Good morning, everyone, and welcome to the PVH Corp. 2nd Quarter 2013 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 express written permission. Your participation in the question and answer session constitutes your consent to having any comments or statements you make appear on any transcript or replay of this call.
The information being made available includes forward looking statements that reflect PVH's view as of September 9, 2013 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 the subject of this webcast and call. These risks and uncertainties include the company's right to change its strategies, objectives, expectations and intentions and its needs 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. 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 Q2 earnings release, which can be found on the www.pvh.com in the company's current report on Form 8 ks furnished to the SEC in connection with the release. At this time, I am pleased to turn the conference over to Mr. Manny Chirico, Chairman and CEO of PVH.
Thank you, Kyle. Good morning, everyone. Joining me on the call this morning is Mike Schafer, our Chief Financial Officer and Dana Perlman, our Treasurer and Senior Vice President in charge of Business Development and Investor Relationships. Ken Duane is also on the call. Ken runs all of our heritage businesses as well as our North American wholesale businesses.
Looking at the business, we were pleased with the 2nd quarter results. We beat our 2nd quarter revenue and earnings guidance. We saw strong outperformance against our projections in both Calvin Klein and the Tommy Hilfiger businesses as well as in all of our heritage wholesale businesses. From a macro point of view, I would describe the environment from a consumer point of view as volatile. We saw the quarter we saw the second quarter get off to a strong start in May early June And then the business and the environment softened particularly in North America and Europe where we saw traffic trends in June July that were actually down year over year.
Business strength and began in August particularly in our North America business. And as we turned into September, we've seen business soften and traffic trends soften in the North American environment. So overall, we're trying to follow the consumer and seeing where the trends are taking us. Focusing in on each business and the performance in the quarter on the Tommy Hilfiger business, it continued to be strong overall during the quarter. We posted 11% revenue increase.
Revenues
were up about 10% in North America
driven by a 7% retail comp store increase, growth in square footage in North America in our retail business and strong growth in our wholesale business. Internationally, revenues were up 11% for the quarter. Revenue growth in Europe was partially offset by continued weakness in our Japan business. Our retail comps in Europe posted a 6% increase in the 2nd quarter. Operating income for our Tommy Hilfiger business grew 3% to 100 $1,000,000 as 20 percent earnings growth in North America was partially offset by a 15% earnings decline in our international business.
Continued weak performance in Japan coupled with gross margin pressure in our European business caused by higher promotional selling and a weaker U. S. Dollar on merchandise purchases negatively impacting our international results overall. As we look into out to the Q3, 3rd quarter sales trends in North America are running on plan with our retail store comps running up about 3%. Looking at the 3rd quarter international sales
trends, European comps are running ahead of plan,
up international sales trends, European comps are running ahead of plan, up mid single digits. We are planning our wholesale fall and holiday sales up about 8% for the year. Geographically, we see continued strong growth in Central and Northern Europe with particular strength in Germany, France and Russia, partially offset by weakness in Southern Europe, Spain and Italy in particular. Looking out to spring 2014, which we begin shipping in January last fiscal month of our year, we are seeing our spring order projections flat to last year as strong business trends in Northern Europe are being offset by double digit declines in Southern Europe particularly the Italian market. Moving to our heritage business.
Our wholesale heritage businesses continued their strong performance. Sales came in ahead of our estimates. We also saw strong performance in our newly acquired Speedo and Intimate business units. Overall, 2nd quarter operating margins improved in our Wholesale Heritage business to over 12%. This margin expansion resulted from a significant improvement in sportswear margins driven by strong sell throughs at retail and higher average unit retail selling prices.
3rd quarter sales trends are running on plan and inventory levels are quite clean during the back to school season. Our performance in our heritage retail businesses for the Q2 was disappointing. Comps were minus 10% and were particularly weak in our Bass Footwear division. 3rd quarter sales trends at retail have improved to and are now posting a low single digit negative comp quarter to date, so we're seeing some improvement in that business as we move into the back to school season. Moving to our Calvin Klein businesses.
We exceeded our sales and earnings estimates in the Q2. We posted strong sales gains and higher than estimated operating income. By region, we saw the strongest results in South America, Asia and North America. Our South America business was very strong particularly in Brazil where we continue to see sales growth of about 10% driven by the performance of the Calvin Klein Jeans business. Our order book for the fall holiday season is also running up about 10%, so there is good momentum in this business as we go to as we move into the 3rd Q4.
Asia overall comps in our Asia business are up slightly for the quarter. We saw strong sales in China and Southeast Asia where comp store sales are up about 5%. The only difficult market continues to be Korea, where comp sales trends have improved from Q1 and are now running down about minus 5% for the Q2. 3rd quarter sales trends in Asia continue to improve and are running at about plus 2% for the quarter to date Q3. In North America, our businesses continue to perform strongly across all product categories with the exception of men's and women's jeans.
We have seen very strong performance in our wholesale men's sportswear and our men's and women's underwear business. In addition, our North America retail business posted a 6% comp store sales increase and higher operating margins due to better sell throughs at higher average unit retails. The 3rd quarter trends in these businesses are running on plan. Quarter to date in the 3rd quarter, comps are running on plan at about plus 4% in our retail stores. The Calvin Klein Jeans business in North America and Europe continues to be the only difficult business in the Calvin Klein portfolio.
