Good day, everyone, and welcome to the PVH Corp. 1st Quarter 2012 Earnings Conference. 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 expressed 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 certain forward looking statements that reflect PVH's view of future events and financial performance as of May 23, 2012. All statements are subject to risks and uncertainties indicated from time to time in the company's SEC filings, including those identified in the company's Safe Harbor statement that is part of the earnings press release that is the subject of this webcast and call. These include the company's right to change its strategies, objectives, expectations and intentions, if need to use significant cash flow to service its debt obligations, its vulnerability to weather, economic conditions, fuel prices, fashion trends, loss of retail accounts, disease epidemics, war and terrorism, availability of raw materials and other factors. Its reliance on the sales of its licenses and retail customers and its and its exposure to the behavior of its associates, business partners and licensers.
Therefore, the company's future results of operations could differ materially from historical results or current expectations as more fully discussed in its SEC filings. The company does not undertake any obligation to update publicly any forward looking statement, 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. A reconciliation of these measures is included in the company's earnings release, which can be found on the company's website, www.pvh.com, and its current report on Form 8 ks furnished to the SEC in advance of this webcasting call. On today's call, we have Mike Schafer, EVP, Chief Operating Officer and Chief Financial Officer of PVH Corp and Manny Sherico, Chairman and CEO of PVH Corp.
At this time, I'll turn the conference over to Manny Sherico. Please go ahead, sir.
Thank you, Roger. Joining Mike and myself on the call is Dana Perlman, our Treasurer and Senior Vice President and Charge of Investor Relations Alan Serkin, our President and Chief Operating Officer and Ken Duane, our CEO for North American Wholesale. In general, we're very pleased with our Q1 results. We beat the top end of the guidance by $0.05 And given the momentum in our business, we also increased our 2012 earnings guidance by 0.05 dollars to $6.15 to $6.25 Let me jump into some of the businesses. I'll start with the Tommy Hilfiger business.
The Tommy business continued its strong momentum during the quarter. We posted an 8% revenue increase and a 13% increase in operating income. When you take out the foreign currency headwinds that we felt in the Q1, our operating performance was just outstanding. On a constant currency revenue basis, they were up 11% and operating income was up 18% for the quarter. Focusing in on our international businesses, the Tommy International revenues were up 9% in local currencies.
Our retail comps in Europe posted a 5% increase for the quarter, while wholesale revenues were up 9%. Geographically, we continue to see strong growth in Central, Northern and Eastern Europe, partially offset by softness in Spain and Italy. On a product category basis, we saw strong performance in men's and women's sportswear, denim and footwear. Overall, saw strong sell throughs within our retail department store accounts throughout Europe and feel like we're gaining significant market share during this turbulent time in Europe. Moving to our North American business, we posted a 12% increase for the quarter, driven by a 16% comp store sales increase in our retail businesses and mid single digit growth in the Tommy wholesale businesses.
We continue to elevate product and gain additional floor space in top doors at Macy's, which is fueling the brand's exposure. We see tremendous momentum in this business and strongly believe that the significant investments we are making in product and in our marketing programs are paying dividends for us with the consumer. In North America, we're experiencing a 10% increase in our average unit retails out the door at both wholesale and retail. We strongly feel that our marketing and product initiatives only intensify in the second half of the year and believe we are well positioned to continue to exceed our plans for the balance of the year. For 2012, we are planning our overall Tommy revenues to grow 7% to 8% on a constant currency basis.
Given the uncertain economic environment, we are planning our revenue growth more conservatively for the balance of the year than the current business trends would indicate. Moving to our Calvin Klein businesses, these businesses continue to exceed our financial directly reported a 12% increase in sales in the quarter. This strong performance was driven by our Calvin Klein retail businesses, which posted a 9% comp store increase and equally strong performance in our wholesale businesses. The business is experiencing comp store sales increases and growth in square footage. The square footage growth is being driven both by new doors as well as the expansion of existing doors and shops.
For the year, we are planning our Calvin Klein wholesale and retail businesses to grow about 10%, which will be driven by a mid single digit comp store growth in our own stores and growth in square footage at both wholesale and retail. Moving to the Calvin Klein licensing segments, licensing revenues were up royalty revenues were up 2% on a constant currency basis. The business posted strong revenue growth across all regions with the exception of Europe. Specifically, North American sales were up between 4% to 5% despite a significant reduction in jeans sales to the value channel. Asia sales were up 6 percent driven by double digit growth in China, partially offset by soft sales in jeans and underwear in Korea.
Latin and South America sales were up 10% driven by Brazil and Europe sales were down 8% and I'll put some more color on that. Focusing in on some of our key businesses with our key licensing partners, the overall Wanaco business was down about 6% on a constant currency basis in the Q1. This reduction was due to 11% decline in jeans driven by poor performance in Europe and a $30,000,000 planned reduction in U. S. Jean sales sold to the secondary channel.
Moving to Calvin Klein underwear, revenues were up 3% for the quarter, led by strong growth in both U. S, Asia and South America. Our men's business continued to perform well, up 7% for the quarter with the launch of bold that is driving that growth. Women's was down slightly in the quarter, reflecting the timing of new product launches versus 2011. In 2011, we had the CK1 launch with that significant fixture fill in the Q1.
