Dana Telsey with the Telsey Advisory Group.
Good morning, everyone. Manny, can you give us your thoughts on the moderate department store channel? It sounds like the Kohl's launch is going nicely. JCPenney is improving. What are you seeing there?
Anything that's changing with the customer there? And then any other new brand introductions that you would take a look at that could be on the that could be coming up?
Thank you. Okay. So I would our
JCPenney JCPenney and Kohl's business in sportswear couldn't be healthier. We're seeing just very strong performance there with those two brands. We are seeing on the intimate side, we don't talk about it a lot because it's just not a big part of our business overall, But the Warner's and Oliver business, our core intimates business is just having a very strong year in all channels of distribution, but particularly with Kohl's and JCPenney, new presentations. We've allowed that business for
the first
time in years to actually invest back into those brands. It was really a significant harvest strategy that Wannaco had with both the core intimates business and I would say the Speedo business. And we've allowed the businesses to invest back into those businesses, both capital and the customer consumer has really reacted with both brands to that. So we've seen nice payback there. And with our Warner's business, that's really a mid channel play for us.
Business is very healthy in those with those 2 mid tier department stores. And then finally, I would just say is the one business at wholesale that's been more challenged across all channels of distribution has been our dress shirt business. As a category, dress shirts are just in a negative sales, low single digit kind of business, really being driven by fancy dress shirts, which just don't carry the same gross margins that basic EDI replenishment business is. So that business is just going through what I would describe as a normal cycle that goes through seems every 4 or 5 years as the business evolves. I think we're well positioned there, but that's been a more challenged business for us.
At this point, our growth with Kohl's and Penney is very healthy. Our relationships couldn't be better. We're investing on the floor with shops with those 2 key retailers for us. I think their businesses in November have been healthy. I don't see their entirety of their business, but I see our businesses.
And our business there has been healthy, and I think that is reflective of how they're performing in November, which is basically on plan. So I think we're happy with that with those relationships and our performance in that channel of distribution. I don't see us growing with additional brands at this time in that channel of distribution, but I do see with Kohl's that the Izod business will continue to expand in some new categories and really giving us an opportunity to expand the Izod presentation with Kohl's very successfully for both of us and they're really on top of it there. So I think you'll see even a broader presentation for spring and then fall 2015 in cold across the store.
Thank you.
Now we'll go to John Kernan with Cowen and Company.
Hey, good morning, everyone. Thanks for taking my questions. Many helpful color on the Tommy Hilfiger licenses and regions that you're not operating directly. Could you remind us the relative size of those businesses and what they're doing with the dollars at retail? Just so we can try to understand how what the boost to top line will be if you bring some of these businesses back in house?
Sure. I think if you took it all in on the Tommy side, it's about $1,000,000,000 and on the Calvin side, it's about $1,000,000,000 in sales round numbers. So let's say $750,000,000 to $1,000,000,000 for both opportunities. Given the growth that's going on particularly in Asia and Latin America, those numbers depending when we did a transaction could be higher at that time. What we're seeing in most of those markets since Tommy is at the early stage of development in those markets, a lot of those markets, we're seeing double digit kind of sales increase in our license business there.
So and to remind everybody, Australia. In those four key markets, we are joint venture partners there. So we don't get to report our profitability our sales in those markets, but we do own between 40% 50% of those businesses. So it clearly gives us a real insight into those business and understanding of what's going on there. And obviously, it gives us a direct path to acquire the business as we go forward over time.
Okay. That's really helpful. And then just on the Calvin Klein International business, the margin improvement year over year there was noticeable given the FX headwinds you clearly faced in the quarter. Can you remind us where the European Calvin Klein profitability stands? I know when you bought it from Warneco, it was barely profitable after previously being a double digit operating margin business.
So where do you stand in some of those international Calvin Klein regions where the profitability was very depressed when you bought the business from Warneco?
Okay. So Europe is really the market where the Wanaco Calvin Klein businesses were depressed. It's about a $450,000,000 business, ongoing business since we're cleaning up distribution as you look at it. And that business today, given the investments that we've put in above where Wanaco is, where Wanaco was at a marginal profit of 1% to 2%, we are today at a marginal loss of about 1% to 2%. So as we look at it, the opportunity is a 1,000 basis point improvement over time in that business as we get it to a scale and we start to be paid for the investments that we're making in the business.