We have planned these businesses down mid single digits and are anticipating continued pressure on margins in order to move through goods for the 3rd Q4 of this year. In the licensing area, ongoing royalty revenues were up about 10% in the quarter due to the strength in our global handbag and accessory businesses as well as our women's apparel businesses, which are operated by G3 in North America and Club 21 throughout Asia. Our fragrance royalties in the Q2 were flat as we are planning for significant launches in the second half of the year. This year our key marketing initiatives are all second half weighted. We have a major women's fragrance launch planned for the Q3.
The fragrance is called Downtown and our celebrity talent is Rooney Mara. You're starting to see some of the marketing associated with this launch as it goes forward and we would expect that there will be major there is a major marketing campaign around the launch, particularly in the Q4. Just to update you on our integration plans, which are all on track. We continue to validate all those plans and we're seeing all the processes and system conversions to move and we're on plan there. Over the last 3 months, we've successfully converted a number of systems in North America and Europe.
There have been no surprises in this area since the last time we updated you and we're very comfortable with our integration timetable. From a people perspective, we have our senior management teams in place across the globe and have had some key hirings across the globe as well and are moving forward in a very positive fashion in this area. Mike will put a little bit more flesh on that. And I'm going to turn it over to Mike to quantify some of our 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 Q1 were $1,965,000,000 a 47 percent or $628,000,000 increase over the prior year. Driving our revenue increase over the prior year was the Wanaco acquisition, which accounted for 507,000,000 dollars Tommy Hilfiger, which was $77,000,000 $43,000,000 in the pre acquisition Calvin Klein Businesses. Overall, our pre acquisition heritage business was flat to the prior year as our ongoing wholesale business performed well for the first quarter, but was offset by continued disappointing business in Bass Retail and the discontinued Timberland and IZAG women's wholesale business. Versus our guidance, revenue were up as a result of strong performance in Calvin Klein China, Calvin Klein North America and Calvin Klein Brazil coupled with strong performance in our Tommy Hilfiger North America retail businesses.
Our earnings per share for the Q2 was $1.39 Driving the earnings per share beat was our revenues, which were slightly better than planned. Our revenues for 2013 are projected at $8,250,000,000 Calvin Klein revenues are planned at approximately 2,750,000,000 dollars Tommy Hilfiger revenues are planned at approximately $3,420,000,000 up around 6% to the prior year. Heritage revenues are planned at $2,080,000,000 Year over year comparisons for the Calvin Klein and Heritage Brands revenues are significantly impacted by the Wanaco acquisition. I wanted to put some color to 2013 operating margins for the company and our businesses. Operating margin for the year is expected to be approximately 11.8%, a 60 basis point reduction to 2012.
Driving this overall reduction is the switch from running a licensing model to direct operations for the Calvin Klein Jeans and Underwear businesses combined with our expenses associated with rebuilding and investing in the acquired Wanaco businesses. The current operating margin guidance of 11.8% reflects a reduction of about 20 basis points to previous guidance as we see continued pressure and volatility particularly in Southern Europe. For the year, we are projecting our Calvin Klein operating margins to be about 15%, Tommy Hilfiger operating margins are planned at about 14% and Heritage Brand operating margins will be in excess of 8%. We're planning the full year tax rate between 25.5% 26% and full year interest expense between $195,000,000 $200,000,000 For the quarter, we're projecting revenues at about $2,200,000,000 and earnings per share of 2.20 $2.0 When comparing to the prior year, earnings per share for the Q3 impacted negatively by the new seasonality of our business as a result of the Wannaco acquisition, particularly in the acquired heritage businesses, coupled with the higher tax rate. The tax rate for the Q3 is planned at 26.5 percent compared to 22.2% in the prior year.
About $0.13 of our earnings per share drop versus the prior year is associated with this tax increase. Also negatively impacting the current year's Q3 is the shift of advertising expense as compared to the prior year, which is worth approximately $0.10 Operating margin for the Q3 is expected to be about 13%. Our debt pay down for the year continues to be projected at $400,000,000 Integration efforts are in full swing and initial conversion has been very successful. We have converted the wonderful Calvin Klein North America retail and Calvin Klein Jeans operations to the PVH platform. Our Calvin Klein Europe operations have also successfully migrated to the PVH platforms.
We are now focused on North America Underwear as well as planning and allocation systems in Asia. And with that, we'll open it up for questions.
Thank you. We'll take our first question from Bob Drbul with Barclays.
Hi, good morning.
Good morning, Bob.
Manny, I guess, as you look at the rest of the year, the sort of full year number that you maintained, what was the like biggest factors that you looked at that kept you comfortable with the $7 number versus increasing it? And the second question that I have is, can you just elaborate a little bit on the European the trends especially on the wholesale side and the order book a little bit and the margins or just the promotional side of what's happening in Europe?
Sure, Bob. I guess as we've been pretty consistent. We've been talking about $7 from the beginning of the fiscal year And we're holding on to that even though as you know we've beaten our 1st and second quarter initial estimates for The Street. I think what's causing us to be more cautious about the 2013 fiscal year is the is just the consumer environment that we see and the lack of consistency from the consumer from a traffic point of view and spending point of view seems to come in fits and starts. When you look at our overall sales trends through the 1st 6 months of the year, there's still particularly in the Calvin and Tommy businesses, they're still pretty impressive putting in mid single digit comp store increases in North America and Europe.
But it still gives us some pause as we go forward looking at the business and with the kind of plans we've had in place. So we're really looking at the second half. And right now, I guess, you'd have to say that we are anticipating that our sales trends will remain positive, but will not be at the same levels that we were able to garner in the Q1 and the Q2 of this fiscal year. That may hopefully prove to be conservative, but right now it seems to be the right path to take based on what we're seeing in the business. When we talk to our retail customers in North America or in Europe or major department stores, there seems to be a level of cautiousness of as they approach the back to school season and the holiday selling season.
