Good morning, everyone, and welcome to the PVH Corp. 1st 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, rebroadcast 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 June 4, 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 that is subject of 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 service its debt obligations. Therefore, the company's future results of operations could differ materially from historical results or current expectations. EVH does not undertake any obligation to update publicly any forward looking statements, including, without Reconciliations to GAAP are included in the referenced earnings release, which can be found on www.pvh.com and 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.
Thank you very much, Jennifer. Good morning, everyone. Thank you for joining us. Joining me on the call is Mike Schafer, our Chief Financial Officer Dana Pearlman, our Treasurer and Head of Investor Relationships and Ken Dwane, our CEO of Heritage Brands and North American Wholesale. Looking at our results for the quarter, although we came in line we came in, in line with our earnings guidance for the Q1, we were disappointed that we needed to lower our EPS guidance by $0.10 for the year.
To be specific, the guidance take down is a reflection of the near term sales and margin pressure in our North American businesses. I strongly believe that our long term growth strategies for our Calvin Klein and Tommy Hilfiger businesses remain intact and that the planned strategic investments we are making in our Calvin Klein business will accelerate sales and earnings in the second half of twenty fourteen. Let me get into each of our businesses by geographic region. In North America, our business in the Q1 was clearly negatively impacted by the unseasonably cold weather. As the weather improved in April, we saw an improvement in sales and store traffic trends.
Our Calvin Klein and Tommy Hilfiger businesses were on plan for the Q1. In our retail business, the Tommy comps were up 2%, while Calvin Klein comps were flat to last year. Our wholesale businesses performed well and achieved plan and delivered a 2% to 4% sales increase for the quarter. Our heritage businesses struggled in the Q1 in North America, with retail comps down a disappointing 11% and our wholesale EDI replenishment business is negatively impacted by weak store traffic trends at our key accounts. We have seen our North America sales trends improve in the Q2 across all of our businesses.
Our retail comps at Calvin and Tommy are running up 2% to 3%, while our heritage comps have improved to minus low single digits. We are planning the Q2 to be promotional given the macro retail environment and have lowered our 2nd quarter margin expectations to reflect this. Moving to Europe, our Tommy Hilfiger European business continued its strong performance with overall revenues up about 8%, driven by strong retail comps of +6% as well as retail square footage growth. Strong sales trends have continued into the Q2 with comp sales up mid single digits. At wholesale, our business came in on plan for the Q1.
We continue to plan our full holiday sales up about 5% based on our order books for the season. Our early selling of the pre spring season is indicating a continuation of these strong sales trends and could positively impact our 4th quarter sales plan. The Calvin Klein European business continues to be under pressure, particularly our jeans business. We are planning this business down low double digits for the first half of the year as we eliminate off price sales and reposition the business for the new fall Jeans product launch in the second half of the year. Moving to Asia.
Our Calvin Klein business continued its strong performance in the Q1, posting a high single digit sales increase despite the lack of a Chinese New Year in the Q1. This performance was driven by strong sales performance in our China and Southeast Asia businesses. Sales trends in the 2nd quarter in China and Southeast Asia have continued their strong performance. However, our business in Korea has weakened driven by the ferry accident, which has significantly impacted the total consumer spending in Korea. We have seen this business improve over the last 10 days and are continuing to closely monitor the situation in Korea.
In Latin America, our business in Mexico and Brazil continue to post high single digit revenue increases in local currencies. We are planning this business to grow high single digits in local currency for the year. However, for the Q2, we are planning the business flat due to the World Cup Soccer tournament that is taking place in Brazil during the month of June. We expect consumer spending to be negatively impacted in that month because of the tournament due to store closures during the matches that will occur in Brazil. Let me update you on some of the integration that's going on in the business.
We continue to execute our plans and are on track with all our processes and system conversions. Let me give you an update on some of the strategic investments we are making to build a solid foundation for our Calvin Klein Jeans and Underwear business into the future. These strategic investments fall into 6 broad categories. On the people side, we have filled all key positions across the Calvin Klein Jeans and Underwear Global Businesses. On the systems and infrastructure side, we have completed all system conversions in North America and Europe and over the last 3 months have successfully converted a number of systems in Asia.
There have been no surprises in this area since the last time we updated you and we are very comfortable with our integration timetable. Moving to the off price area. We are in the midst of significantly reducing our off price sales and warehouse club sales in North America and in Europe to bring that overall jeans and underwear sales distribution in line with the healthy mix of our other Calvin Klein businesses. We expect this process to continue through the end of this fiscal year. We are also in the midst of upgrading quality and design of the Calvin Klein jeans product.
We should begin to see the benefits of these initiatives in the second half of this year with product hitting the stores in August September. We are also elevating the presentation and point of sale marketing of the Calvin Klein jeans and underwear presentations at retail. This will be an ongoing process. Let me give you a few examples of our new shops for Calvin Klein. In North America, in the jeans and underwear area, we're touching over 200 doors throughout North America.
