Good morning, everyone, and welcome to this PVH Corp. conference call regarding the acquisition of Warnaco. This webcast and conference call is being recorded on behalf of PVH Corp. 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 broadcast of this call. The information made available on this webcast and conference call contains forward-looking statements that reflect PVH's view as of October 31st, 2012, of future events and financial performance, including that our proposed acquisition of Warnaco is completed on the terms proposed and financed on the terms currently anticipated.
These statements are subject to risks and uncertainties indicated in the company's SEC filings and the press release that is the subject of this webcast and call. This includes the company's right to change its strategies, objectives, expectations, and intentions, and its need to use significant cash flow to service its debt obligations. The company's future results of operations could differ materially from historical results or current expectations. The company does not undertake any obligation to update publicly any forward-looking statements, including, without limitation, any estimate regarding revenue or earnings. The information made available also includes certain non-GAAP financial measures as defined under SEC rules. Reconciliations of these measures are included in the company's press release of October 2nd, 2012, which can be found on the company's website, www.pvh.com, and its current report on Form 8-K, furnished to the SEC in connection with that release.
At this time, I am pleased to turn the conference over to Mr. Manny Chirico, Chairman and CEO of PVH Corp.
Thank you, Candice. Good morning, everyone, and thank you for joining us this morning. Joining me on the call this morning is Helen McCluskey, the Chief Executive Officer of Warnaco. Also, Mike Shaffer, the PVH Chief Financial Officer, and Tom Murry, the head of our Calvin Klein businesses. I'm going to walk you through the investor presentation along with Helen. I'll just make some notes. On page two of the presentation that's on our website is our safe harbor. I just draw your attention to that. Also on page three is some additional information concerning our filings and some of our financial information that you may find helpful as well. I'm going to be moving to page four of the presentation. I'm going to quickly just touch on some of the strategic rationale for the transaction.
This transaction creates an $8 billion global branded lifestyle apparel company with significant growth prospects driven by our two powerful designer brands, Calvin Klein and Tommy Hilfiger. Most importantly, from a strategic point of view, it reunites the House of Klein to ensure a single brand vision. Post-transaction, PVH will have strong operations in all major consumer markets globally. Again, we are complementary businesses. Warnaco's high-growth markets of Asia and Latin America will complement our very large business platforms in North America and Europe. We believe there's a significant amount of synergies there. The transaction will enhance our revenue and EPS growth and improve our overall operating margins over the next five years. There'll be approximately $100 million in annual run rate synergies, and the transaction will be accretive to earnings. I'll get into that in much more detail.
We've had, here at PVH, a successful record of bringing in acquisitions and achieving the financial targets that we've laid out, we plan on continuing that as we go forward. Moving to page five to talk about some of the specifics of the transaction. Warnaco stockholders will receive $51.75 per share in cash and 0.1822 of PVH common stock, which is a fixed ratio for each share of Warnaco common stock. Based on our closing stock price on October 29th, the aggregate value of the consideration is $68.43 per share. The total enterprise value is approximately $2.9 billion, representing a nine times 2012 EBITDA figure. The financing of a little bit over $4.3 billion is committed from our three banks. It'll consist of bank financing and a senior note offering. We expect accretion in year one that's estimated to be about $0.35 a share, excluding one-time costs.
We expect about $100 million of annual run rate synergies to be achieved over a three-year period, we expect one-time integration transaction-related costs of approximately $175 million. From a management point of view, the PVH senior management team will lead the company with key Warnaco executives expected to join. Helen McCluskey has agreed to join the PVH board as an independent non-management director. We are targeting early 2013 for the closing of the transaction. The transaction is subject to the customary closing conditions, including a Warnaco shareholder vote and regulatory approvals. I'm going to turn it over to Helen, we're going to move to page six of the presentation. She'll talk about the Warnaco benefits.
Great. Thanks, Manny. Good morning, everyone. I'm excited to be here today. While I'm sure that most of you on the call can appreciate the business logic of the combination of the two companies, I did want to share with you the perspective of the Warnaco board and management team. We really continue to have confidence in the significant potential of our business and certainly the long-term promise of our standalone plan. Having said that, we believe that the combination of Warnaco and PVH provides a really compelling opportunity to accelerate the strategic growth initiatives that we had put in place, in particular, to drive our Calvin Klein business in developed and emerging markets. I feel very strongly that this combination will unlock the substantial potential of the Warnaco business and brands more quickly than we could have accomplished on our own.
The investments that we've made in building our global infrastructure and regional platforms can now benefit the combined companies and brands, especially, as Manny mentioned, in Asia and Latin America. The unification of the Calvin Klein brand allows us to better integrate the powerful jeans and underwear businesses that we've built with the creative and marketing strength of the House of Calvin to exploit a much more efficient and effective brand message and experience to consumers around the world, which we believe will further enhance what's already a superior brand awareness and image. Also, our heritage businesses of Speedo, Warner's, Olga, and Chaps will certainly benefit from the resources and the leverage of the scale of what will now be over a $2 billion segment. Finally, the combination really affords our 7,000 Warnaco associates worldwide with really remarkable opportunities for further career development, advancement, and mobility.