And as our Tommy Hilfiger management team operates that business clearly on a much, much larger Tommy Hilfiger business in Europe, they're earning in excess of 15% operating margins. Our initial goal over the next 4 to 5 years is to get Calvin to about a 10% operating margin business. And that's where Wanaco operated the jeans underwear business in Europe, if you go back to 2,008 and 2,009. Operator, since it's after 10 we're going to make this our last question. Thank you.
Okay. Then we'll take that question from Eric Tracy with Janney Capital Markets.
Hey, thanks, Doug. Thanks for squeezing me in. Manny, just a follow-up on that Seekay Europe business, the jeans in particular. Can you just sort of I guess it's over a 4 year period to get back to that 10% level, but maybe just the cadence, is there anything incremental that needs to be done from a spend perspective? Or should we relatively step function from here in terms of the improvement of that profitability?
We in order to get to 10% operating margins, we would have to the business needs to also scale. Given if you look at the European business model with the diversity of country, the need to have an expense and organizational structure to support our pan European business. That business in order to get to 10% operating margin needs to be at about $750,000,000 base of sales base across the market. So there will continue to be investment spending as we grow the business normally as we put shops in where we are. But what you should see and this is how anybody is going to budget or project a business.
If you're going to go from breakeven to 10%, you're going to do it over 2 to you're going to do it over 4 to 5 years. What you're going to see in a business plan from any management team is it goes to 2%, 4%, 6%, 8%, 10%. What we are hoping for given our market expertise and given the strength of the team that we have in Europe that runs the Tommy Hilfiger business that we're able to leverage. And our past experiences with acquisitions, the Tommy acquisition, the initial Calvin acquisition is what we'd like to do is actually accelerate that time frame. And obviously, that's our goal.
But if you're asking me what our financial plan is, it's that steady growth, trying to grow operating margins 200 basis points a year and working our way up over a 4 to 5 year period approaching 10%. So that's our goal. That's how we've planned it financially. That's what I'm willing to commit to with the understanding is that we're doing everything possible to accelerate that turnaround.
And then I could just switch to Tommy. I just want to clarify, I mean, really decent profitability in 3Q in that business, sales decel, the expectation that it reexcels in 4Q. You mentioned that the environment had got more promotional. Is that your expectation as well that you guys participate in that? And so the actual operating algorithm doesn't really change?
Or is there potentially you accelerate sales and actually hold the profitability as well?
Okay. It's a great question. And the best answer I can give you and the fairest answer I can give you is I don't think anybody knows at this moment in time. I think we've planned it prudently. I believe we've planned it with appropriate level of markdowns and promotions.
If business were to slow down and we needed to step on the pedal in order to liquidate goods and clean up, That's what we do. We don't stay with problems. That's our business model. So I don't want to throw out any guarantees or whatever, but our models and our business practices that's what we do. So we will react to whatever the market conditions are.
I think we've clearly prudently planned it in a way that we've given ourselves room to be promotionally competitive with the rest of the market. But if that steps up another notch in an environment like this, which is the Q4 holiday season, it happens just very quickly and you need to react, We're going to react. So we will be transparent. We will let the market know what's going on. We'll clearly send signals to let everybody understand it.
But I think in our model, we've built that all in. And the one thing that gives me a level of comfort about all that is the weakness that was experienced last year in December January that we really felt because of the market conditions we left money on the table last year. I think there is really I think we've really built that into our plan that it will be promotional and it will require us to be competitive with the market and we've tried to factor that in as best as possible.
Perfect. Appreciate it. Thanks guys. Best of luck.
Thank you. Okay everyone. First of all, I'd like to just wish everybody a happy holidays, Merry Christmas, happy Hanukkah. And I'd also say to everyone, we look forward to speaking to you on our Q4 call and have a great and healthy and happy New Year. Thank you.
That does conclude today's call. We thank everyone again for their participation.