We are specifically hitting Herald Square and Union Square and the Macy's stores, the Key Lord and Taylor flagship stores here in New York, in Canada, in Toronto, at the Bay and some of the significant stores. Just to remind everyone, in jeans area, in a number of the top doors at our key partners in North America, the Calvin Klein Jeep presentation was eliminated from the sales mix both in men's and women's jeans. That is in the process of being rectified as we go forward. You should start to see those new doors coming on board in the 3rd Q4 of this year into the first and second quarter of 2015. We're spending in total in capital and new shop expenditures in jeans and underwear in excess of $12,000,000 So clearly investment spending there in North America.
Moving to Europe. We're seeing across Europe new jeans presentations in some of the key retailer accounts. Just a few examples. Harrods in London, a new men's jeans shop will be opening there in the Q3 of this year. In Paris at Galleries Lafayette in Pritamp, we'll be opening new jeans men's and women's shops.
Peak and Clappingbird will be opening in their flagship stores in Cologne and Vienna. And there'll be various other key doors that we'll be opening. We're clearly making significant investments there. And we continue to make investments in new shops and stores throughout Asia, in China with new stores opening and new concepts opening in Shanghai as well as in Korea and in Hong Kong. Finally, we're making investments as well in our e commerce business at both Tommy and Calvin Klein in order to support the significant growth we are experiencing in these businesses for both brands.
We continue to make these planned strategic investments in Calvin Klein in order to unlock the full potential of this business over the long term. As we have said, 2014 continues to represent a year of 2 stories. The first half is pressured by our strategic investments, while fall 2014 will be the 1st season we offer product by our newly established design and sourcing teams, which will be presented in enhanced retail environments. Despite the first half pressures, we feel we are well positioned with solid underlying business fundamentals and have not changed our outlook for the second half of the year, where we expect second half earnings per share to grow 20% over the prior year. We believe that the strength of our global growth brands Calvin and Tommy Hilfiger and the strategic investments we are making today will allow us to drive ongoing earnings per share growth of 15 plus percent in 2015 and beyond.
And with that, I'm going to turn it over to Mike Schafer to quantify some of the results for Q1 and our guidance.
Thanks, Mandy. The comments I'm about to make are based on non GAAP results and are reconciled in our press release. Revenues for the Q1 were 1.9 $6,000,000,000 a 4% increase over the prior year when excluding the BaaS business, which was sold to G III in Q4 of last year. Driving our revenue increase over the prior year was a 6% and 4% increase in our Tommy Hilfiger and Calvin Klein businesses respectively. Our heritage business revenues were down 2% excluding BaaS for the quarter.
Our earnings per share for the Q1 was $1.47 at the midpoint of our previous guidance of $1.45 to 1 point dollars While we were at the midpoint of our range, we were disappointed with the performance of our North America businesses, which were negatively impacted by the environment and fell short on gross margin for the quarter. The earnings shortfall was predominantly in our moderate heritage North America businesses. For the Q2, we are projecting earnings per share of $1.40 to 1.45 dollars or an increase of 1% to 4% over the prior year and revenues of about $2,000,000,000 or an increase of 4% over the prior year excluding BaaS. Our 2nd quarter guidance reflects the continuation of a highly promotional environment in North America in most channels of distribution, which will negatively impact our gross margin as our customers and competitors move through higher than planned inventories. Our 2nd quarter EPS guidance reflects a takedown from our initial plans.
Additionally, our Q2 comparison to the prior year is negatively impacted from the Calvin Klein investment spend and $10,000,000 in additional marketing spend always planned in the Q2 and for the full year. Our earnings per share for 2014 are now planned at $7.30 to $7.40 a $0.10 decline to our previous guidance. Our change in guidance is the result of the takedown in our first half EPS reflecting the difficult North America environment. Overall, our 2014 earnings continue to be negatively impacted by the incremental spending in the acquired Calvin Jeans and Underwear businesses. We have not reduced these investment plans from our initial budgets and continue to make all the necessary investments to continue to grow these businesses for the future.
Our second half EPS estimates remain unchanged and reflect growth of approximately 20% over the prior year. This growth will be heavily weighted to the Q4 due in part to anniversarying our investments in the acquired Calvin Klein businesses. Our revenues for 2014 remain projected at about $8,500,000,000 or a 5% increase over the prior year excluding BaaS. Tommy Hilfiger and Calvin Klein are planned to have revenue increases of 7% 4% respectively. Our heritage business revenues are planned to increase 4% excluding BaaS.
Our full year operating margins will be down about 60 basis points versus the prior year, a 10 basis point decrease from our previous guidance resulting primarily from the first half North America gross margin pressure. 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. For the year, we are projecting our Heritage and Tommy Hilfiger businesses to have operating margins flat to the prior year. Calvin Klein operating margins will be about 14%. Finally, we continue to pay down our debt pay down continues to be projected at about $400,000,000 for the year.
And with that, we'll open it up for questions.
Thank
you. And we will take our first question from Bob Drbul from Nomura.
Hi, good morning.
Good morning, Bob. Hi, Bob.
I guess maybe the first question that I have is around the back half outlook and your sort of reaffirmation on your beliefs of the growth. Given some of the challenges of the business thus far, what gives you the confidence in the ability to sort of reaffirm what you think is going to happen in the second half and specifically the Q4?
Well, I think Bob a couple of things. We are making these significant investments on the Calvin Klein side of the business. We've seen good order flow from our retail partners. We've opened up in North America new doors, some of the top doors I was mentioning in the jeans business and significantly adding square footage in North America. We're adding about on the Men's side, we have an increased plan for the second half of the year in square footage of over 50%.