Importantly, the transaction rewards our shareholders. With this transaction, we feel that we've really delivered on our commitment to them. Since our restructuring in 2003, under our board stewardship, we've nearly doubled revenue, nearly tripled our operating income, and our share price has appreciated by about 500%. As the press release reports, the transaction value represents a significant premium of 34% to the closing price of Warnaco shares. With the mix of the transaction of cash and PVH stock, Warnaco holders not only monetize a significant part of their holdings, but they'll also share in what we all believe to be the sizable upside and promise of the combination with PVH equity that they'll receive as part of the merger. We at Warnaco are very proud of what we've accomplished to date, and we're very appreciative of the support of our shareholders over the last 10 years.
We are very confident that together with PVH, the business has even a greater opportunity to continue and grow and prosper with this transaction. Turn it back to Manny.
Thank you, Helen. I'm going to now move to page seven in the presentation. The acquisition of Warnaco has tremendous strategic and financial merit and will provide a compelling opportunity to create value for our shareholders, our associates, customers, and our business partners. With over $8 billion in pro forma revenues and over $1 billion in pro forma EBIT, PVH will be one of the largest and most profitable global apparel companies in the world, as depicted on page seven. Moving to page eight of the presentation, we will now have strong operating platforms in every major consumer market around the world: North America, South America, Europe, and Asia. We plan to leverage Warnaco's well-developed presence in Asia and Latin America, which we believe will strategically complement our strong operations and expertise in North America and Europe, giving PVH a truly global operations. Moving to page nine.
Asia and Latin America provide PVH a well-developed presence and local infrastructure in these high-growth emerging markets to further develop Calvin Klein and Tommy Hilfiger in these regions over time. The transaction increases our presence in emerging markets, particularly Asia and Latin America. As you can see from the slides, from a revenue base, our Asia and Latin America business more than doubles from 7% to over 15%, and the profitability of those two regions today, which is 13% of PVH, grows to well over 20% as we go forward. We believe this is a very complementary acquisition for us from an operating platform point of view, and over the next three to five years, gives us the ability to develop our brands globally on a direct operating platform.
Moving to page nine, you really would like to talk a little bit about the Warnaco businesses in these two key markets, Asia and Latin America, in these two high-growth markets. As you can see, the Warnaco business in Asia, well over $500 million in sales this year. It's grown close to 20% on a compounded annual growth rate. The key markets, China, India, growth markets, Korea, a very large market for the Calvin Klein Jeans and underwear business. Moving to Latin America, Warnaco has been extraordinarily growing this part of the world with over $250 million in revenues, compounded annual growth rate of over 30%. Mexico, and particularly Brazil, being a high-growth market for us. We really are excited about the opportunities that these two markets present for us over the next few years as we go forward with our two key global lifestyle brands. Moving to page 10.
Strategically, when you think about moving to page 11, I apologize. When you think about the rationale and the strategic significance of this acquisition, clearly the most important thing it does for us is reunite the House of Calvin Klein to ensure a single brand vision. This will allow us to be in a better position to collaborate and coordinate product design, merchandising, supply chain, retail development, and marketing. It should help us improve our brand image and positioning, and execution across all markets. Calvin Klein is truly a global mega brand. We will end this year with just under $8 billion in global retail sales. As you can see from the slide on page 11, clearly one of the great global fashion brands in the world. Moving to page 12.
This transaction reinforces our strategy to drive Calvin Klein's brand reach globally through new customers, regions, and channels. Since 2002, the licensing model has worked very well for us, providing PVH with predictable and steady cash flows, and allowing us to keep creative control over the brand while minimizing our operating risks. We are a different company today, and clearly able now to take on the direct operations of significant businesses. We expect this business to continue to allow us to grow our businesses. From the period 2003 to 2011, we've grown at a compounded annual growth rate of about 13%. We expect to continue to grow the brand globally 8%-10% a year as we go forward. Moving to page 13 of the presentation. Again, talking about the brand and the single brand vision.
One of the key initiatives that we will continue to have, and one of the key characteristics is the continuation of a very strong royalty stream of over $170 million. We believe this combination will only strengthen that royalty stream and the protection of the brand. The Calvin Klein fragrance business is currently our number one license category, with almost $1.5 billion in global retail sales. Our Calvin Klein North American women's apparel and accessory collections total over $1 billion in retail sales as well. We believe the coordination and control that we'll have going forward will enable those businesses to continue to perform and to continue to grow. Moving to page 14. Again, here we believe we're very well positioned for long-term revenue and EPS growth. We are focused on the growth opportunities related to our Calvin Klein and Tommy Hilfiger businesses worldwide.
These opportunities, coupled with $100 million of expected expense synergies, which we will realize over a three-year period, will drive strong top line growth and bottom line growth for the next five years. We expect the transaction to be $0.35 accretive to earnings in year one of the transaction fiscal 2013. When the $100 million of expected expense savings are fully realized in year three, we would expect the transaction to be accretive to earnings by about $1 per share as we go forward. Moving to page 15. I think this pictorially displays the kind of growth we're expecting. We continue to expect a very high single-digit growth, 8%-10% in Calvin Klein and Tommy Hilfiger. Our heritage businesses, we expect low double-digit growth. Coupled, we're looking for 6%-8% revenue growth of the combined company on a pro forma basis, excluding the initial acquisition of Warnaco.