For 2012, our launches are much more second half driven. And for women, we have the launch of Push Positive, which is an innovative new product for women's Calvin Klein underwear. Moving to fragrance with Coty, our fragrance business continued its strong performance across all regions. For the current year, our new fragrance launch schedule is all second half weighted compared to last year's spring launch of CK1. Despite that timing issue, fragrance sales were flat for the quarter and well ahead of projections.
We continue to see strong performance from our Euphoria, CK1 and Calvin Klein Beauty franchises. For the second half of the year, we have 2 new product initiatives planned. The first is a new men's fragrance for fall, which will be called Encounter. And the second is a new global marketing and advertising campaign for Euphoria, our largest fragrance franchise. Both of these launches will be supported by significant marketing and advertising spends as well as new celebrity talent, which should fuel significant growth in the second half of the year.
We will have much more to say about these two exciting initiatives on our Q2 earnings call in August. Moving to our U. S. Women's business, our North American U. S.
Women's Apparel and Accessory businesses were very strong in the quarter. Our royalty revenues with our licensees G III and Gymblar were up over 15% for the quarter. On the apparel side, this growth is being fueled by the strong selling of women's sportswear, women's performance, dresses and suit. In footwear, revenues are ahead about 20% with strong growth in both the men's and women's businesses. In addition, our new handbags and accessory business continues its very strong performance.
G III has seen excellent sell throughs at all department store accounts. We are targeting 20% growth for this category in 2012. Our CK Bridge business in Asia continues to grow dramatically, posting an 8% increase for the quarter. We expect this business to grow about 20% for the year. The growth is being fueled by the China, Korea and Hong Kong markets where we are experiencing significant door expansion and comp store sales growth.
For 2012, we are planning the overall Calvin Klein loyalty growth more conservatively than in prior years due to the uncertainty in Europe. We are now planning royalties to grow at a constant on a constant currency basis at 3% to 4% compared to our prior guidance of 4% to 5%, with foreign exchange providing about a 200 basis point headwind. The primary driver of this reduction is the weakness we see in Europe, particularly in the Wanaco apparel businesses. In order to take the financial risk out of those businesses, we are currently projecting the European Jeanswear and CK Bridge businesses at contractual guaranteed minimum royalties for fiscal 2012. As such, our overall European royalties are being planned down in the high single digit range for 2012.
In North America, our royalty revenues plan call for high single digit growth with department stores being partially offset by a $30,000,000 planned reduction in sales to the off price channels, resulting in overall North American royalty growth of mid single digits in 2012. Moving to Asia and South America, we see these two regions continuing to grow at double digit rates. Retail store square footage coupled with strong comp store sales increases will drive the growth in these regions. Our heritage businesses revenues were down about 3%, which was on plan and in line with our previous guidance. Retail comparable sales growth of 3% was more than offset by 6% decline in wholesale businesses.
Our heritage business is in turnaround mode and we feel we are very well positioned in this business. Our formal orders are on plan, inventory levels are in line with our retail sales plans, second half product costs are decreasing in the range of 5% to 8% and our in store presentations are being enhanced and expanded with key customers. All of this gives us a high degree of confidence that we'll see a dramatic improvement in this business in the second half of twenty twelve. Let me move just to some of the trends we're seeing at the beginning of the second quarter. Our Q2 in May is off to a strong start.
In particular, business trends in our Calvin Klein and Tommy Hilfiger businesses continue to outperform our plans. In our U. S. Retail businesses, the comps for Calvin Klein are running up about 7%, while the comps for Tommy are running up about 12% against mid single digit comp store plans. Comps for our heritage business are running up low single digits in line with plan.
In the U. S. Wholesale portion of our business, both the CK and Tommy Hilfiger businesses continue to perform ahead of sales plans and we continue to see increases in our out the door retails. Heritage continues to be challenging, but but we're moving through inventory and seeing improvement in spring and summer sell throughs. Moving to Europe, wholesale, which represents about 70% of our business continues its strong momentum.
Our spring and summer 2012 season, which started shipping in the 4th quarter is ahead 13% against last year. For the fall holiday 2012 season, our order book is up 4% to 5%. At retail, our comps for Europe have improved from 5% to high single digits against a 3% comp store plan. Finally, we've been prudent with our guidance and our estimates. We believe we have taken a significant portion of the risk out of the Calvin Klein European royalties by planning the jeans and CK Bridge royalties at contractual guaranteed minimum royalty levels.
We feel that we've put together sales and operating margin projections that we can not only meet, but if business trends continue, we can exceed as we go forward. We believe that the momentum we have seen in our Calvin Klein and Tommy Hilfiger businesses will continue to drive our growth and should allow us to continue to outperform our current projections. And with that, I'll turn it over to Mike to quantify some of our guidance and our results for the quarter.
Thanks, Manny. The comments I'm going to make are based on non GAAP results and are reconciled in our earnings release. We're very happy with Q1 results. For the quarter, we delivered revenues and earnings per share above our guidance and greater than the prior year. Our revenues for the quarter increased about $60,000,000 or 4% over the prior year and were about $35,000,000 greater than our previous revenue guidance.