And most of that is in top doors. And on the Women's side, we're looking for an increase of about 35% from a square footage point of view. So that really positions us I think well as we go forward getting repositioned back in these stores. It also is I think it's an endorsement that on the product itself that the retailers are getting behind it. Now clearly, the consumers got to vote and we have to see those sell through.
So that's in North America. In Europe, we've also seen our order book up double digits as we've gone into the back half of the year. That's being offset by the elimination of the off price and warehouse club sales that were going on. But clearly, we're seeing doors opening there that we haven't been in before in new markets. The challenge there will be again the same thing is positioning the goods getting them in place.
I think that's all in front of us and then seeing how the goods sell through and transact as we go forward. That's the open issue as we go forward. How we perform at retail in Europe specifically in our own stores and at the department store level. So we really we feel positive about that. We have the orders in hand to do the business we feel.
And then obviously in jeans and underwear there's a big reorder EDI business that goes on. We need the sales flow through to follow that. But based on planning and where we are and working closely with our retail partners, we feel that's all in place as we go forward. I'd also say last thing I'd say is, as we work our way through this Q2, the comparison is much tougher for us first half of the year versus second half of the year. And I think you see that throughout all of retail as we go forward.
So clearly, we think there's opportunity in the second half to outperform both our Calvin and Tommy businesses as well as our heritage businesses. So getting paid back for the investments we're making today, getting paid back for the additional marketing and presentation we're putting in and getting paid for the new product that gives me confidence as we go forward and now we have to earn that as those goods hit and sell through.
Great. And then the second question that I have is just the promotional environment currently, Q1, Q2, how much of it is wholesale promotional concerns versus your own retail business in terms of the promotional cadence?
I think it's 2 things, Bobby. I think if you take if you view the business comparatively and I think that's what you really have to do comparatively to where it was last year. Last year's Q1 from a weather point of view, from a business point of view was very, very strong. And as everyone came in including us came out of the Q1 into the Q2, everyone was chasing inventory. They had outperformed sales across the board.
There was less clearance pressure and less promotional pressure. What we see now is across the mall, particularly in the middle of the mall with specialty retail, we are seeing the need to as sales were being missed on a macro level in January, February March, despite a strong April that didn't make up for some of the sales misses that took place in the beginning part of that 1st 3 months of the calendar year. And I think we've in general inventories are heavier than they need to be and there's more promotional going on. So we are seeing a higher promotional environment at the outlet stores here in North America and our regular price stores internationally. And we're also seeing at the department store level, prices AURs that are lower than this time last year, anywhere from 3% to 5%.
Great. Thank you very much, Manny.
And next we will hear from Michael Binetti from UBS.
Hey, good morning, guys. Good morning. So just to get one thing out as far as our modeling goes and thinking about the cadence in the quarter since you guys are so helpful with how you're planning it. I think there's a lot of pressure on the to hit the guidance for the year in Q4. You mentioned that well over 20%.
But I think there's some noise in there related to the way you guided taxes and interest and the interest expense benefit. So just to avoid a boogeyman, can you help us think about the growth rate that's implied in the back half for the Q3 versus the Q4 given those two variables?
Sure. So I guess just to say the growth rate for the Q3 we've talked about on EPS was about these mid single digits which and then of course for the second half of the year is 20% in total. So that is the plan. To get their taxes and interest do play a part, our tax rate benefit for the year is greatest in the Q4 and then secondarily in the Q3. So those are the 2 quarters with the biggest benefit in taxes.
And interest because the deal was done to refinance in the Q1, pretty flat second, third and fourth quarter.
Okay. Thanks. And then Manny,
could you talk to us
a little bit about as you look at you've taken down your assumptions for Q2 based on promotionality in the how are you thinking about promotionality in North America in the second half as you set the guidance maybe relative to what you're thinking for the Q2 that
you just We're looking for a more a less promotional environment that we've seen in the second quarter that we've seen in the first half of this year. I think a couple of reasons I think is on a comparative basis. Last year's 3rd Q4 were more promotional than last year's 1st and second quarter in general as you look at what transpired particularly in the Q4. So I feel there's more opportunity in the 3rd Q4 from a margin point of view to outperform where we were last year than there was in the first half of the year. And then secondarily, looking at the plans that are out there, I think everyone is really focused on executing to get inventory levels down in the second quarter and position themselves back to school.
So all of our key retail accounts are moving through goods with the strong incentive beginning of month August to be in a position that inventories are clean and moving forward to have an appropriate level of clearance, but not to be overly weighted in that area. So I think the plans are all in place. We know we are moving aggressively to do that in our Q2 and I think the industry in general is doing it.
Okay. And then just if I could follow-up one last modeling question as you look at the second half guidance. Can you help us think about what type of comp sales and replenishment trends are you implying there since those are
such big variables? Thank you.
Well, I guess in the second half of the year, we're looking for comps in general to run. In North America, we're looking for comps in a row retails somewhere in the 2% to 3% range. We're looking for Europe comps in our Calvin business to be up somewhere around low to mid single digits and we're looking for the Tommy business in Europe to be up about mid single digits. That's pretty consistent. All of that is pretty consistent where the trends are today with of the Calvin Klein Europe business, which is being planned down now low double digits.