A couple of good weeks of business will change all that, but right now that's the tone of business and it's hard to be more aggressive in this kind of environment that we see. On the European order book, I guess I'd start by just reminding everyone that the last 3 years that there's been so much volatility in Europe, we've been fortunate enough to grow that Tommy Hilfiger business at over a 10% sales increase on a what I would on a pretty large business and a very profitable business. Now that trend continues through the Q2. As we go into the fall season, we're seeing a continued momentum in the order book. But as we turn to spring, coming off of what can only be described as a very challenged overall macro European retail environment for the 1st 6 months of the fiscal year, I think retailers are being cautious as they buy.
But if you look at our order book, Northern Europe, our order book is up between 5% 6% and we're really seeing the pressure in the Southern European markets, principally the Italian market where business is down over 20%, where there's really been a contraction and open to buy dollars and also cautiousness on our part into selling into a number of these small specialty accounts where we have significant credit collection issues there and we're just being very cautious as we sell into those accounts and judicial as we plan that business. So we're trying to approach the market appropriately. I've also the flip side of that whole comment is when you look at our own retail businesses on the Tommy side, where we're running up high mid single digit increases in that business that continues to go. So it gives us clearly it validates the strength of the brand. It validates continued gains in market share that we're making.
And I think we're dealing with a moment in time with a challenging springsummer order book in the face of such a challenging 2013 spring order book with retailers being cautious as they buy. So I think we're planning it appropriately and we're dealing with it. So hopefully that gives you some color.
Thank you.
You're welcome.
We'll take our next question from David Glick from Buckingham Research
Group. Yes, good morning. Thank you. Manny, I just wondered if you could kind of update your thoughts on how if at all kind of your guidance update today and being a little bit more cautious. I mean, how does that make you think about the sort of intermediate to longer term sort of financial model that you guys have been talking about?
The high single digit growth in Calvin and Tommy's overall mid single digit growth in earnings and 15% to 20%. I mean, clearly, you've got a lot of levers on the Calvin Klein side, particularly Wernaco, you've got C. K. Bridge, lower interest expense and taxes potentially over time. But how, if at all, does these recent developments change how you think about the growth prospects for the company?
Well, I guess, when you look at it from a long term perspective, it doesn't change anything. The opportunities which we've been speaking about for the last 9 months on the Calvin side and the Tommy side, we're just more excited about. We don't think that any of the trends we're seeing in the business really have any impact on what's going on there. More intermediate meaning, I know how the investment community is thinking about starting to think about 2014, clearly the order book for our such an important business in Europe being flat will put some pressure on some of the earnings growth that we see. But as you said, we have plenty of levers.
We expect to have a benefit on the interest expense line. We expect to see margin improvement in the Calvin Klein businesses as we go forward. We think there's margin opportunities in Tommy business. So I guess in the intermediate period, it will put some pressure on that 15% to 20% growth kind of range and maybe puts us more on the bottom end of that as we go forward as we start to think about it. But it's really too early to start to give any kind of specific guidance about 2014.
But from a pure growth trajectory point of view, opportunities for both brands and what we see, nothing that we're experiencing in this short window and dealing with the consumer as they go through these the volatility in the economic markets really impact our thinking about what the growth opportunities for the 2 brands are.
Thanks. And just a quick follow-up. I mean, CK Bridge is represents a major white space opportunity for you guys in Europe. Could you update us on where your thinking is now in terms of the launch and rollout of that brand?
Sure. I think in Europe the let me take a step back. As I think everyone's aware, it's already a very successful business in Asia throughout Asia. Club 21 in conjunction with us runs that business and that continues to be to grow at a double digit rate somewhere between 12% 15%. So we're very happy how they manage the business and growing.
In Europe, the plan is to launch men's for fall 2014 with our major wholesale accounts, Also to begin to open some of our own retail stores Calvin Klein where we would have women's accessories and women's apparel as well. And then looking out probably a year or so launching women's apparel in the 2015 timeframe, probably fall is the thought process right now, but continue to really focus on that. We see it as a big opportunity. We believe we understand the market, have the infrastructure with Tommy Hilfiger experience and the management team that's in place to really take advantage of that. But it's critical for us 1st and foremost to really try to get our arms around that jeans business, have that repositioned, get some traction in that business, improve the distribution in that business in Europe and take a business that's actually losing money and start to bring it to a breakeven to a small profit in 2014 and then move it forward combined with the Platinum launch to really start to create a significant sportswear apparel offering for the Calvin Klein brand in Europe that just doesn't exist today.
Great. Thank you very much. Good luck.
We'll take our next question from Christian Bois with Credit Suisse.
Yes. I was wondering if you could talk about some of the progress with the key hires that you've been looking to make?
Sure. I think clearly throughout Asia we've made some significant progress. We've hired some key positions in the merchandising design and the planning side of the business in the retail side of the business as well. A strong management team in place in country there that existed with the Wanaco Group and very close to announcing the hiring of a new CEO for Calvin Klein Asia. Similar fashion in Europe that business has all come under the direction of the Tommy Hilfiger management team on the ground.
Systems have been converted. Management's been put in place. The country managers have now been all put in place for the Calvin Klein business as well as the Tommy businesses as we go forward. And we should be very close in the next month and a half to making an announcement about a new CEO for Calvin Klein Europe as well. Both of those are down the road and will be in place by the Q4 of 2013.