Revenue growth over the prior year was driven by increases of 8% 7% at Tommy Hilfiger and Calvin Klein respectively. Our Tommy Hilfiger revenue growth of 8% includes a 3% or $20,000,000 FX hit. On a constant currency basis Tommy Hilfiger revenues were up 11%. We delivered earnings per share of $1.30 for the Q1, which was $0.05 greater than our guidance of $1.25 6% greater than the prior year. Our earnings per share beat was driven by stronger than expected revenues for Tommy Hilfiger and Calvin Klein as our gross margin and operating result percentages were in line with our previous guidance.
Moving to our guidance for 2012. We've raised our full year EPS guidance to a range of $6.15 to $6.25 an increase of 14% to 16% over the prior year. Revenues are planned to be up 5% to 6% excluding the impact of foreign exchange and our discontinued businesses. Including the impact of foreign exchange and discontinued businesses, we're expecting revenues to be up 1% to 2%. Tommy Hilfiger revenues are planned to be up 7% to 8% on a constant currency basis with Tommy Hilfiger North America increasing 5% to 6% and Tommy Hilfiger International increasing 8% to 9% on a constant currency basis.
Including the negative impact of foreign exchange, we're expecting total Tommy Hilfiger revenues to be up 2% to 3%. Calvin Klein revenues are planned to increase 6% to 7%, while our ongoing heritage businesses are planning revenues up 1% to 2%, excluding the impact of exiting our ISOD Women's and Timberland businesses. Our total heritage revenues are planned to decline 4% to 5%, including the negative impact of related exited business. Gross margins for the year are planned up about 125 basis points with expenses for the year planned up about 50 to 70 basis points, due in large part to an increase in pension expense. Impacting our gross margin and expense in 2012 is our mix of business as a result of faster growth in our higher gross margin and higher expense Tommy Hilfiger and Calvin Klein businesses.
Operating margins for 2012 are planned to increase about 60 to 70 basis points over 2011. Our tax rate for the year is planned to 23.5% to 24% and reflects the continued benefit of additional foreign earnings, which are taxed at a lower rate than domestic earnings. Interest expense is planned between $115,000,000 $117,000,000 reflecting a reduction to the prior year as a result of debt repayments. We currently anticipate to make $300,000,000 of term loan payments in the current year. For the Q2 of 2012, earnings per share is planned at $1.18 to $1.20 or an increase of 10% to 12% over the prior year.
We're planning our revenues to increase about 4% to the prior year, excluding the impact of foreign exchange and exited businesses. Including the impact of foreign exchange and exited businesses, we're planning our revenues basically flat. Our gross margins for the Q2 will be up about 125 basis points with all businesses planned to show gross margin improvement as we begin to sell full product later in the Q2, which is showing cost decreases of about 5
percent to 8%.
Overall, operating margins will be relatively flat for the 2nd quarter as expenses are up by mix of business and as a result of the pension expense increase. Our tax rate for the 2nd quarter planned at 26.5% to 27%. And with that, we'll open it up for questions.
Thank you. We'll go first to Bob Drbul at Barclays Capital.
Hi, good morning.
Good morning, Bob.
Hi, Manny. I guess the first question I have is a bigger picture question, Manny. When you look at the European outlook and the performance of Tommy, are you more concerned about your heritage business performance given the Q1 results or are you more concerned about the outlook on the European side?
Look, I guess we get paid to worry about everything. But on balance, I think is I feel very confident about the heritage turnaround because the business is in front of us. We see the cost declines that Mike discussed of 5% to 80%. We see where we're positioned from an order flow with our retailers. The inventory is in line.
We can if the inventories are controlled and we just continue to see the kind of sell throughs that we're experiencing in spring summer, we should be very well positioned for second, 3rd and 4th quarters to outperform our guidance and to really see significant improvement in the second half of next year. So that seems to be within our grasp. And the only thing that could really screw us up is if inventories get out of line and we lose control of the promotional agenda, which I just don't see happening at this point. Europe, we've consistently seen strong performance there since the acquisition of Tommy. We're now on our approaching now our 30th month of running that business and feeling very strong about the trends in the business, feel very strong about how that business is happening.
And but you have to be concerned what you read in the paper and the constant drumbeat that goes out there. So it's really a balancing. I read the headlines and then I look at our daily sales reports and we continue to comp mid to high single digit comps there and we see our spring summer retail sell through is very strong. So I know we're gaining market share. I know we're doing everything that's in our control to manage that business.
And if Greece pulls out, I can't tell you what kind of impact it's going to have on the consumer and where it is. So there's this uncertainty that just overhangs the business. I think that's why we've been much more cautious with our guidance. Given all of that, I couldn't be more confident given where we are in the world that we're going to deliver or exceed the guidance that we've given to the Street. It just seems like there's a lot of momentum in all of the businesses we operate.
Got it. And in terms of the progression of the comps in Europe, can you just talk about like if was there a major change from the beginning of the quarter until sort of where you are right now through the Q2?
No. I think the trend has been pretty consistent. It's just all of it has just moved. So in the last 3 or 4 weeks, we've just seen business get better almost in every market from what it was 3 months ago. And it was obviously the plus 5 moving to high single digit comps for the next for the last 3 weeks.