We believe that will drive high teens growth from an EPS point of view as we go forward. The growth will be driven by the growth of the two key brands, Calvin and Tommy Hilfiger, along with significant debt paydown over the period, as well as the $100 million of expense synergies, which we'll realize over a three-year period. Moving to page 16. We have a strong history and a proven track record of delivering on acquisitions and achieving the financial targets that we've set. We've demonstrated that with the Calvin Klein acquisition in 2003, and along with the Tommy Hilfiger acquisition in 2010. In connection with that acquisition, we will have repaid $1 billion of debt related to Tommy Hilfiger acquisition by the end of fiscal 2012. That's a three-year period, well ahead of our financial targets and our growth.
As you can see from the schedule on page 16, you see the kind of growth that we've been able to achieve on the Tommy Hilfiger acquisition from an EBITDA point of view against pro forma EBITDA. We've grown 18% since that time. The total debt is down $1 billion that we've been able to repay. Our pro forma leverage, which was 3.6 times, is below two times by the end of this fiscal year. Our earnings per share growth has more than doubled during that same period of time. As I've mentioned, with this transaction, we're expecting to pay down debt over the next four years at the rate of about $400 million per year. We're expecting accretion of $0.35 next year, and by year three, a total accretion of about $1 related to the transaction.
Finally, on page 17, some of the opportunities that we haven't quantified and put into the plan. We see significant revenue opportunities above what we've projected related to the Calvin Klein brand as we bring the brand in under one brand vision, under one management. We believe that the opportunities for revenue synergies and profit synergies are well in excess of what's been put into our financial plan. We believe in North America and Europe, we can reestablish our leadership position that we had four or five years ago in the Calvin Klein Jeans business.
We believe that we'll have the ability to expand the breadth of the category assortment in jeans, our sportswear, and accessories business now that it is being managed under one roof and is not being burdened with the licensor or licensee relationships and contractual concerns that we've had to deal with over the last eight to nine years. We believe the opportunities for the Tommy Hilfiger brand worldwide over the next three to five years to develop those businesses directly through the use of the Warnaco collaborating platforms in Asia and Latin America could be significant and have not been really quantified in our financial plans that we're presenting today. We believe the new opportunities for the brands, both Tommy and Calvin, new geographies, under-penetrated markets, and under-penetrated product categories. Clearly, we see significant revenue synergies that are not quantified in this business plan today.
With that, Operator, we'll open it up for any questions that the group might have.
Thank you. If you'd like to ask a question, please signal by pressing the star key, followed by the digit 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. If you have signaled for a question prior to hearing these instruction on today's call, please repeat the process now by pressing star one again to ensure our equipment has captured your signal. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We'll take our first question from Christian Buss with Credit Suisse.
Yeah. Thank you very much. I was wondering if you could talk a bit about what the brand vision is for Calvin Klein looking out over the long term. If you could articulate where you'd like to see Calvin Klein be in four or five years, I'd love some color there.
Sure. Well, I guess I would start by saying the Calvin Klein brand, from all the market research we've done, from all the consumer panel discussions we've had, from the research that's both internal and external, Calvin Klein is usually listed geographically as one of the top three brands by market as we go through it in the apparel area and the fashion area. I think in some ways, it's a continuation of the brand vision and the positioning of the brand. I think by bringing it under one management focus, it clearly would give us the opportunity to better manage that vision in a more cohesive fashion, not get hung up in some of the licensor or licensee issues that we've had to deal with in the past that just naturally come up with that relationship.
From a business point of view, what we'd like to see is a significant strengthening of the business, particularly in Europe as we go forward. The brand is a large brand in Europe. On a retail sales basis, about $1 billion in retail sales in Europe. Again, we'd like to see a stronger positioning, particularly on the apparel side of the business, and we're focused on that as we go forward. We think we will benefit from the operating platforms that we have in Europe under the Tommy Hilfiger management team, Fred Gehring and his team in Tommy, to really bring some more scale to that business and some logistical and operating expertise from a platform point of view, country by country, that we possess there that we'll be able to put onto that business.
We would expect that over the next four to five years, we could see our brand grow to well over $10 billion in global retail sales, and to really take advantage of its positioning, and to fulfill some of the promise that we see in these developing markets.
That's very helpful. Nuts and bolts, can you talk about what's implicit within that $0.35 accretion for 2013?
Sure. Specifically, we've assumed that the $100 million of synergies would come in over a three-year period. We're assuming in year one, about 40%-50% of those savings would come through. We're also assuming for purposes of that calculation, in order to be somewhat conservative, that the Chaps license would not continue. That decision has not been made as of today. We will be in discussion with the Ralph Lauren organization over the next few months, and that decision will be made public when that decision is made at that time. For purposes of accretion calculation, we've assumed that that business does not continue. We've not put in any significant heroic business assumptions. We've kept our assumptions pretty stable from our point of view, and we've looked at the Warnaco situation, and we've tried to be conservative with their projections.