So good progress there as we move forward. In North America, the business is really we've taken the business forward. We've moved the jeans business under our Calvin Klein sportswear businesses, which we've been very successful with here in North America under Alex Cannon. We've also moved the underwear businesses under Cheryl D'Apellito, who's taken over that business for us and brought it forward. On the supply side, both in jeans and underwear, we've made good progress and we've got some strong people on the Global Supply Officer that was brought in place to really move that business forward as well.
So I think we are on track to where we thought we would be from a people perspective and moving forward. Still some work to do there, but I think we'll be well positioned as we go into 20 14 from a people perspective.
Could we talk a little bit about the systems? Can you give me a little bit of a sense of the timeline for the integration of those Warwind ecosystems onto the PVH platform over the next 12 months? And then when do you expect to be fully complete with that systems integration?
Okay. Let me start with the last piece first. As we look to the full integration, it won't be till 2015. But the bulk of the systems integrations in North America will be completed in 2013 and in the first half of twenty fourteen. Asia and Latin America will then follow.
Europe, as I said before, has already moved on to the PVH platform. So that is the timeline as it stands today.
And that's the same timeline where we started the fiscal year. So everything is on track.
That's great to hear. Thank you and good luck.
We'll take our next question from Erinn Murphy with Piper Jaffray.
Great. Thank you. Good morning. I want to focus a little bit on trends in Asia. Maybe first with Calvin Klein in both China and Korea.
It seems that you guys have still been very strong in China despite kind of some of the denim peers struggling a lot of excess inventory there. Can you just speak a little bit more to that landscape? And then in Korea, still a little bit volatile. Maybe just help us appreciate kind of the comparisons you're up against in the back half of the year. And then for Japan as it relates to Tommy Hilfiger, could you just help us understand kind of as you've repositioned the brand there, what you've seen year to date?
It sounds like it's still a little bit soft and promotional. How should we think about some of the levers you have in the back half of this year?
Okay. Starting with the Calvin Klein businesses. Our China business has been strong all year. We as soon as we took over the business and got involved and even before we took over the business, we made a decision about cleaning out inventories quickly. So there was a significant inventory glut.
There was about 6 months too much inventory on hand. We moved in that inventory. We destroyed some of that inventory. We moved some of that inventory to other markets, but we took decisive action to try to get that behind us and I think probably move quicker than most of the other markets in China other competitors in China to get fresh goods in place, particularly by the start of Q2. So our business there has been good, continues to be good.
And I think we're not suffering as much from some of those inventory situations because we moved so quickly when we got involved. In when you think about Korea, Korea has been a tough market both macro and micro for us with our own situation and issues. I think most of our inventory flow issues are behind us, particularly as we get into the Q3. You're absolutely right. We start to cycle some double digit negative comps from the prior year.
So I think the comparisons do become easier and we've seen business improve from trends that were running first half of the year double digit negative comps to low single digit comps in the Q3 so far to date. So seeing some improvement there as we go forward. So I think in Asia, I think we have the business planned appropriately. We have room in the business if we stay on those kind of trends that we're seeing to outperform our plans financially as we go forward. The driver being for the Calvin Klein business really the China business as we go forward and the stability that we're starting to see in Korea quicker than we might have anticipated.
The Tommy Hilfiger Japan business has been a challenge for us since the acquisition. It's the only piece of the Tommy Hilfiger business that really hasn't come together well for us. We made the decision after about owning it for a year to reposition the brand in Asia and really take it up to mirror the way it's positioned throughout the European and Asian markets overall. And when we obviously, when we've done that, we move very quickly. The consumer is still catching up with that.
It is the right thing from a brand positioning point of view, but it is putting pressure on the top line and the bottom line. We believe we are under the numbers now from the point of view we're not happy where the numbers are, but we're clearly in the single digit operating margin range for a business that's about a $250,000,000 business for us overall. So we think there's opportunities as we go into 2014 to start to see some improvement in that business. It's a business that should operate when it's hitting at the right cylinders in the 10% to 11% operating margin. So there's clearly opportunity there.
I don't believe it's going to come to a short term. I think it's more of a long term 2014, 2015 kind of issue for us to get that business back on track as we go forward.
Yes. Thank you for that. I guess just a quick clarification on the Tommy Hilfiger International margins then, a little bit lighter in the Q2. I mean is that kind of the promotional driven nature of what happened in some of the key regions there for Tommy? And then just with inventory being in good shape, should we expect the margin profile of the international business for Tommy to improve in the second half?
Or just maybe help us think about the puts and takes there? Thank you.
I think as you start to look at that business, the expectation is those operating margins will level off and it should be flat to up slightly for the second half of the year. I think we were aggressive about marking inventory down both from a financial perspective in the business and from an in store point of view. So I think a lot of that is behind us as we go forward. Some of the U. S.
Dollar purchasing issues alleviate as we get into the 3rd and particularly into the 4th quarter. So some of those comparisons year over year with the weakness of the dollar from a hedging point of view on inventory purchases, which has been impacting us for the first half and into the Q3 of this year will be behind us. So I think you'll see those margins in the Q3 flatten out and then we should start to see improvement in the Q4. And that's really just with the kind of sales trends that we're seeing in the business today. It doesn't call for any major Herculean changes in the business.
So I think we feel very confident about that margin expansion in the second half of the year. And hopefully can see some sales upside if as that European environment starts to stabilize.
Great. Thank you guys and best of luck.
Thank you.
We'll take our next question from Omar Saad with the ISI Group.