But I think that that's we're really looking for the Q3 to be an inflection point, new product, new presentation, up against soft results from last year that we should start to see a better comp performance in our Calvin Klein Europe business with all the initiatives that are in place.
Thanks.
And we will take our next question from Christian Busch from Credit Suisse.
Jennifer, I think we lost Christian.
Christian, are you there? Okay. We will go to our
Yes. Hi there. Sorry about that. I was wondering if you could provide some color on the cadence of new product introductions in the jeanswear and underwear business? And also where we should expect to see the store environments change first?
Well, I think the store environments will be changing throughout 3rd Q4. You'll see it in Europe, particularly Northern and Central Europe. You'll see it in the 3rd quarter throughout the U. K, Paris and Germany, big markets to give you a sense of some of the and I mentioned some of those key retailers. Here in North America, it's an ongoing process 3rd and Q4.
But I think that you should start to see it September 1, you should really be in a position. If you went to Herald Square, if you went to Union Square, if you went to some of the big doors, you should see some significant improvement in the jeans presentation in those departments as well as in the underwear presentation in those stores as well. So it will be ongoing, but I think it clearly will be visible to you as you visit those doors going forward. And from a product point of view, some of the new product launches, underwear, there'll be some key launches both on the women's side, on the broad side of the business and with key marketing campaigns, 3rd quarter supported by some significant marketing and on the men's side as well. So we've got some real initiatives going forward that we haven't totally made public yet from a marketing point of view.
So you'll there'll be more about that, but be assured there'll be significant marketing supporting the launch here in North America, Europe and in Asia.
That's helpful. Thank you. And Good luck.
And next we will hear from Erinn Murphy from Piper Jaffray.
Great. Thank you. Good morning. Manny, I was hoping you could just follow-up a little bit more on the Calvin Klein Europe side of the business as you talk about trends kind of being down double digits in the first half and then starting to improve as we get into the second half. I mean, first question, where should we start to see that off price product levels start to be at closer where you need them to be?
And then as we think about just kind of longer term, I think on the last call you talked about the brand kind of reaccelerating back to that high single digit range beyond this year. Is that still how we should be thinking about, Calvin?
I guess, let me start with the first part. I think from the elimination of these of the off price in Europe, I think that it should become almost invisible by the end of Q3 that you'll see it in market. And I think it's you might see some product with T. K. Maxx, but besides that it should be much cleaner than it significantly cleaner than it's been.
And more importantly, I think you'll start to see more of a presence key department stores that I laid out before. On the second part of your question
Just on the overall Calvin Klein brand, I think you've talked about it being closer to a high single digit grower over time. Or should we still think about that for beyond this year?
Yes. I think a lot of these key product investments that we're making, I think is what will be critical for us is that we really feel that there's significant growth in the jeans business here in North America and in Europe as we get to a more healthy base as we go forward. I think that will continue to drive growth. We won't have the burden of cleaning up as we did this year, cleaning up the off price sales that we had for carryover. So as that gets cleaned up, we won't have that in the base.
And that's worth 200 to 300 basis points by itself. So I think clearly not having that headwind in front of us will start to get us would get us much closer to high single digit kind of a growth rate. And if we can get some momentum in the European business to go along with the momentum we see in Asia and Latin America, I think that's when we could really start to get closer to that double digit kind of growth again.
Great. That's helpful. And then just the last question for me just sticking on kind of the European theme. Could you just speak to how you're viewing the European consumer currently as we kind of get out of the spring into the fall season? And then just any other context on regional performance within Europe would be really helpful.
Sure. I think the story continues. The one market that we have not seen any significant improvement in is the attack. It continues to be a challenging market. It continues to be a market as you know it is a market that is dominated by specialty stores as opposed to large department stores.
So there's clearly pressure in the from a credit point of view to continue to sell into that channel, worrying about getting paid. So that puts a number of pressure on it as well. And then the issues that are going on with the consumer in general. We are seeing Spain for the Tommy Hilfiger business. This is the 1st season where we're actually seeing some growth off of the base where we've gone through now 3.5 years of contraction in that market.
So we think that market is leveling off. And then our Tommy business as you can just see from the results up 8% for the quarter in Europe is that's really being driven by Central Northern Europe, the U. K. Business as well continuing to grow that business both from a retail point of view, Square Footage growth, but also our wholesale bookings. And I mentioned the bookings that seem to be trending again as we go into spring 2015 in a more positive way and consistent to what we're seeing in fall.
I'd say the only other risk out there and we included in Europe is the Russian market. With what's gone on
in the
Ukraine, we don't have a big business in the Ukraine and the Crimea area, but we have a big business in Moscow and that whole territory Eastern Europe there. And that business for the last 1.5 months has been under more pressure. We've seen it level off as the crisis heightened nature of the crisis has also leveled off. But it's an area that we watch very that we're watching very closely. And we have a big business there with both Tommy and Calvin Klein and a business that's very profitable for us.
So we're watching it very closely.
Okay. Thank you guys. Best of luck.
Thank you.
And our next question comes from Omar Saad from ISI Group.
Hey guys. Thanks. Good morning.
Hi Omar.