From a macro point of view, we're assuming that this environment continues to be somewhat challenging, particularly in Europe and some of the other areas. That's the backdrop for the assumptions.
That's very helpful. Then I guess finally, could you talk a bit about the structure of the debt financing and sort of what we should be assuming for interest rate and sort of timing of closing?
Sure, Christian, it's Dana speaking. How are you?
Hi, Dana.
Just to give a little color around the financing commitment. It's a $4.325 billion financing commitment to fund the transaction as well as Warnaco's existing debt, as well as our existing bank financing. Looking forward, we would look to finance this deal in advance of closing. We would look to be in the market sooner rather than later. What I would tell you is it will be very similar to a construct that we have today. A mix of both bank financing and unsecured notes. From an interest rate perspective, clearly the markets have been quite constructive, and we'll give you guys a little bit more color as we go forward.
Okay, that's very helpful. Congratulations, I hope everyone's safe and dry.
Same here. Thank you.
We'll take our next question from David Glick with Buckingham Research.
Yes, good morning. Manny and Helen, congratulations. That's number one. Number two, apologize for the background noise. I'll ask my questions. You guys can put me on mute. Not easy to find power, as you would expect. Manny, I was wondering if you can talk a little bit more specifically. If you kind of take the business by geography and talk about kind of the integration opportunities and issues and kind of how you see, to the extent you can, how you see your management team. Who might be running these specific businesses in the U.S. Do you continue to expect to operate all the heritage businesses excluding Chaps that you've acquired?
From a Europe, Asia, and Latin America perspective, how you plan to integrate these businesses into the infrastructure that you have in Europe, which is pretty well developed, and obviously how it might affect Asia, where you have a joint venture with Tommy Hilfiger, and then Latin America, where you really don't have much infrastructure. Thank you.
I guess first of all, from an operating structure or management point of view, we're expecting, hopefully all of the significant operating executives of Warnaco to join PVH, continue running their businesses, and their management teams continuing to run those businesses. We don't have a closet full of people that we're gonna just pull out and now say, "Go run the Chaps business or the Speedo business or the Calvin Klein businesses." From an operating point of view and a management point of view, we would expect those operating teams, both geographically and by brand, to continue to be operated by the Warnaco team. In the U.S. specifically, our plans at this point of view is to continue to run all those heritage businesses. They're good, solid businesses with strong cash flow and strong operating margin businesses, very similar to our dress shirts and wholesale sportswear businesses.
We'll be excited to add those stable businesses to our heritage businesses under the Warnaco management teams, working with our teams. We would expect in the Calvin Klein area that there would be some combination, particularly from a brand and marketing point of view, but from an operations point of view, the jeans and underwear businesses would continue to be operated by those teams within our operating platforms. Clearly, there will be, with $100 million of savings, there will be significant duplication in the back office, in the logistics areas, and finance and accounting areas that we would expect to have synergies. We will make sure that those integrations are handled in the best possible way with significant severance, stay bonuses, retention bonuses put in place for all of the management and associates that will be impacted, both on the PVH side or on the Warnaco side.
Clearly, we'll be looking at that as we go forward. Moving into the international markets. Clearly, we hope to benefit from the operating structure that we have and the operating platform and expertise that we have in Europe, which is a $1.5 billion business today, with strong country presence throughout Europe. We would hope to be able to utilize that structure under Fred Gehring's and Daniel Grieder's leadership to bring that business in-house and to get the most out of that business. When we move to Asia and Latin America, we don't see really any impact to the Warnaco businesses going forward. We really see those businesses continue to operate as standalone operating divisions with the strong management teams that they have in place today.
Over time, we will look at the opportunities to potentially look at some of our PVH brands, including the Tommy Hilfiger businesses, about utilizing those platforms in key countries to really get some strategic benefit of directly operating those businesses and utilizing the Warnaco Calvin Klein operating platforms in those markets to really enhance the performance of our Tommy brand in both Asia and Latin America. That's all to be worked out, and I think that's part of our long-term plan. I don't see anything happening for at least 24 months there as we really integrate this business and get it established going forward.
Thank you.
Thank you.
We'll take our next question from Joan Payson with Barclays Research.
Good morning. Thank you. I guess first off, to talk a little bit more about Europe and increasing the exposure to Southern Europe through the transaction. Are there any steps you expect to take at this point to change the strategy on the Calvin business at this point, to sort of protect against that piece of the business?
Sure. The Warnaco team, I think, has done a very solid job of already positioning that business as secure as possible. Very careful about the expansion of that business given this market, what's going on in those markets, and we think it's been very prudently managed as it's gone forward. They have been going through a transition as they've been moving some of their design and merchandising functions from Italy to London, so those are more operational in nature. I think given our scale and our systems and operating platforms, I think as they've been focused on that business turnaround, we, I think, will have an opportunity to accelerate that turnaround given the management expertise that we possess in those markets and the operating platforms that exist in those markets.