Thanks. Good morning. Manny, thanks for all the color, especially in Europe. It sounds like on the Calvin Klein Europe piece, you've got a lot of the management pieces in place, the systems pieces in place. It's such a big kind of profit dollar opportunity Calvin Klein Europe from where it stands currently as you took the business over.
Is it time now to start thinking about the cadence of when some of the big chunks of those profit improvements are going to flow through? Is it or is the macro kind of headwinds going to over weigh that? Thanks.
Well, I think it's look it's a very fair question. We have a Calvin Klein business that does $500,000,000 between jeans and underwear in Europe. It's a business that all in is if you put it all together is operating at low single digit kind of operating margins 3%. Clearly, that's a business that should be at least let's just use 10% as a goal. I know everyone's going to tell me Tommy is at 14%, but I think 10% at this moment in time for the next 3 years would be a great goal for us to improve the 3% to 10%.
And I think it's clearly there's that opportunity ahead of us. How quickly it comes? I mean we have to remember we're not dealing with white space here. We are changing a lot of the distribution. We're cleaning up the distribution.
There is some spots and profitable business in the secondary channel that we are making decisions to get out of. As we start as we're seeing growth, particularly in the spring book for Calvin Klein. If you look at it from a regular price business, the business is up 10% to 15% in jeans at the same time that we are bringing the off price business down. So overall, it's up slightly. We're planning for spring 2014, but on a much healthier distribution platform and better sales.
Also to remind everyone, just by the nature of the jeans business in Europe for Calvin, the way it's been established, 75% to 80% of that business is done in Southern Europe. So those markets although we're seeing growth in those markets for the Calvin brand, it's still in an environment that's very much challenged. And if that starts to stabilize and improve, I think we could start to see an acceleration there. We're making significant breakthroughs in Northern Europe on a very small base, but from a percentage point seeing very, very big percentage increase kind of growth with the opportunity to really grow that business further. So there's real opportunities there.
And I think we'll see improvement in operating margins in 2014. I'm not at this moment ready to start putting a stake in the ground what it would be. But I think you clearly have to think about this improvement from 3% operating margins to getting to 10% operating margin as a 3 to 4 year path to get there. It's not going to happen overnight. It's going to take time to reposition the brand to get the profitability where we think it needs to be and to move the business forward as we go and making the right investments to really take advantage of what we think is at least $1,000,000,000 opportunity as we go forward.
And today, we're at $450,000,000 to 500,000,000 dollars So a big opportunity over the next 4 years with the brand and a big margin expansion. The cadence of which I don't think we're ready to be very specific about, but we're trying to point out the opportunity. It will improve the magnitude of that improvement, I think, as we get into the Q4 and Q1 of next year and ready to give guidance, we'll be more specific about.
Okay. Got
you. And then a quick question on Tommy Europe, Manny. Is it fair to say you're seeing kind of a dichotomy in the business, the Tommy wholesale? And I'm not talking about Northern versus Southern. I'm talking about the wholesale kind of through the department store channels in Europe versus the Tommy kind of owned stores, which seem to be comping pretty well.
Am I interpreting that right?
Well, I guess, look, I know the focus is on spring 2014. I understand that. I think you have to think about the business model in Europe, which is more like the North American model used to be 25 years ago. We had pretty healthy spring order book up 3% to 4% followed by a strong order book for fall planning up 9% to 10% as it came through. So in that as a backdrop for that, the retail comps we're seeing in the business kind of mirror that what's going on.
The issue really is from a macro point of view, the retail environment in Europe was very much challenged in spring 2013 and every retailer is buying the spring 2014 order plan very cautiously. And everyone is planning they're open to buy dollars down. And what we are seeing in Northern Europe where our business might have been up 10% to 11% for 4%, we're seeing that up 5% to 6%. So it's still pretty healthy growth. Unfortunately, we're really being impacted in Southern Europe where we're seeing double digit declines closer to 15% overall with the Italian market down over 20%, where we have seen open to buy dollars cut and also we've eliminated a number of specialty store accounts where we're really concerned about being paid as we go forward given the economic environment there.
So I think if we're really dealing with a moment in time on that spring order book and we have to get through it. So I think it's as you look at it and get into it, I don't think it's really a disconnect. It's just understanding how the business models work and where we're going. So what it tells us is the brand continues to be very strong. We continue to garner market share in the wholesale channel, but also in our own retail channel given the strength of the performance we see.
We're recognizing this is an issue we have to deal with the spring summer order book that we have to deal with, but we really feel it's a moment in time and a transition as we reestablish ourselves. I would expect that our forward book will be up in the mid single digit range as we go forward, but that's to be seen as we go forward.
Thanks, Manny.
We'll take our next question from John Kernan from Cowen and Company.
Hey, good morning guys. Thanks for taking my question. I wanted to jump back across the pond to Tommy Hilfiger North America. I think square footage growth has been pretty impressive this year. How many more outlet doors can you open in North America?
And what's the full price square footage growth opportunity over the next few years?
Well, let me take the second part first. I clearly we operate in North America, I guess, all in about from a specialty store regular price business probably 20 stores overall. There's clearly a huge opportunity if that materializes a successful business strategy and that's what we're testing. I think the specialty store opportunity the specialty store test that we're doing is really twofold. One is we think regular retail is very appropriate for the brand, positioning of the brand, having a chain of overall 30 to 35 stores throughout North America from where we are today at about 20 would be great.
It positions the brand. It communicates with the consumer to be part of all channels, marketing of the brand to the consumer and really allows us to showcase the brand in appropriate retails of formats. The separate question then is, well, doing that, can you actually make money and does it make sense? And that's what we're testing. And we I guess our results have been mixed.