Now reading into that, it's a 3 week trend, feel very good about it, but I'm not ready now to take that and extrapolate it out yet. So at this point in time, it gives us confidence and it makes us feel good about that obviously the spring and summer lines are very strong and the consumers reacting to it. But I wouldn't want to draw any conclusions of the economy in Europe overall.
Great. Thanks very much. Good
luck. Okay.
We'll go next to Adrienne Shapiro at Goldman Sachs. Thank you. Manny, when you initially provided guidance in January of this year, it seems as if what has changed since then besides the fact that obviously we're starting off with a strong beat and you're passing that on. On one hand, the world has gotten a bit scarier, but on the other, it seems like you've taken out risk to your guidance, especially with the Calvin Klein business now planned at contractual minimum. So maybe in terms of where we sit today versus where your head was at in January, you provided the initial guidance, how you feel about the remainder of the year, especially with the back half being better than the first?
Sure.
Well, look, I think
when we let's put it in perspective. When we first came out in January, we said that the first half would be flat to down. And right now, the first quarter was up earnings per share 6% and the second quarter we're guiding now to a 10% to 12% increase. So clearly, what's in front of us, we feel really good about. And that's enabled us to do a couple of things.
It's enabled us to take some of the risk out of the Calvin Klein royalty business by taking future royalty in Europe down and also at the time we were looking at a euro that was 130 and now we're projecting something more like $1.27, $1.26 So clearly we factored that into it as well and took those EPS hits while raising guidance January of probably $0.15 So, feel much better about the tone of business right now, but I just don't have a crystal ball to tell you how everything is going to actually come together in the macro environment.
Great. Okay. So in light of the Q1 6%, 2Q 10% to 12%, we should still be thinking about the back half better than the first half, even though you had thought it was going to only going to be flat to down. That still holds true that the back half still presents an opportunity. Yes.
Just the math, I don't have it in front of me, but the earnings per share growth in the back half of the year is well in excess of 15% when you put it all together since we're growing at the top end of the guidance 16 percent. So clearly, I don't have the math in front of me, you guys can do your own. But based on our guidance, we're looking for even a stronger second half. I think 2 things are going to fuel that. Overall, just a natural flow through of the cost declines that are in the system have been ordered, booked and in place.
And we should really we're feeling more and more confident about Heritage getting back on to its track of delivering steadier earnings, 9 out of the last 10 years. So with the exception of the blip that we had last year with Heritage, with all the chaos in the market, we really feel strongly that business gets back on track second half of the year.
And then Manny, just following on that, it's exciting to hear that you see opportunity for heritage to get back on track. But on the flip side, we're obviously seeing some pretty strain out of J. C. Penney with comps down 19% in Q1. Maybe help us think about how you're getting more excited about heritage, but we're obviously seeing some challenges as J.
C. Penney tries to transform that business.
Just on a couple of levels, Our overall on the heritage side, we sell everyone. So I think that's important to take into consideration. On the heritage side also, the key with the in the PennEast situation from an operating point of view, I think is to make sure your inventories continue to be on plan. Now everybody was surprised business was softer in the Q1 for PennEast and we've adjusted all of our inventories and our flow and our order book to really take that into consideration. One of the advantages we have going on is we have 2 new brands at JCPenney that didn't we have one new brand at JCPenney that didn't exist, which is the Arrow business, which is growth against last year.
And in addition, the Izod business, which is in the same number of doors, but is getting stronger presentation and deeper buy is very positive for us as well. So all those businesses at PennEast, as tough as the PennEast business has been, all they're using our ARO and our Izod business for the Q1, we're right on plan against our projections. Our inventories are in line and we've just adjusted the inventory flow and the inventory purchasing for the back end of the year. So that's what's happening there. Offsetting whatever chaos that Penny is creating in the market is just very strong business with Macy's with our heritage brands and very strong businesses at Kohl's with our businesses there as well, both sportswear and dress shirts.
So that flow is really coming back and the order flow seems to be in place for us.
Perfect. Best of luck.
Thank you.
We'll go next to Omar Saad at ISI Group.
Thanks. Good morning, guys.
Hey, Omar. Hey, Omar.
Hey, guys. Man, we've been hearing some rumbling about in Europe that some department stores are getting a little bit more cautious in terms of their planning given all the kind of macro and headline stuff that you mentioned. Are you guys seeing department stores kind of look to maybe cut orders a little bit just to manage inventories a little more tightly? And then how do you feel overall about the inventory levels in your business at retail in Europe?
Okay. We're not seeing with any of the major accounts any cancellations at all on the Tommy business. For fall and holiday, as you could see in the open to buy, our sales order flow and our order book, we're planning the business 4% to 5% based on the order flow. So clearly, based on 5 or 6 consecutive seasons since we've been operating the business of double digit growth, open to buy dollars has shrunk in the second half of the year, retailers getting their inventories back in line. And that's all factored into our 4% to 5% growth in the wholesale business for the second half of the year.