I think there's an ability to move that turnaround that Warnaco's been going through and to move it and accelerate it somewhat faster. Helen just has some comments.
If I could add something to that. The strategy that Warnaco has had in place for the last couple of years has been to continue to drive and build the Northern European business, which to date has been very strong for us. Our comps in Germany are very strong. We have a nice growing business in the Scandinavian countries. Our business in France is very strong. I think what this combination enables with the strength that Tommy Hilfiger has in Northern Europe, is for us to really accelerate then the growth of Calvin in Northern Europe to strike a very good balance between Southern and Northern Europe.
Thank you. Also in terms of goals on debt paydown, how does that change with this transaction and how are you looking at that now?
Well, I guess when we did the Tommy transaction, we were very clear that the paydown of debt would be our highest priority for the use of our cash, and I think we've delivered against that by over a three-year period, we'll be paying down approximately $1 billion in existing debt, and we've brought our leverage down to under two times. With this transaction, we would expect to generate at least $400 million a year in debt paydowns, excess cash. The priority would be to really focus on that over the next two to three years, and to bring our leverage, as we've done with the Calvin transaction, as we've done with the Tommy transaction, to bring our leverage down to our target rate, which is much closer to two to two and a half times. That would be our goal. That continues to be our goal.
I think the nature of the businesses that we operate together, both PVH and Warnaco, our heritage businesses, as well as our designer businesses, they're inherently cash flow positive. One of the characteristics, given our licensing model, given the heritage businesses that don't require significant investment, we've really been able to demonstrate an ability to pay down debt. I think this transaction should only enhance that ability as we go forward.
Okay, great. Thank you very much.
We'll take our next question from Omar Saad with ISI Group.
Thanks. Good morning, guys. Congratulations to everybody on both sides.
Thank you.
Thank you.
One of the interesting things about the split up of the various businesses and the licenses for Calvin Klein over the last couple decades, is how it can be a little bit confusing for the consumer, the difference between Calvin Klein Jeans Sportswear, and Calvin Klein Sportswear, or Calvin Klein Jeans Accessories, and Calvin Klein Accessories. There's been a little bit of a blurring on some of the lines in the brand. Can you talk about the opportunities to maybe manage the Calvin Klein brand a little bit more cohesively, in terms of how the end consumer views it, maybe in a more uniform manner globally? I wanted to see if you have any thoughts on that.
Sure. I think that will be one of the enhancements. I have to tell you, Omar, I believe that from a brand cohesive point of view, that it really has not been a major issue for us at all. We've had strong controls, and great partnership with Warnaco, G-III, throughout. North America has been by far our biggest market where we've seen significant growth, but we've also seen it in Asia or Latin America. I really think that the brand message to the consumer has been pretty clear across the board. I think this will enhance it. It'll also open up opportunities where we've had some conflict between the licensor or licensee relationship. In our men's sportswear business, I'll just give one example.
The inability for us to present denim on the collections floor in our shops has really somewhat limited the business, even though it's performed exceedingly well, but not having that where every other designer on the floor has that ability. On the jeans side, not to have the ability to have casual pants, chinos, to sit next to the denim when it's appropriate, has also created a lack of competitive advantage against some of the competitive set. I think those are just two small examples of where I think we can enhance the existing businesses as we go forward, where we don't have this conflict about who's going to get credit for the sale, who's going to get credit for the profitability as we go forward. I think that will bring cohesion to it.
I think, obviously, look, anytime you're operating a business under one roof, you will just naturally have better control. The decision-making will be quicker. It's just natural. That comes with it. I think it's something that we are looking forward to, and I think it'll help the business.
Yeah, that's great. Fair enough. Could you also talk about a lot of the infrastructure Warnaco has built up quite successfully in Latin America. How much of that will be helpful to you guys with some of your existing businesses, Tommy Hilfiger, for example, or do you need to kind of rebuild a separate infrastructure in that marketplace?
Those are all long-term opportunities that I think exist, that we really are going to have to study over the next couple of months as we look at this business. I really do believe there's so much growth left for the Calvin Klein business in Latin America, that it would be a mistake to burden that now with putting Tommy on top of that. We have great partners in that part of the world today, licensing relationships and joint ventures throughout South America, that we really think can continue to build the Tommy brand. Clearly, at some point in time in the future, and it may be three to five years out, there will be an opportunity to bring the brands together on an operating platform. Clearly, the Warnaco platform that's been built in Latin America is unbelievably impressive.
When you look at it, what they've been able to do over the last four years in Brazil in particular, but all of South America to grow that business, clearly is a testament to the management team that's in place there and the operations that they've built. I think we will continue to invest in those operations. We'll continue to invest in the marketing of the brand there to maximize the Calvin business there, and then over time, look at the opportunity for some of the PVH brands to utilize that operating platform in Latin America.
One last quick question. Could you address the swimwear business specifically? If you can, I know how it fits into the portfolio, the importance of it long term. I know there's probably a couple buyers out there who'd be interested.