You guys talked
a lot about the new product, the new presentation
for Calvin Klein going into this fall. Can you maybe elaborate on it a
little bit? What's new? What's new about the product? What's new about the presentation? I know you're going to do some more marketing spend.
Is it different styling? Is it different quality? What's the presentation going to look like versus what it used to look like? Maybe just help articulate some of the things that we could expect to see when we're in the stores this fall?
Okay. On the jeans side, it's in Europe and in North America, it's a complete redo. It is a completely different sourcing base. It is designed instead of being designed by a central design group in North America, we've gone through our regional approach for Europe, Asia and North America. We think that's more appropriate.
And with the centralized control of key items as we go forward, we believe that's a significant there's been an upgrade in piece goods. There's been an upgrade in make. We believe that the design aesthetic is more in tune with the Calvin Klein consumer. It's a more modern fit. It's a more modern styling.
So on the jeans side, it's a complete makeover, new packaging, hang tags, brand branding on products that we think is enhancing to the presentation and will warrant the higher price position that the brand warrants. And we talked about is how challenged particularly in North America the jeans business has been from an average unit retail point of view. We're just looking to get back to where the brand historically has transacted. And I think we have done that from a design point of view. And now the consumers got to vote to see how that's being presented.
So from that point of view on the jeans side, it's been a total remake. On the underwear side of the business, it's been it's always been a successful business. The big improvement that we've done is we felt that packaging significantly cheapened and the presentation was significantly cheapened. That's where we're making the investments on the Calvin Klein underwear business really going after the business in a big way. You could see it through Macy's Herald Square, new shop, men's shop, 2,400 Square Feet.
On the Calvin Klein Women's Fitness business, the big focus for us is the bra business. We've always been a major player in the bottoms panties business and we believe there's been a lack of investment in the actual technical design of the product that has not made it as universal as it should be to fit all women. So we are relaunching Perfectly Fit for the 3rd Q4 of this year. That will be a big initiative for us as we go forward. That's been a successful product category.
And I think with the packaging, with the point of sale presentation that we have there, I think it's very significant. Just to reiterate, we will be spending in the 3rd Q4 of this year in excess of $12,000,000 in North America on shop presentations for jeans, underwear and our men's sportswear business. We will also be spending about $5,000,000 to $6,000,000 in Europe in capital expenditure in presentation at in our own stores as well as in our partners' stores in key accounts. So that's it's night and day from what it was. And we believe that's going to really drive the business back and get the Calvin Klein brand repositioned in Designer Jeans back to where Heritage has been as the brand that started Designer Jeans around the world.
So I think we are highly confident of our initiatives and where we are here in North America. And as we've discussed, Europe is just more of a challenge because of the brand positioning there and what needs to happen and how far we need to move the brand, but we're making all the right moves and all the right investments for the long term growth of the Calvin Klein business there.
And Manny marketing spend, incremental marketing spend to get the word out to let consumers know that come back to Calvin Klein? It's different. It's new. It's kind of back to where it should be. Is there kind of spend lined up to support those?
Yes. So look we spend every it's never been an issue about not spending marketing money because thankfully especially on the jeans side that was a contractual requirement that Wanaco had to spend in jeans. So that spend is continuing. We believe now it's more focused, more brand right and it's also coupled with retail presentation. So it's great that you're out there marketing the brand, but if you don't have if you're not presented well and if you're not presented in an appropriate environment at retail, the marketing by itself is not going to drive it.
So we think to a great extent, the investments we're making at point of sale in capital and in marketing at point of sale are as important as our marketing campaigns.
Okay. One last question that's really helpful Manny. On the digital side, on the e commerce side, it hasn't been it's not as big a percentage of your business as it is maybe some of the peers out there, where there's a traffic issue going on in retail generally because of the rise of e commerce. You just give us an update? And I guess you've got a lot of balls in the air especially around Calvin Klein, but an update on how you're strategically thinking about really entering the digital side of the business in a much more material and significant and focused way?
Sure. I think there's 2 stories. I think the Tommy Hilfiger business, which is about an $85,000,000 business today and profitable, has been a business that's been growing 20% or whatever, it's high double digits. That's been a business that is that with the control of the brand, we've been able to make the investments in, pull the goods together and make a real statement about the brand and the product and transact well there. And the focus has been Europe and North America.
On the Calvin Klein brand being a light us running a licensing model, it was very difficult for us to really pull together an economic model that worked. We had a significant brand statement on the Internet and we had a $20,000,000 business that transact and lost a couple of $1,000,000 But now that we have control over jeans and underwear and a much bigger control over sportswear, we're able to going forward, we're able to make a much more solidified cohesive message going forward and we're making investments. We'll be launching calvinklein.com to sell and transact a commerce site in Europe. We'll be launching in throughout Asia in the second half of twenty fourteen into 2015. And we'll be also launching in Brazil a site for spring 2015.
So a significant amount of investment going on with the technical capabilities are there. We're investing in the brand site itself as we go forward. That's all built into our numbers. And we think it's an opportunity for us as we go forward to grow our direct to consumer business with Calvin Klein. We have a very big 3rd party e commerce business with our partners where we are significantly penetrated at Macy's and our partners throughout Europe and Asia.