We're not seeing any attempt by the retailers to cancel goods at this point. We believe Tommy, unlike most of the brands in Europe, continues to gain market share in this environment and has been a proven performer at retail with our key customers. So they continue to get behind that brand and we haven't seen any softness in that business at all. Whatever orders that we have canceled has been more our decision from a credit point of view with some of our smaller specialty store accounts, but clearly immaterial to the overall business and feeling good about out of business seems to be projected progressing.
Got you. Thanks. That's really helpful. And then could you step back and think about the success you guys are having with that brand and the management team has been excellent. The execution has been great.
We were starting to hear other brands over there comping down, comping down mid teens, even in Northern Europe. It's not necessarily just this kind of Southern Europe, Northern Europe split.
I know stepping back and
you think about that business, why how could you explain what's your explanation of why it's doing so well? Is it just execution? Is there a fashion trend in Europe where they have that Tommy Hilfiger preppy red, white and blue fashion is in fashion right now? What are your thoughts on that? Thanks.
Look, this is one of those things that you can never really put your thumb on exactly why we're outperforming. But clearly execution is a big part of it. I think the management's team for merchandising point of view, product assortments point of view, really staying on top of it. From that point of view, I think it's always been a strength and continues to be a strength of the Tommy brand. I think to some degree, we are in a preppy traditional very much color focus from a brand point of view.
I think that does benefit the brand to a degree. But again, we're up against a lot of competitors that fill that bill as well and gaining market share. So I really believe it comes out to execution and product assortment. And I think is the intensification of the marketing that's been going on for the last 24 months has really been a key both in Europe and in the United States from that point of view. So I think that's the best I can do from an explanation and looking and just monitoring the business and not seeing any kind of slowdown in it at this point.
All right. That works for me, Manny. Thanks a lot. Great job.
Me too, Omar.
We'll go next to Avren Koffelman at Wells Fargo. Hi, good morning. Thank you. Your North America outlet business seems to really have outsized growth ahead of your other channels. Can you talk about why kind of the reasons behind that?
And also how is the profitability in that channel relative to your other channels?
Sure. I guess, look, I think where we're seeing the most outstanding growth is with Calvin and Tommy. Our heritage brands are doing fine low single digit comp increases, which are on plan delivering. I think the outlet channel, that channel in general is a robust channel. I think there is a significant international tourist component to that in key markets, Florida, Vegas, the New York Metro market, the West Coast.
And I think we benefit dramatically from that both with Calvin and Tommy. And we have not seen any slowdown in that tourist inflow at all. So business has been it's both from a domestic tourist flow, which I think will only intensify in the summer and from an international tourist really adding to the business. Our biggest international tourist for most of those key markets continues to be Brazil and both the Tommy brand and the Calvin brand are extraordinarily strong in the Brazilian market. And when they come here, they shop significantly in that channel of distribution.
So I think those are some of the reasons why we're doing as well as we are. And I think the last reason is we've also really focused in on some key markets, expanded stores in those markets to take advantage of the growth that we're seeing and have been able to really capture more market share because of that.
And how is the profitability?
I'm sorry. The profitability in our Tommy and Calvin businesses are one of the highest in our franchise. So it's somewhere in the 11% to 13% range.
Thank you. We'll go next to Howard Douban at RBC Capital Markets.
Thanks guys. Great quarter. Maybe just some more color on inventories and how you feel about kind of carryover in your inventory if there is any and how you're planning inventory for the fall season?
Yes, I think inventories are in terrific shape in house and also a bit as we can tell, we monitored weekly at retail and department with our key department store accounts. We really jumped on the fall holiday inventory mid Q4 to really keep ourselves well balanced. So I feel like we're I guess on two levels, I think we're in an excellent position. We're in an excellent position from a quality point of view from a quantity point of view and being able to stay out of trouble on seasonal goods. But we're also very liquid and been chasing and I feel confident that as sales hopefully materialize above all plan that we'll be in a position to capture that.
So I think we've really been able to balance that, particularly in some of our quick response in our EDI businesses, dress shirts, in particular, neckwear, we've been really able to be very liquid and stay on top of that in order to drive that business. So I think that will continue.
Great. Thanks.
We'll go next to Robbie Ohmes of Bank of America Merrill Lynch.
Hey, Manny. Good morning.
Good morning, Robbie.
Hey, two questions for you. The first question was just the strength of the AUR, the Tommy Hilfiger AUR up 10%. Can you walk us through the timing of when the AUR tailwind began and when you anniversary that? And does that mean if I look at Tommy's comps in North America up 12% that 10 points of that is AUR? And sort of if so, how you're thinking about AUR in the, I think, the fall season?
I think you start to lap that. And then the second question on heritage. So Izod, I think you're doing the shop in shops with J. C. Penney and then you mentioned Arrow going into J.
C. Penney. I was just I remember historically there was sort of a desire for some exclusivity from Macy's versus Kohl's and Penney and Kohl's versus Penney and it sounds like Arrow and iZot are sort of broadening distribution and maybe being less exclusive. Can you just sort of walk me through what's changing there with your partners? Thanks.
Sure. I guess there was a couple of questions there. On the Tommy AUR, we've experienced AURs improvement in Tommy and Calvin really starting in the last year. So we are we've already anniversaried some of that. Last year's AUR increases, first half of the year were close to 4% or 5%.