We have some good stores that are making a nice profitability for us in that channel and we have other stores that are breakeven for a small loss for us as we go forward. And in fairness, it's a we're in the very early stages of development and you would expect that to happen. So from the specialty store opportunity is huge. And I guess as you said, what could be the magnitude, you theoretically could have 100 stores to 125 stores throughout North America, if you could do it profitably and we wouldn't get too far ahead of ourselves until we could prove that to ourselves. So next year, I think we're talking about opening 2 stores.
So clearly, this is a slow test, understanding and communicating with our consumer and also getting the benefits from a brand positioning point of view for a relatively small dollar investment to balance off our positioning in North America be it our Macy's full price strategy some of our outlet strategy as well. Where we had tremendous square footage growth and I don't think it's going to be as high in the future has been in the outlet environment not only new stores, but also the ability to expand square footage in major AA markets like Harriman, New York Orlando, Florida Las Vegas, Nevada. Some of those still exist and I think we'll see it. But when we think about square footage growth, I think we're talking about 3% to 4% square footage growth for Tommy going forward, coupled with the conservatively 2% to 3% comp store growth. I think that would translate into business that can grow 5% to 6% to 7%.
And we're always looking for opportunities to be opportunistic about growing that square footage since it's probably our most profitable business in North America.
Great. That's really helpful. And then I guess one final question. The timing of the realization of the $100,000,000 in cost synergies with Warneco has that changed at all in terms of your thinking? And when that will flow through of things?
No. We're still on track. We're talking about $25,000,000 for this year and we're still on track for the $100,000,000 as we move forward.
Okay, great. Thanks.
We'll take our next question from Kate McShane with Citi Research.
Thanks. Good morning. Manny, with regards to your comments about pulling back some sales from Southern Europe, I understand Italy is weak. Is this the first time that you guys are pulling back a product or has this been ongoing? Well, I
guess is look, we're always looking at credit and the situation. I think it's been ongoing, but our sales declines in Italy have been more in the 8% to 10% range as opposed to what we're seeing for spring 2014 about 20% decline. So that is one market when we talk about Europe in general saying we're seeing some stability and we're not seeing any stability in the Italian market at all. And that continues to be a very difficult market overall.
And is there any opportunity then because of the strategy and as you look into spring 2014 to reduce some of the SG and A spend? Or is that what is the strategy around SG and A dollar spend?
Well, that's a great it's a great question. Given the size when we looked at the Calvin Tommy business in Italy combined and it was one market where Tommy had a major position actually larger overall than the Tommy business, we really felt we needed 2 organizations as we go forward. We're in the midst of relooking at that overall trying to understand where there might be some more synergies as we bring both as we rationalize the size of both businesses as we go forward. So that's in process dialogue and we're looking at it as we go forward. So clearly, it's one of those areas that as we are looking at the trends in the business that we're looking hard at to see if there's some SG and A expense leverage that can be gained there.
Okay. That's helpful. Thanks. And then my last question is a bigger strategic question just around Calvin Klein underwear. As you take a look at the positioning of that brand particularly in the U.
S, there's been some consolidation with Hanes peaking over Maidenform. I wondered if how that maybe changes the strategic outlook for Calvin Klein underwear? I think
it really has minimal effect on the Calvin business. I mean, the Haines is the major player in the market, particularly post this transaction. And I think it's but we're really in the designer underwear business. Our price points are significantly higher. Their distribution is dramatically wider, selling from selling a number of their brands the brands through Walmart all the way up some through Bloomingdale's where Calvin is really a department store business in North America specialty store business.
Price positioned, I think 3 times the price positioning of Hanes on the men's side. And on the women's side as well, we're really in a different we really feel like we're in a completely different market from that perspective. So I don't think it really impacts Calvin in a way it will have some impact on our Warner's business for sure. I think in some ways it creates opportunities as a player becomes bigger and bigger. Retailers are always looking for opportunities.
I think given our portfolio, when you think about it, I know everyone thinks of the Calvin Klein underwear business, but we have on the men's side, we have a Michael Kors business, we have an IZOD business, we have a Van Meusen business and a Tommy Hilfiger men's underwear business that is significant that gives us a good position in the market overall. So I think it we are well positioned in the overall women's intimates business and the men's business to really continue to grow those businesses.
Okay. Thanks, Manny.
We'll take our next question from Evelyn Kopelman with Wells Fargo.
Thanks. Good morning. Good morning. Manny, I wanted to get your maybe thoughts on the volatility in the market in North America you talked about you've seen recently. Any thoughts on some have attributed the weakness to wallet share shifts given the strength in big ticket items like cars.
What do you think about that? Do you think there's any weather impact? If you could share thoughts there that would be great.
Those all are very logical ideas, concepts, whatever. And I guess I'll leave that to you guys. That's your job to figure out why I have to deal with what we're facing. I do think that probably a number of those things are all true. Everything I read, I watch the same economic reports that you do seeing autos up.
I see home purchases and related goods. And when I look at the retail performance, the one area that continues to be a standout is anything to do with either homebuilding or home furnishing. So I'm sure there is something to do with that. And I think if that's all true, then I think as we move through back to school and really turn into the holiday season, I believe the consumer really apparel becomes front of mind focused. So it gives us a lot of optimism about the Q4 as we go forward.
That coupled with having to anniversary last year at Sandy, which really impacted the November early December selling, which is the 2 very significant months for us. So I think the 4th quarter has a tremendous amount of sales upside if all that holds together.