We have a significant business with some of the pure play retailers as well. So we know there's demand for the product. And now that we have control of it, I think we'll be able to given our retail presence in all of those markets, we'll be able to really take advantage of the e commerce opportunities there as well for us as we go forward.
Thanks, Manny.
And our next question will come from John Kernan from Cowen and Company.
Hey, good morning, guys. Thanks for all the color. Just can you quantify the investments made specifically around Calvin Klein Jeans and Underwear on the SG and A side of things that you expect to roll off next year? And then Mike with CapEx right around $300,000,000 how sustainable is that you need to push CapEx higher given some of the expansion of e commerce and a greater push internationally?
So, Michael, I'll touch CapEx first.
Yes. So, look, dollars 300,000,000 is this year. I do think we'll see a decline in that as we move forward. I think somewhat closer to $270,000,000 to $275,000,000 would be the number as we go forward. Part of this year does include some one time investment spend particularly for infrastructure.
Okay. I guess from the investment point of view, we've talked about $55,000,000 to $60,000,000 in strategic investment spending in those areas that I laid out, combination of spending and elimination of off price sales at profitable margins and overall profitability to be somewhere in that $55,000,000 to $60,000,000 range being spread over the second half of last year into through the 1st 2 or 3 quarters of this year. That those expenses don't go away, but the need to invest at that level above our normal growth rates that's what falls off. So we are up against $30,000,000 or so this year of spend associated with the investment spending that's going on at Thousand Cline principally in the 1st 2 quarters of this year a little bit in the third quarter, but principally in the 1st two quarters of this year. And we were up against that for the second half of last year to the tune of about $20,000,000 to $25,000,000 in the third and more significantly in the Q4 of last year.
Okay. That's super helpful. Just one final question. Can you talk about some of the opportunities you have in emerging markets to bring back some of your joint ventures and licenses internationally?
Sure. I think is the I guess the opportunity to bring back licenses and categories long term is the autonomy helping the business in Asia is principally a licensed model. It's about a $550,000,000 business today. Some of that business in China, we are a joint venture partner where we own about 45%. There's an opportunity over the next 2 to 3 years, if we can make the economics work that we would potentially could bring that back in house.
In a similar way, the Korea business and the rest of Southeast Central Asia, there's 2 license agreements that have varying terms between 3 5 years to go on those license agreements that clearly as the Calvin Klein businesses in those markets are fully integrated, established, gives us the opportunity to potentially bring those businesses in house and operate them directly ourselves. Moving to Latin America, there's a developing business for Tommy in Brazil that's today that's growing very fast, but it's basically $35,000,000 $40,000,000 it will be this year. That business, we believe, has the potential to be between $100,000,000 to $150,000,000 over the next 3 to 4 years 3 to 5 years. And I think that's an opportunity given the strength of our Calvin Klein business in Brazil that as we look at that business developing over time, we again we have the option to bring that business in house 4 years from now if it makes sense and we can make the economics work. And it's a similar story in Mexico as well.
We have a very healthy Tommy Hilfiger business of $150,000,000 in those markets. We have a Calvin business that we operate directly ourselves. Finding the right business model there, which might be a combination of the both, could really work well for us as we go forward. So we're looking at that as well. When you look at product categories then on the Calvin side in North America, the tailored poling areas is an area that we think is a natural fit for us given our strength in the dress furnishings business with neckwear and dress shirts.
And then secondarily, the whole women opportunity that G III does just a fantastic job in operating and has grown that business so well. And now I'm really talking long term. Clearly, that's a license that's 9 to 10 years today. But as that business comes forward, trying to work out a business model that maybe is more that we're more directly involved in is something we'd be looking to do. So those are broad strokes some of the big opportunities that aren't necessarily factored into our growth strategies.
Okay. That's super helpful. Thank you.
Next we will hear from Dana Telsey from Telsey Advisory
Group. Good morning, everyone.
Good morning.
Dani, hi. As you think about the CK transformation and what's happening with the gross margin pressure in North America, looking out towards the Q4 and into 2015, you parse together as you think the gross margin pressure and the changes that you see will happen, does inventory come down? Does product improve? And how do you see that with the CK business in Europe? Is it more promotional there?
Do you see pricing improving? Thank you. Okay. So I
Exactly.
Okay. So, look I think it's a couple of things. I think we are in North America. The Calvin Klein business with the exception of jeans is very healthy. Our margins there are under the least amount of pressure overall than we're seeing.
And I think as we move forward, the new product initiatives, what we were up against significant liquidation sales last year, I think there's a real margin opportunity for us in the Q4 of 2014 as we go forward in North America. I think in general, I think last year's Q4, once we got past Thanksgiving last year, it got significantly promotional. The tighter calendar we talked about last days last year, I don't want to go back and rehash all that, the very challenging January that really occurred. I think I don't anticipate that repeating itself. And that's not built into our numbers that that type of pressure will repeat itself.
So I think relatively speaking from a comparative point of view first half second half to second half comparisons are much easier as we start to cycle those going forward, particularly in North America. In Europe, again, the Tommy business, we've not seen any significant margin pressure there at all. That business is very healthy, continues to perform very well and I would expect that only to continue into the second half of the year. Talking specifically about Calvin Klein, we're looking for some significant margin improvement in the 3rd Q4, principally because we were in liquidation mode all of last year. So sales were under pressure last year throughout.