Springs that was in spring summer. When we move to fall holiday, it kind of went to high single digits and now we're seeing about a 10% increase. I think that gets driven by a couple of things and we're looking at like to like products, so mix plays into this. So it's not just everything, it's not just that overall everything is 10%. But when we look at like for like product, we're seeing 10% out the door retail increases.
So it really is being driven by a combination of a couple of things. AUR is a key component. It's not quite as the percentage that you described, but it's probably 50% of the increase is being driven by AUR and 50% of the increase is being driven by units conversion, some of the other metrics at retail. On the exclusivity question for some of our heritage brands, first, let me take it in pieces. Arrow is basically a Kohl's JCPenney brand.
It's not at Macy's at all. The eyes are C. Penney brand. It's not at Macy's at all. The Izod brand is at J.
C. Penney. It's historically always been at J. C. Penney.
It's been there for the since our acquisition back in 1993. It has always been the halo brand for JCPenney. And I think what hurt that business is when American Living went into that business and attempted to be the halo brand and then couldn't transact at the prices that eyesore transact at and was selling at in all reality 50% below the eyesore price point. And that basically took a big piece of that business that business began to shrink. With the new management team at JCPenney, they've really taken a different focus, taking the American Living brand out of Pennies and have really focused in on IZOD as the halo preppy traditional brand at the store.
For Macy's, we are there we are a main floor brand. We compete with Levi's and some of their private labels. So it's a somewhat different strategy at Macy's. It's more of a category business as opposed to a lifestyle business. And it's based on historical performance, Macy's has continued to have the IZOD business on the men's side of the floor in a big way, where Pennies is added across multiple categories.
So that's the best I can give you a sense of it. And we believe that distribution will continue because the brand works within the strategies of both of those retailers.
No, that's really helpful. And just really quickly, Manny, so a lot of your confidence in the turnaround in Heritage is it sounds like you're picking up the American Living business in your fall shipments into J. C. Penney. So I would assume JCPenney is going to be on a year over year basis your strongest heritage wholesale customer in the back half.
Is that right?
No. Macy's will still be larger than JCPenney overall in the IZOD business. The IZOD business will be a strong business at pennies and it will grow as it performs and gets to a certain level. The improvement in heritage is all about gross margin and it's all about the significant clearance and promotional activity that went on in the 3rd Q4 of last year. Our margins in the 3rd Q4 combined will be down between 4500 basis points.
We are anticipating getting half of that back. We could do better than that and we're in a strong position to really do that. So it's much more margin than it is sales.
Got it. Thanks so much Manny.
You're welcome.
And we'll go next to Jeff Klinefelter at Piper Jaffray.
Yes. Thank you. Manny, I was just curious if you could share a little bit of perspective on comparing, contrasting maybe the Calvin Klein business in Europe, the Tommy business in Europe. I mean, clearly there are more challenges in the apparel side for the Wernicco Calvin Klein business. And do you see that as regional, more exposure to the South?
Are there issues in pricing product? Maybe just a little bit more context around that, given the relative outperformance for Tommy. And then also that very strong op income growth in Tommy in the Q1 and your success in driving marketing dollars to that brand. Maybe a little bit more color on what your expectations are for profitability in Tommy for the year?
Sure. I guess I'm going to give the second part of that question to Mike. I'll deal with the first part about the comparison between Calvin Europe and Tommy Europe. I think you hit on one of the key factors. One of the key factors is the strength of the Calvin business has historically been Southern Europe, where the Tommy business, Southern Europe, Spain and Italy represent probably 20%, 25% of the business where it represents 65% of the Calvin business.
So I think how the brands developed, Tommy is much more geographically balanced than Calvin, particularly on the apparel side of the equation. And I think the real issue we're having in Calvin in Europe, if you really focus on the product category is really on the apparel side. And it really is the sportswear, the bridge apparel, which hasn't been successful since its launch and the jeans business, which Wannakos talked about in great length and I'm not going to speak for them, but clearly they are putting initiatives in place that mirrors some of our design focus, how they're focused on design, how they're centralizing it, at the same time trying to localize it to get a benefit out of that. We applaud all those initiatives. We think they'll start to pay dividends in 20 13, probably not going to really be able to see that much in the business this year given lead times and cycles.
So I think those are really some of the key drivers that are going on. We'd like to see better presentation of product and we'd like to see better product offering. But I think the regional focus on the Calvin business versus the Tommy business is the biggest change. And then I'll just I'll make Mike put a little bit of color on the timing profitability for the balance of the year.
Jeff, Manny has really talked about it. But just in general, operating margins for the Q1 were down about 125 basis points. As we look to the Q2, they're flat. And for the year, they're up 100 up about 60 to 70 basis points. So obviously, the bulk of our improvement for the company is coming in the second half of the year as we've talked about.
And driving that in particular are gross margin and costs. So as we look to Tommy, they will also have a significant improvement in the second half due to that product the cost of product decreases and the gross margin improvements.
And I guess, Jeff, if you're asking, where do we see the Tommy business? I guess, look, we see the Tommy profitability somewhere between 12.5% 13% operating margins for the year. And then directionally looking out, we really think those operating margins start to move between 13% to 14%, 13% beyond. So I think just getting that cost dynamic back in balance and taking advantage of the growth that we're seeing in leveraging SG and A line, I think will drive the overall profitability.