Have you seen the department stores change any planning, any cancellations things like that for the holiday season given the back to school trends?
We have not seen any cancellations in our business. We have I guess I have seen in general the promotional environment intensify. I don't know if I would describe it as a department store issue as much as a specialty store issue. And as I guess as you would imagine as inventories built up in July, what I've heard in the market, although we haven't really experienced it in our businesses, some shipments have been delayed for some periods of time bringing goods in as they work through June July inventory. But I think relatively speaking, I think the market is the inventory position doesn't trouble me at all in the market.
The promotional environment does concern me. It seems like specialty has gotten very promotional. When I walk the mall and I see it that does put pressure into the channel and we'll see how that plays itself out as we go forward. I think it's become particularly in that area, I think the tea market has become very promotional, which does put some pressure on our jeans business, not so much in the more adult apparel and some of our IZOD, our Calvin Tommy sportswear business, haven't really seen it there, but seen more pressure in the jeans area.
Okay. That's very helpful. Lastly, if I can ask about Tommy Hilfiger in South America. Can you give us a little bit color of where that business is? If some of the strength Calvin Klein has in Brazil, if there's been any work done yet working off of some of that strength.
And what's assumed for Tommy in South America in that 3 year 8% to 10% growth goal you have for the overall brand?
Sure. Look, South America for Tommy is about a 2 $50,000,000 business. It is a business that is totally licensed. We have a joint venture relationship with IN Brands where we own about 40% of the business within brands in Brazil for that market, which we think is a huge growth opportunity for Tommy. The Brazilian market is only about $25,000,000 for Tommy compared to Calvin, which is well over $200,000,000 So clearly, we think it's a big opportunity.
Brazil is a very tricky market from a supply point of view bringing goods in, from a real estate point of view developing it. There is no true department store in Brazil. It is a specialty store and a retail strategy. Our strategy with Tommy has been to partner there. And our strategy for Calvin the strategy for Calvin had been exactly the same except they got a much earlier start.
It started as a distribution, then a joint venture where I wanted to own the percentage of the business. They took a larger percentage of the business 4 or 5 years ago and then bought the entirety of the business about 18 months ago. So I think we see ourselves on the same kind of path with the Tommy Hilfiger business in Brazil as we go forward. But again, I don't envision any kind of a transaction for 3 to 4 years where we might bring that business in house because of the relationship we have with InBran, what they bring to the table and the growth that really can come from the business. The rest of the South American market, it's about $200,000,000 business.
When you take it all in, South American, Latin, it's been growing at a double digit rate overall. This year, some of the markets in South America have been more challenged, Venezuela in particular and Argentina as well where Tommy has a major presence there. So this year it's been a little softer there. But I think as we look out, we expect that market to grow in the 10 plus percent range overall. So developing market for Tommy, we clearly we have huge opportunity as we go forward, but I would describe it as more of a long term opportunity.
Great. Thank you.
We'll take our next question from Eric Beder with Breen Capital.
Good morning. Congratulations. Could you talk a little bit about the heritage businesses? What is happening with Bass? And how is your business doing at J.
C. Penney? And how do you see that changing?
Sure. I guess it is really two stories. We've got we have a $600,000,000 retail business and a $2,000,000,000 to $2,000,000,000 wholesale business, which is performing the wholesale business is performing very well through the 1st 6 months of the year operating margins above 12%, running ahead of plan, strengthening our dress shirts and furnishings business, strong performance in our sportswear businesses. Speedo has been a delightful surprise for us as well as well as the Warner's core intimates business overall. We think the business overall when you put seasonality in 3rd quarter is just seasonally a weak quarter for some of the businesses.
We're going to be in excess of an 11% to 11.5% operating margin overall for heritage wholesale. So we're very happy with that business. The weak side of the business has been our heritage retail business, particularly the Bass Footwear division, which is about 50% of that business. As I said, comps were minus 10%. We've seen an improvement in the overall comp store trend where we're down about low single digits through the quarter to date for Heritage and are looking for that trend to more or less continue into the 3rd Q4 as we go forward.
So that is the area where we need to improve. Operating margins in this business are low single digit. We're not happy with them. We recognize something needs to be done. We are looking at terms of J
And in terms of J. C. Penney?
Sorry. I apologize. The J. C. Penney business, we have we're happy with the business.
It's on plan. The sportswear business in particular running way ahead as you would expect as IZOD was a second half launch last year. Our dress business is more or less on slightly off of plan season to date year to date, but we're starting to see some good results there as inventories start to build back into the pipeline. I think that business will just continue to improve as we move through the Q3 into the Q4 and as they fill that pipeline, particularly for the holiday season as we set up. So we are optimistic about how that works.
We've seen a big improvement in our neckwear business, which we were able to react to the inventory demands much quicker given the much shorter lead times in neckwear. That business is actually comping positive in that business. So overall, we're happy with all business at PennEast. I know they're looking for a significant turnaround in the Q3. I think as the inventory levels get into position, as their price positioning gets and reticketing is fully in place and their messaging to consumer comes across.
I think they're starting to see some improvement in their business. I'll let them speak about their own business, but I could just say from our point of view, we think they're making a lot of the right moves to drive that customer back to the store to really drive the inventories forward, which will really allow them to promote and deliver a value message back to their consumer and I think is the start of getting their business to start comping positive in the second half of the year.
Great. Thank you.
We'll take our next question from Howard Toobin with RBC Capital Markets.