We were liquidating goods. We weren't happy with the product quality. We didn't have the right presentations. So I think there on a specific basis for us, we clearly think that there's margins opportunity as we go forward. I think that there will be naturally some level of promotion in the market.
But I think for us, it's about first getting some regular price selling that we didn't almost have at all when it came to the jeans side of the business. So there's a big margin opportunity for us in the 3rd Q4 that we need to capitalize on. Thank you.
Our next question is from Joan Pason from Barclays.
Hi, good morning. In terms of the Calvin Klein distribution rationalizations and I think you started touching on this in terms of Europe. But with regard to the off price versus full price mix in North America, what do you think that could be at the end of this year? And then in terms of the European business, which has always been more heavily focused on the southern regions, what do you think the northern versus southern split could be pro form a?
Just to let could you repeat that you broke up on this side. Could you just repeat the last part of the question about northern, southern? I didn't hear
Just in terms of pro form a for the distribution closures, what do you think the Northern versus Southern mix could be in Europe?
Okay. Sure. Let me start with North America. I think in North America, there's always a healthy mix of off price to regular price selling. You need to clean your goods.
The T. J. Maxx channel, the natural channel do that. And if you do it in an appropriate way and limit the distribution, it could both be profitable selling and it could be it's not brand selling and it could be it's not brand denigrating in any way. And we feel by the end of this fiscal year, we'll have that balance from a dollars point of view in the off price channel, where we want it to be both in jeans and underwear.
And we feel by the end of this fiscal year, we'll have that balance from a dollar's point of view in the off price channel where we want it to be both in jeans and underwear. And as we're growing the regular price business in North America that percentage should come in line over the next year or 2 as we go forward. But I think it's important to keep in mind that the Calvin business relatively speaking is so its distribution in other product categories sportswear, if you go if you move into the women's side of the house or accessory, but that distribution is so clean that when you look on balance, we are not overly distributed from a brand point of view in the off price channel. There's just too much jeans and underwear in that channel that needed to be cleaned up. So I think once we get through this fiscal year, we feel we're in perfectly positioned as we go forward.
Moving to Europe, I think what you have to keep in mind is the Jeans business was principally focused on Southern European distribution, at least on a regular price point of view. There it was very difficult to find prior to 2014 quality jeans distribution in Germany, Central Europe, France, the U. K. That's where the major cleanup is going on and where it is. We've always had good jeans penetration in Spain and we had a big business in Italy, but it was the Italian business was much too much in the off price channel and significantly discounted.
And that is the channel that is going to be the biggest challenge for us. That market will be the biggest challenge because one, it's our biggest market and 2, it's the market that's feeling the most pressure economically and that continues and that consumer is under more pressure. So we're very focused on that. We're focused much more on in the Italian market on opening price point jeans there. We will be more promotional in our own stores in the Italian market just because we have to be given our size and where we are.
So again, we're trying to manage that upgrading, but it will be less promotional than it has been. It will be cleaner than it has been. But we're not going to be able to just turn the spigot off completely in the Italian market.
Okay, great. And then just in terms of your gross margin expectations for the year, if you could provide some additional color just in terms of I guess what the contribution could be from the retail and international expansion compared to the negative impact from promotional activity?
Okay. I guess just two things I want to clear on. Again, we'll talk about gross margin. We are going to see gross margin improvement going forward and that's excellent. But I guess I just want to reiterate a couple of things.
The off price sales because they were done under the Calvin Klein label, which is of the quality that it is, selling into that channel of distribution with planned sales was a very profitable transaction for Wanaka. It wasn't brand enhancing, but it was very profitable. So making 30% margins, which were lower than what the overall brand does, but with almost no incremental expenses was very so on a gross margin basis, eliminating these sales will be enhancing to our gross margin, but not will not be enhancing from a profitability point of view since there was so few expenses that went along with that sales transaction. So Mike will give you some of the guidance specifically for gross margin.
So John, we've talked about the gross margin expansion about 70 bps of improvement for the year. We've talked about a couple of things. 1, as Manny said before, we are doing less promotion, which is helping our margin. The mix of business is a big factor. Selling baths is a factor.
Growth on the international markets where we operate with higher gross margins is a factor. So all that comes together and for the year we still are finding about 70 bps of improvement.
Okay, great. Thank you.
And our next question will come from Eric Beder from Breen Capital.
Good morning. Good morning, Eric.
Could you talk a little about J. C. Penney and what you're seeing at the J. C. Penney stores?
And in terms of let's do the J. C. Penney first.
Okay. Look, I guess on the Penney side, it feels pretty good. Again, sales trends have been positive. You've seen I'll let them speak to their own comps. But our business there has been very solid both the dress furnishings business and our Van Nuysen and IZOD sportswear businesses have been very strong as has our Warner Bros business as well.
So we're very happy with how JCPenney is performing in the mid channel for us. And we haven't those trends have continued into the 2nd quarter for us. So we're feeling good about that.
And how are you feeling about the Kohl's expansion with IZOD? How does that look for you?
We're very excited about that. That's going to be a big launch for us. We really start to shift that very late Q2, but mostly 3rd Q4 is a major growth initiative for us. There will be a significant marketing spend that will go along with that that Kohl's is making a significant contribution for. We are there's a we also have a significant shop presentation spend there.