Thank you. That's helpful. Manny, one other follow-up on the Tommy business. Given this kind of unprecedented volatility and as you said kind of headline risk to confidence, what is your management team the Tommy management team in particular, any changes in how they're kind of approaching the wholesale customers, the utilizing systems to maintain visibility into the booking profile? Just curious how these management teams are attempting to deal with this uncertainty.
I guess, John, a couple of things. On the I think we're constantly investing on the supply chain and focusing on getting good data from our retailers both in North America and internationally. I think that continues. I think it's those things are ongoing, but I think it's also how you manage the business intuitively. I think when we were in a cycle where the brand was growing and had an order book that was flowing at 12% to 15% increase is and feeling that there was so much momentum in the business, we were being more aggressive on our inventory buys and really feeding it.
So if you had an order book that was 100, you might be buying 110% of that inventory with a strong belief that you'd be able to sell in season and really manage your business. In an environment we're in now, I think we're very cautious about that. So if we have orders that are 100, again, I think we're buying something closer to 98 right now and really not the risk reward is just not there to go chasing business that may or may not materialize. And if it doesn't materialize, you could be left with inventory that really could create risk for you. So we have the visibility in that European wholesale business is much greater than the U.
S. Visibility. Just by the nature of how retail is done there, orders are given, orders stick, you don't have the cancellation issues that you do in the United States. It's just an easy more easily managed business from that perspective. And given that visibility, we're being very cautious on the inventory buy not to get ourselves some trouble on with excess inventory at the end of the season.
So just a mindset about how to manage that inventory going forward.
Thank you very much. That's very helpful.
We'll go next to David Weiner at Deutsche Bank.
Yes. Good morning, everyone. Can you hear me okay?
Yes, I can.
Okay, perfect. Thanks. So just was wondering if you could maybe give a little bit of an update on your plans in China. You did go through some of the numbers in Asia for the quarter. But I mean, I guess any update there in terms of how you're planning for that business for the 2013?
I guess on the Calvin Klein China business, the business it continues to be very strong, continue to make investments in square footage there, strong jeans and underwear business, a very strong CK Bridge business and strong accessories fragrance business as well. So really haven't seen anything to slow us down in China from a royalty point of view on Calvin. On Tommy, the business is significantly smaller than the overall Calvin brand, but it's growing dramatically. We are really now operating we've been operating the business as a joint venture for about 9 months now. And for the first time, I think we're actually breaking out the joint venture income and you'll be able to track that as we go forward.
So that business is very healthy. We're seeing 15% to 20% kind of growth in that business that we're projecting for the year. It's actually stronger than that, haven't floated through yet. We continue to just to remind everyone, we continue to collect royalties like a normal licensing relationship and then we own 45% of the China business. So that growth continues to happen and it's a franchise distributor model.
We'll operate some the joint venture will operate some owned flagship stores, basically selling more of a wholesale model into partners. And it seems like a very good model for us and it's off to a very strong start. That infrastructure is being built. The investments are being made. And that's all included in the joint venture income that you see reported in our numbers.
Is the on the Tommy side in China, is the product I mean are there any major differences in kind of how the product looks there like for local taste and things like that? Or is it pretty similar to what you'd see otherwise in other countries?
There's a significant I think if you go to every one of our key markets, there's always a localization from a merchandising point of view that takes place, sizing and all the issues that go on with that. So clearly that goes on, local purchases will go on for a percentage of the business. But if you walk into those stores and if we are doing our job right, and I think we are right now, if you go into those stores, those stores should look very much like our European stores. We're positioned at a premium level there and there should be a consistency globally how the Tommy brand is positioned. So localization from a merchandising point of view, but the brand DNA stands always as a key focus point.
Great. That's very helpful.
We're executing really well against that.
Great. And just last question, how many stores roughly do you have in China or run-in China?
Operating directly a handful. Yes. And points of sale, I think operating directly a handful and points of sale, I think right now we are just under 100 somewhere in that area.
Okay, perfect. Thanks very much.
We'll go next to Carla Casella at JPMorgan. Hi. I was wondering if you could talk a bit more on the jeans business on the weakness. Is it that you were losing distribution or losing share? Or do you think we could be seeing a slowdown in the denim cycle?
Carl, I think on the specificity of some of the Calvin Klein jeans business, I think some of these questions should just go to Wanaco and I think they've been raised ad nauseam with them. So I'll defer on that side. I will say that the gene we've been in a 12 month gene cycle that has been tough, but we're now starting to anniversary that and we're starting to see growth in North America on the jeans side of the business and we're starting internationally where we should start to see some growth in that business as well. A lot of initiatives going on, on the Calvin side with color denim. And I think a lot of those have been worked very well.
But at this point, especially for spring, there's still too small a piece of the overall jeans business to change the direction of what's going on there. So I can't give much more color than that.
I think you really need
to speak to Wanaka.
Okay, that's great. And one follow-up on the acquisition front. Can you just talk about your views of diversifying into more women's to balance the assortment more or would you prefer on the acquisition front to look at men's business and how important is an international component when you're looking at acquisition opportunities?