When we started to do the due diligence, we've been really pleasantly surprised at the strength of the Speedo business. It has really impressed us from how it's positioned. It's impressed us how it's been managed over the last two to three years, in particular, just with the growth it's come across, then the profitability expansion and operating margins that are in the mid-teens. I think that management team has done an unbelievable job, and we have no intention of selling it at this point. You always look at what might be possible, and it is a very marketable asset. Clearly, at this moment in time, we're looking for ways to help them grow that business, invest in that business and that brand, and take it forward, because we think that management team has just done an incredible job there.
Thank you both. Thanks, guys. Congratulations again.
We'll take our next question from Evren Kopelman from Wells Fargo.
Great. Thank you. Congratulations, everyone.
Thank you, Evren.
Just three quick ones. The first one is on the timing of the deal, if there was a catalyst to drive it because the combination made business sense for a while. If you could speak to that. The second one is, you had highlighted the Tommy Hilfiger growth rate of 8%-10% recently at your Analyst Day. With the combination with the platform that Warnaco brings in Latin America, Asia, should we think about that as you think Tommy will grow at that rate, this will just make the execution a little bit easier? Or do you see upside to that 8%-10% growth rate for Tommy? Lastly, a quick one is your assumptions, the $0.35 and the $1, the $1 especially.
What level of EBIT margin do you assume in there for the Warnaco business, and also what tax rate for both accretion numbers? Thank you.
Okay. Let me take it in pieces, I guess. On the timing of the transaction, and Helen could chime in on this is a transaction that's been talked about in the market. It's been talked about between the two companies since 2004, probably, where we've gone back and forth and talked about the strategic rationale for the transaction and the business logic for the transaction, which I think is irrefutable. I think like everything else, to get a deal done in the past, there's been market conditions that have not allowed things to happen and whatever. All I could say about that is we started dialogue a few months back, before the summer. We began talking.
Helen was always looking at shareholder value and what would be best for our shareholder group, and it was very easy to come up with a rational approach to the acquisition with having a partner like that on the other side. It was something that we really were able to just get done at this moment in time. Sometimes the stars align. We were in a situation, I'll speak for PVH. We were in a situation, given our financial position, that from the Tommy acquisition in early 2010, where we took on a significant amount of leverage and debt, we just wouldn't even be able to consider a transaction on top of that.
The success of that transaction, the pay down of debt that I talked about, really, as I said at the beginning of this fiscal year, we were clearly looking at opportunities that would make sense because we saw our financial position improving dramatically. That's the color I'd give on it, and I just ask Helen to just comment.
Thanks, Manny. I think as I said in my opening comments, when we looked at this in relationship to our standalone plan, which certainly we have a lot of confidence in the business and the opportunity ahead of us, and what we were capable of delivering. In evaluating that against the offer that Manny and company put on the table, our board, in conjunction with our outside advisors, determined that for our shareholders, this was a very good full-value transaction, and really offered the best opportunity for our shareholders to realize a lot of value from their investment in the company. I think from a business perspective, again, we believe strongly that there's a lot of potential in this business, and with the combination, the ability to accelerate realizing that potential is there.
I think, based on the way Manny has laid out, just the way they're looking at the business and things that are possible, I think that potential will be fully realized. We're very excited about the opportunity for the business. We're really pleased with what value we've given to our shareholders today, and we're pretty excited and confident about the prospects for our 7,000 associates within this combined company.
I guess the second question was about the upside for the Tommy Hilfiger business. I don't think you can really plan any of that into any of your models, because the strategy in the near term, at least the next two years, would not be to do anything that would change the structure in Asia and Latin America at this point in time. We'll keep you up to speed on that as those things develop. We're really studying those businesses right now. We see significant growth in Calvin, both in Asia and Latin America, and we think the best way to approach those two markets for the next two to three years is to continue to focus on the brands independently through the management of the way we have been doing it at this moment in time.
The Tommy brand has continued to grow significantly in Asia, has had a very strong business in Latin America with a real opportunity in Brazil that we hopefully will be able to garner in the next few years there. We have a $200-plus million business today in Latin America with the Tommy brand, and a $600 million business in Latin America with the Tommy brand that we don't operate directly, but through licensing partners. Clearly there, we see us continuing that strategy with our strategic partners around the world. The benefits, I think, would be more long term than that as the businesses come online and are fully integrated as we go forward. On the synergies, I'm not going to get into too many specifics, but I would say that we are looking for $0.35 next year and $1 three years out.
When you think about it, we expect $100 million of expense savings over a three-year period. Also, I would say is that we're anticipating this year operating margins for PVH standalone of about 12.5%. With the combination, we would see that early on in 2013, approaching 13% with the synergies factored in and the mix of the Warnaco business, coupled with the heritage businesses that come together. Then we could see that operating margin growing each year about 50 to 75 basis points a year as we go forward. That's where it is. I think the tax rate, Mike is just writing me a note as we go forward. I think if you look at the two companies and blend them together, that'll give you some sense about where to take the tax rate, somewhere around 26%-27% as a pro forma rate.
Again, a lot of this needs to be worked out and finalized, as you're working on your models, I think those are reasonable numbers to use to get to an end game. Next question.