So the brand will be presented in an excellent way going forward. You should start to really see that. I would think in probably September 1 to September 15, you'll really start to see the IZOG presence in Meggs, in kids, in tailored clothing and dress furnishings in that store. So I think we're very much excited about that. They're excited about getting into this whole getting some of the national brands that they're launching second half of the year and eyesight is clearly on the men's side, the bigger launch for that.
Great. Good luck for the rest
of the year.
Thank you. Operator, we're going to take 2 more questions and then call it. It's about 10 o'clock right now.
Okay, great. We will take our question from Howard Tubman from RBC Capital Markets.
Thanks guys. Assuming 2Q works out the way you expect it to, how should we think about kind of total inventory growth kind of going into 3Q and ending the year?
Yes, Michael, it's Kevin. Look, I think as we get through the Q3, we'll see our inventories get more toward flat and then we'll see normal growth as we get into the 4th. As we end the year, we'll start to see more normal growth reflective of sales. At the end of the second quarter, our inventories were up about 3.5%, 4%. Our sales are planned up 1%.
I think Manny said it earlier. Inventories are at point or so high. I guess I would say that the inventory composition is heavily basic weighted. The piece that's a bit of a the overage piece is heavily in basics. And we really don't see much exposure and it's going to take some time to work that down throughout the year, but it's really not a financial exposure for us at this point.
Also we are building our inventories to begin the shipping of IZOD, which will ship early Q3. So that's all hitting our warehouses in June July that's set up as we go forward. So I think that buildup and that fixture fill that goes on is also reflected in there. So the quality of our inventory will be down will be pretty strong in the by the end of the Q3. And then by year end, I think you'll see it back to normal levels.
Got it. Great. Thank you.
And our last question will come from David Weiner from Deutsche Bank.
Yes. Good morning. Good morning, everyone. Dave Weiner from Deutsche Bank. So I just had two questions to end things here.
The first, Manny, you were talking about AUR increases in the genes in the CK Jeans business earlier in the call. Can you just remind us in North America Europe where those are and where you'd like them to go? And then my second question would be and I don't know if I missed this earlier, but can you give some kind of quantification of the early interest you're seeing in Europe and North America on your redesigned CKI Jeans product? Thanks.
Sure. Okay. So on AURs, I think I've I don't think I mentioned this on this call before, but we've talked it is the jeans in North America going for a seasonal basis all in T shirts, jeans and whatever going out like $25 The right number for the positioning of the Calvin Klein brand with markdowns and clear should be closer to $40 Our men's sportswear is $45 to $47 To put it in perspective, jeans by its nature with big T shirt business is going to be lower than sportswear and that includes all the markdowns and clearance that's appropriate for the business. So for us, it's moving that $25 to that $40 mark and our financial plan calls for that to happen over a 3 year period. Starting in the fall season, we should see a 10% to 12% improvement in AURs.
We're hoping to get closer to $30 as we go forward and then moving that up over the next 2 years from to $35 and then to $40 So I think it's we're doing it in a smart way. We'd like it to happen quicker, but I think you also have to recognize that the consumer has been trained at this and you can't go overnight and take out the needle, particularly here in North America with some of the promotions that have gone on. Hopefully, we could outperform that. But it clearly gives you a sense of how underperforming the jeans business was from a margin point of view since the goods bottoms are ticketed 59%, 69% for 80% of the bottoms businesses are at that point and 20% are a little bit higher than that. So it just gives you a sense of the kind of pressure that the Jeans business has been on.
And I think a lot of that just has to do with product and presentation. In Europe, directionally, it's a very similar story. The price positioning in Calvin Klein jeans should be closer to €80 in Europe and we've been going now closer to €45 in Europe when you factor in T shirts and everything that goes with it. So it's a similar opportunity. We think in some of the markets that the brand hasn't had significant distribution in Northern Europe, Germany, France, the U.
K. And some basically Central Europe that there's an opportunity to move the out the door retails quicker and that will be more challenging to do in Southern Europe in the Italian market and the Spanish market. So those 2 big markets will be more of a challenge for us to move it. So we factored all that into our business plans as we've gone forward to really work that through. But again, over a 3 year period, we want to move those out the door retails to where we believe it's appropriately targeted.
We have a Tommy Hilfiger denim product is executing out at the door is a good benchmark for us as we go forward. So it's clearly where the brand should be positioned and how we should go forward. As far as some of the doors, I really spoke about that in detail and where we're seeing some of these increases. But I think the biggest endorsement here in North America is the new doors and our key retail partners opening up new shops in the top 100 doors in the U. S.
Over the next 2 years. And they believe in the brand. The brand performs in every other product category men's sportswear, women's sportswear, accessories, tailored clothing, dress shirts across the board and clearly believe that jeans should be a significant opportunity for the brand since it's its heritage. So that's probably the biggest endorsement we have from a distribution point of view and what we've been able to secure for ourselves in the 3rd Q4 of this year.
Okay. Thanks for your color.
Thank you. Okay. Listen, I'd like to thank everyone for joining us on the call. We look forward to updating you again in September on our second for our Q2 results. Everyone have a good day and speak to you soon.
Thank you.
And that concludes today's call. Thank you.