I think look at this point in time, it's less about women's and it's more about whatever we decide to get involved in the strength of the brand. We really our choice would be a brand that is both men's and women's focused. Our choice depending on the expertise that comes with the brand and a potential acquisition, it will be determination whether we run a women's business ourselves or license it out in the Tommy business because of the in house expertise that we have and how it's been developed. We directly operate most of the women's businesses we're in. On the Cowen side where it's been where brand has grown from a licensing model, we obviously operate we don't operate any of those business and we use a licensing model.
So I think it will depend on the circumstances from that point of view. Our first choice for an acquisition component will be continue to do more Calvin and more Tommy and grow those franchises either by product categories like we're doing in Europe with the sportswear businesses there. And what we're doing with Tommy, taking back tailored clothing, dress shirts and neckwear in Europe and Asia to run those in house directly for 2013. Those are 2013, 2014 initiatives, but clearly they will be big growth drivers for us as we go forward. So I think that would be our first priority more Calvin and more Tommy.
Okay, great. Thanks a lot. We'll take our next question from John Kernan at Cowen.
Hi, guys. Thanks for squeezing me in and taking my question. I went back in September of 2010 at your Analyst Day in Amsterdam for Tommy Hilfiger. You laid out some pretty ambitious door growth plans, both in the wholesale side of things and the owned retail. Where are
we in that cycle? What type of door growth, I guess, year
over year in each of
10, we are dramatically ahead of plans. We've clearly opened internationally significantly more retail stores and flagship stores. We opened the large London store, Tokyo, 2nds, Osaka. We've opened a new store in Paris on Champs Elysees, a new Hamburg store in Germany. So just those are just examples of only opening stores, but also opening stores that are profitable and at the same time significantly brand enhancing, giving the global appeal.
Our plan, I guess, from a store opening point of view is globally for the Tommy brand is probably owned and operated stores to add between 50 60 stores a year in North America and the rest of the world. And then probably another 25 to 30 franchise partner stores around the world. For Calvin, we're adding in excess of 150,000 square feet a year. We probably will add in excess of 100 stores, doors internationally with significant focus on Asia, China being the biggest market there, but also Korea with our sportswear, with our CK business and then Southeast South America, Latin America, Brazil being a real focal point continuing open square foot throughout Latin America. So that gives you a sense of the 2 big brands and the kind of growth we're looking for.
And clearly, it's accelerated over the last 2 years.
Great. That's helpful. And then the Tommy Hilfiger flagships in Japan that you announced, what do you Tommy has been in Japan for a long time. What do you see as that market? What do you see the long term potential there for Tommy?
Well, that business is about a $275,000,000 business depending on currency bouncing around, but about a $275,000,000 business, 10% operating margin business. The brand position there, we are really in an elevation mode for the last 2 years of continually trying to lift the brand presentation. It became much more of a jeanecommie, a little bit too urban brand for us in Japan, really the only market outside the states that really had that issue. And we have been really on a mission there to upgrade our positioning there and really are focused in on the commie sportswear men's and women's product as the anchor and has opened, as I said, the flagship store in Tokyo, 1 in Osaka and continue to open full price stores, the lift of perception of the brand there. We don't view in all of our growth models, we don't view Japan as as a huge market.
We believe that the brand could be twice its size, but our financial plans call for it to continue to grow in the low single digit kind of range with the economy in Japan. But clearly, there's an opportunity if we break through to really get some momentum and acceleration, typical to what we're seeing in the United States where we never would have planned double digit kind of growth and that's what we've been experiencing in the last 27 months.
Okay, great. Thanks and good luck.
Okay. Operator, we're supposed to be at another investor meeting. So we're going to take one more question and then end the call.
Okay. And that question comes from Christian Busch at Credit Suisse.
Thank you very much for squeezing me in. I was wondering if you could provide some perspective on the game plan and the timing for the Bridge business in Europe, an update there would be very helpful.
Sure. We are still in a lot of discussions, a lot of planning with our retail partners. The plan right now is to launch with men's before 20 13. We are working very closely with the key department stores accounts in our largest markets in Europe right now. So the plan is to launch in men's probably 12 months later to follow that with women's.
It'll be apparel and accessories. And I think we'll have a lot more to talk about in the next 3 to 6 months that we really put some flesh on it for you. We've sized the market and it's just a guesstimate over the next 5 years that we really believe it's a $500,000,000 business for us long term men's and women's sportswear, apparel and accessories there. So I guess at this moment in time, that's about as far as I'm willing to go with talking about the positioning of the brand, how we're going to market it. We'll clearly give a lot of color on transparency on that as we get to the fall of this year.
But be assured that start up costs are all accounted for. We have everything placed in our guidance and our budget and we feel confident about that we have what we need budget and we feel confident about that we have what we need and resources both financial and people wise to really make this a success in Europe. And with that, we're going to end today's call. We really appreciate your attention. We look forward to our Q2 call.
And I guess I'd be remiss if I didn't mention Alan Serkin. Alan Serkin is our President and Chief Operating Officer. I know all of you know him. Alan will officially be retiring on June 21 at our annual meeting. We'll have some nice things to say about him then.
But just with this group that I know has had a lot of interaction with Alan, we all wish him all the