We'll take our next question from Erinn Murphy from Piper Jaffray.
Great. Thank you. Good morning, and congratulations to the team. Just a follow-up question. First, just back to Latin America, I'm sorry if I missed this earlier, but would this imply that Tommy Hilfiger would not need to necessarily sign a JV in Brazil specifically, but would use Warnaco as more of their local partner? Secondly, on the Calvin Klein Bridge situation in Europe, does this change how you're thinking about that longer term potential in Europe? Would you also think about potentially bringing back the Asian license for the Calvin Klein Bridge back in-house and controlling that globally? Just my last question would be: how does this change your thinking on some of the other licensing structures like G-III? Thank you.
Okay. I think as we look at the Calvin Klein business, let me start there. As we look at the Calvin Klein business, for Bridge in Europe, we're studying the situation. I think we would look to bring jeans and the Bridge sportswear businesses more closely aligned. We are looking now at what's the appropriate time to relaunch Bridge in Europe, how to continue the Warnaco business without having any missteps, and I think we'll bring more clarity to that over the next four weeks or so. We'll be talking to all the market participants about that.
On the broader question, which I guess really comes back to, without getting into all specifics about bringing in other license agreements, I think we'll look at those on a case-by-case basis, and we'll make a decision about what makes the most sense for us by geography, what makes the most sense for us by product category, and I think we'll do that in consultation with our licensing partners. There are benefits, particularly in the U.S. market, given the dynamic of this market with a consolidated retail customer base here and having experts in key categories like fragrance, like eyewear, like certain accessory categories, children's is another one, where probably we would not want to operate those businesses necessarily directly ourselves and be associated more with a product expert that we could have significant control over.
Someone like G-III, who you mentioned, where we've had nothing but great success in managing those businesses, growing those businesses together. I don't see us doing anything drastic in the next two to three years there, and we'll evaluate as we go forward. Internationally, it opens up the opportunity for other categories, specifically because it's not as developed some of those categories as we are in North America, that we clearly look at what some of those opportunities might be for us to operate directly. Also, with the platform that we have in Europe, that we might want to take more direct control of some of those categories as we do with Tommy. That might make sense. Again, nothing has been decided. We'll do these things in consultation with our licensing partners to make all those decisions, and I would think those are all relatively long-term decisions.
I see nothing happening over the next 18-24 months in a material manner there. We'll take the next question.
We'll take our next question from John Kernan with Cowen and Company.
Good morning, guys. Congratulations.
Thank you.
Manny, you really over-delivered on the Tommy accretion targets you set out back in 2010. Within the dollar EPS accretion target you're laying out now, what type of revenue synergies are embedded in that, and where do you think you could potentially be erring on the side of conservatism?
Since my conservative sandbagging nature precedes me I will try to live up to that and say, I'll just make a couple of comments just for clarity purposes. We haven't built in the three-year projection that we've given here, any significant revenue synergies in the model. We are assuming that the businesses will continue to grow. We continue to target for Calvin an 8%-10% top-line growth from a global retail sales combination of licensing and directly operated. It's a similar number for Tommy, we haven't really put anything additional onto that, and I would hope that we can over-deliver against that. At this time, I'm really not going to get into any, as you would expect, I'm not going to get into details above that.
I think right now, given the $0.35 that we've given, I think that's a real strong target for us to shoot for and hopefully exceed in 2013. I think as you look out three years, $1 of accretion on top of the kind of growth that's been factored in for PVH on a standalone basis of mid-teens, 14%-16% kind of earnings per share growth. To put $1 on top of that, I think is sufficient pressure to put on the management team and the business at this point. I'll just leave it at that, and hopefully performance will be indicative of what future performance is, and we can over-deliver against those projections. Thank you.
Great. Thanks. I guess one more follow-up to that would be, this is obviously a transformational type acquisition. What do you think the biggest risk to this acquisition is as you look at the model and look at kind of the strategy going forward?
Well, look, I think anytime you do. We never underestimate at all an acquisition, especially one of this size. If you really think about it, its complexity. If you just put it in perspective, this would be much easier to manage if a $2.5 billion of revenue were all in North America and focused here under this platform. That would be much more simple. The Warnaco business is a very complicated business. Its business is very geographically diverse. That's what creates all the opportunity. In some respects, from an integration point of view, that's what puts some of the pressure on to really be focused on it. I think the biggest risk is the geographic expansion of Warnaco and integrating all of that in, and the global nature of the business that we will be taking over.
We're in no way underestimating the challenge that's ahead of us as we go forward in some of those markets. We will be very prudent about that, very focused on that, and we will not be rushing the integration. We'll try to manage it in a way that makes the most sense from an operating point of view and a brand point of view.
Congratulations, and good luck.
Thank you.
We'll take our next question from Eric Beder with Brean Capital.
Good morning. Let me add my congratulations.
Thanks, Eric.
Thank you, Eric.
You mentioned that the licensing revenue next year is about $170. Is that basically delta what we're seeing this year and next? That's the loss from the shift over in licenses?