Hey, thanks guys. Maybe just a quick question on just an update on your marketing plans in North America for the upcoming fall season maybe for both brands Tommy and Calvin Klein?
I think our plans are pretty much on consistent with what they've been the last few years. We're not looking for a dramatic increase in spend overall for the year. But if you look at our marketing spend, it's being more intensified in the Q3 this year. First half down slightly, 4th quarter down slightly when you take out the want to go noise of that 4th quarter, but third quarter up pretty significantly. Again, I think it's just it coincides with some of the major launches we have going on and some of the launches we had going on last year where fragrance was more first half weighted last year, it's more second half weighted this year.
And last year, we had a major underwear spend in the Q4 around the Super Bowl, which we're not anticipating to repeat this year. So when you put that all that in on the Calvin side, I think there's there hasn't been a dramatic change in the overall spend, but some of the quarters have really moved. On the Tommy side, it's kind of business as usual continuation of the focus on the brand and uplifting the brand both from a presentation point of view and the marketing spend there and also from a print media spend as we go forward. You won't see television this year. I think the real focus will be on outdoor and print and social media, both here in Europe and in Asia in particular, with increased spend in China in particular as the Tommy brand continues to grow there very strongly.
That's great. Thanks.
You're welcome.
And we'll take our next question from Dave Weiner with Deutsche Bank.
Yeah. Good morning, everyone. Dave Weiner, how are you? Good morning. So two quick questions, if I could.
One on in terms of your comp expectations the quarter, can you talk a little bit about how much of that either what you're seeing or what you expect for the quarter? Is it being you would attribute to AUR increases versus traffic? And if you can maybe differentiate a little bit between CK and Tommy and North America and Europe that would be helpful. And then as a second question following on an earlier one from someone who asked about maybe consumers taking a breather here on apparel in favor of some other segments. I think one of the call outs from specialty some specialty guys and even some department stores is that there's been kind of a lack or a void of kind of more compelling fashion products for consumers.
You had skinny, you had color, you had dresses over the last two, two and a half years. Do you have any thoughts on whether you're seeing that at all? Or any comments there would be helpful. Thanks.
Okay. On the first part, I guess, through the 1st 6 months of the year from an AUR point of view, in North America, the Calvin in Calvin Klein, the AURs were up across the board pretty healthily overall. The Tommy Hilfiger AURs were up slightly, not as much as the Calvin AURs. So when you look at the mix of the business coming from there, it was a combination of AUR in North America and increased traffic overall as we or conversion as we went out because traffic was actually down slightly and we had an increase in AUR and conversion in Calvin and Tommy North America. In Europe, AURs are down.
I think it's and it's the pressure in the market. Some of the mix of the business with as you could imagine in this kind of environment our outlet stores are really posting very strong comp store increases where our full price business is up 1%. The outlet business is up even higher. So that has really shown that AURs overall are down slightly in Europe as well and that's also part of the gross margin discussion we had a little bit before this. As far as the trends that are going on, look I think there was some it's like anything else.
There was there's always some positive trend
going on. Tommy was really able to take advantage of some of
the real color stories that went was really able to take advantage of some of the real color stories that went
on in the bottoms business and whatever.
I think in offsetting that is the denim business has solidified from where it was significantly weaker, both in the macro environment in North America. Denim is not comping double digit negatives anymore. In fact, it's probably flat now to slightly up. So that's not as much as a drain and that's usually a margin builder for you as you go forward. It's although there's fashion in the business, it's also a much more predictable business, especially when you're on your sales trends.
So I think that from that point of view, especially on the women's side, I don't think that there's anything exciting going on directionally from an apparel point of view where dresses were huge a couple I guess, 2 seasons ago and that helped drive the business and other categories. I think there's nothing that's dramatically different that's really changing anything there. So I don't think that there's excitement in the overall apparel area and that's one of the problems that we're dealing with right now.
Great. Thanks for the color.
Okay. We'll take one more question operator and then have to call the call as we're approaching 10:40 9:40 5.
We'll take the next question from Robbie Ohmes with Bank of America Merrill Lynch.
Hey, Manny. How are you?
I'm very good.
I know
you got to go.
So just a quick question, a follow-up on Dave's question. Can you take that AUR conversation in the IMU versus AUR conversation in the IMU versus promo outlook into what your backlogs for the back half of this year and spring of next year? And I know AURs have generally been strong for the last couple of years. How does that look going forward in North America and Europe? Look, I think that
is as you go into every season, I think that's always the challenge is what's sell through is going to be, what kind of AUR expansion, can you sell more goods at 1st and second markdowns than 3rd markdowns. What I will say is there is no ticket any significant ticket price increases going on. The cost environment is such that we're not seeing any real cost pressures coming from sourcing point of view as we look into spring 2014. So there's the pressure that existed say 2 years ago and has continued from some point of view to move retail in order to drive AURs that's behind us. So that's not there.
What you're always looking to do is to drive your AUR up by selling the mix of business that you sell, manage your inventory flow throughs and as you go through. So that's always a big question. So as we look out, we are not anticipating dramatic AUR expansion. In Calvin and Tommy, we're looking for 2% to 3% AUR expansion. And in our heritage business, it's more like 1% to 2%.
So the growth is going to be really unit driven as opposed to AUR driven as we go forward. That seems to be the way most retailers are planning their business as they go forward.
Got it. Thanks very much.
You're very welcome. Okay. I'd like to thank everybody for joining us today. We look forward to speaking to you in December on our Q3 call. We will update you on our progress on the integration of Wanaco and our business overall.
Everyone have a good day and thank you very much.
This does conclude