I believe, yeah. That's correct. I think that the Warnaco royalty revenue is round numbers, very round, is about $100 million. If you take that out of our royalty base, I think you come to a number that's approaching $170 million-$175 million.
Great. How do you look at, in the U.S., Warnaco? I know that you have outlet stores. Does this give you the potential now that you control all the brands to do full price stores? I know Warnaco talked about doing underwear standalone stores. How do you look at the full price store potential for Calvin Klein down in the U.S.?
I think it's something that we really will look at. We're already looking at Calvin Klein full-price accessory stores in the United States. We've got a great business model that seems to work in a couple of stores. It needs to be fully tested. Warnaco has an underwear model that clearly works. There's two tracks to go down. For the Calvin business, would a regular price retail store be a profit opportunity that you would roll out to 50-75 stores? That's something that we'll look at, given the bringing together of the two companies and not having to share the margin on jeans and underwear, and being able to have it under one roof makes it a much more compelling story. Also from a brand point of view, we have a number of specialty stores already in North America.
I would imagine that this would only enhance our ability to have more from a brand-building point of view. We would look at it from that point of view as well. Clearly, there's a regular retail opportunity as we go forward that we'll explore.
Okay. Again, congratulations on the deal.
Thank you. We've got time for two more questions. As you can imagine, with everything that's going on today, and our need to speak to our people and some of the press, we're up against it a little bit. Operator, we'll take two more questions.
We'll take our next question from Steven Marotta with C.L. King & Associates.
Good morning, everybody. Quick congratulations as well. Manny, can you talk a little bit about the sourcing opportunities with the increased volumes associated with Warnaco's business on top of your platform? Can you talk a little bit about the gross margin opportunities going forward? Additionally, is this included in your assumptions under the $1 in year 3 EPS accretion?
No. I was trying to be very clear. We've included expense synergies and quantifiable expenses that you could really feel, touch. There's clearly an opportunity on the revenue side and an opportunity on the core side to garner savings. Now, on the product side, what we would have to determine is, would we want to put those core savings back into the product to just enhance the overall level of the product for our product categories, the Warnaco product categories? I don't expect all of that to fully fall to the bottom line. There is an opportunity. We've got all sorts of ranges, what that could be worth, but we're looking at it. You can be sure we're focused on it, and it's not factored into the projections as we go forward.
Terrific. Thank you. In conjunction with this release, you also commented on current quarter and year trending at the high end of your range. Do you want to amplify that a little bit on Europe comps or domestic comps, or speak a little bit about that additionally?
Sure. I'll give you just a little bit of background. Business continues to be good, absolutely, these last three days in dealing with all the craziness in the Northeast that we've had to deal with. I guess I'd say to you, as the quarter ended, where comps in Calvin and the Tommy retail businesses in North America ended in the high single-digit range. Tommy Europe was in the low teens from a comp point of view, and our Heritage Business comps were about flat in North America. Again, the trends continued. We've seen no real slowdown in business. Our wholesale trends against plan and retail selling at retail have been strong. We're at or ahead of plan with mostly all of our businesses. We feel good about this year and how it's shaping up from PVH's point of view.
Terrific. Thank you very much.
This will be our last question.
We'll take our final question from David Weiner with Deutsche Bank.
Good morning. Congratulations to the team there on the acquisition. A lot of questions have been asked, just on China, I don't think any comment was made on that. You've given the game plan for Tommy in prior calls. Can you kind of maybe talk about how that might change going forward with the new combination of brands? Thanks a lot.
Okay. I don't see it changing at all. We have a joint venture in Asia that is contractually established for the Tommy business. We have it with the strong partners that have been with us for a number of years. The business has been performing exceedingly well. It is not as nearly as big as the Calvin business today, but it is over $80 million this year. Growing very strongly for us and growing very profitably as it does expand. I think that business needs to be nurtured. That business needs to be brand focused the way it is. Fred and his management team are totally focused on that, the positioning of the brand, not only in China, but the rest of Asia, and its premium position throughout Asia is critical for us.
For China, the rest of Asia, I don't see anything impacting the structure of the Tommy business for the next 2-3 years. I think it is something we will study long term. Clearly, this gives us the opportunity. We had talked about from the acquisition that there was a five-year plan over time to potentially bring in some of those Asian businesses, those joint ventures. This gives us now an operating platform that would give us greater confidence when we decided to do that, but I don't think it is really accelerated any of our plans at this time. Something that needs to be studied, and it is clearly not something that is going to impact us for the next 24 months as we go forward. With that, I would like to thank everyone for joining us today.
I sincerely thank Helen for being here, for taking the time and running around crazy with everything that is going on. I meant to mention at the beginning of the call that I hope everyone is safe and sound and with their families as we all go through this crisis in the New York metropolitan area, on the East Coast overall. We are constantly reaching out to our associates, both at Warnaco and at PVH, to make sure everyone is safe and secure, and we keep them in our prayers and our thoughts. Everyone stay safe. We will be around for questions if there is any follow-up to this. We look forward to seeing you in the coming weeks. We will see you on our third quarter press release calls. Thank you very much.
This does conclude today's conference. Thank you for your participation