Please standby. We are about to begin. This webcast and conference call is being recorded on behalf of PVH and consists of copyrighted copyrighted material. It may not be recorded, reproduced, retransmitted, rebroadcast, downloaded 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 certain forward looking statements, which reflect PVH's view of future events and financial performance as of March 28, 2011. Any such forward looking statements are subject to risks and uncertainties indicated from time to time in the company's SEC filings. 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 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, ww w.pvh.com, and in the company's current report on Form 8 ks furnished to the SEC in advance of this webcast and call. At this time, I am pleased to turn the conference over to Mr. Emmanuel Chirico. Please go ahead, sir.
Thank you very much. Good morning, everyone. Welcome to our call. Joining me on the call is Mike Schaeffer, our CFO Alan Serkin, our President and Ken Duane, our Vice Chairman in charge of all our wholesale businesses in the company. Also on the call is Pam Hootkin, who I think you all know is retiring and this will be her last official conference call with us.
So we will definitely miss Pam as we go forward and there's some big shoes to fill. And Pam's replacement on new Treasurer and Senior Vice President of Development and Investor Relationships, Dana Perlman is joining us on the call as well. Let me start the call by saying how excited we are with our results, how pleased we are with those results.
And I'd like to just jump right into
the business review. Let me start with our Calvin Klein businesses. We had a very strong quarter at Calvin Klein. Our Our momentum continues there through the Q4. Total revenues for the Calvin Klein combined businesses were up about 18% in the quarter and our operating profits increased over 27% in the quarter.
Focusing in on these Calvin Klein apparel businesses that we operate directly, we recorded a sales increase about 22% in the quarter. This strong performance was fueled by our men's wholesale sportswear businesses as well as strong performance in our own retail stores. Our Calvin Klein retail businesses posted a 10% comp store increase in the quarter. That strong trend has continued into the Q1 of 2011 with comp stores posting over a 10% increase through the last week of March. In our licensing segment, our royalty revenues were up about 11% for the quarter.
And let me put some color on some of our biggest businesses. I'll start with fragrance. Our Coty fragrance business had a strong quarter posting a 10% increase in revenues. Business was very strong across the board in all geographic areas. We had very strong performance with Euphoria and CK1 fragrance having particularly strong sell throughs at retail.
The quarter also benefited from the launch of Calvin Klein Beauty. The Calvin Klein Beauty business was particularly strong throughout Europe and South America. Moving to our U. S.-based women apparel business, there we also posted
strong revenue growth. Our G3 partner
and licensing partner was up growth. Our G3 partner and licensing partner was up over 30% in the quarter. The growth is being driven by strong selling of women's sportswear and dresses as well as good performance in the outerwear category for the quarter. Our watch and jewelry business saw significant growth in the quarter posting a 40% increase over last year's Q4. The growth was driven by door expansion and significant comp door sales growth in the U.
S, Asia and Europe. Our Seekay Bridge business in Asia continues to grow dramatically posting an over 50% increase in revenues for the quarter. The growth is being driven by China, Hong Kong and the Korean markets where we are experiencing a significant door expansion and double digit comp store sales growth. Moving to underwear with Wanaco, the Calvin Klein underwear business for the quarter was ahead about 8% with all regions Europe, Asia and the Americas posting strong sales growth. The growth was being driven by continued growth of the international retail square footage and the extremely strong performance of men's.
Men's Calvin Klein continues to drive performance and the addition of X Elements has given us an added sales boost. In women's, the introduction of ENVEY has been well received with Europe and Asia posting the strongest results. We believe this is an important step in continuing our momentum into 2011 and beyond as we really start to focus on a younger consumer with the launch of CK1. In our jeans business, our jeans business across the board was up 11% for the quarter. We saw strong growth in Latin America, Asia and in the U.
S. We have a major launch going on in the Q1 of 2011. We are constantly looking for impactful launches at Calvin Klein. Historically, these launches have driven sales and created significant marketing and PR buzz for the brand. Starting with the launch of euphoria in 2,006, steel in 2,008 followed by X in 2010 and that trend will continue.
Spring 2011 will mark the introduction of CK1, a dual gender multi product category launch. The launch will focus on our largest product category areas, fragrance, jeans and underwear. Given the high awareness of CK1 due to the success we have enjoyed in fragrance, we are very enthusiastic about the potential that CK1 1 brings to jeans and underwear. The launch will be supported by a major cohesive marketing campaign that will combine our fragrance, jeans and underwear category. The campaign and the product offering are targeting a younger consumer demographic.
CK1 represents the largest introduction in our history and is expected to represent about 10% of our annual underwear business. Initial orders have been very and more importantly sell throughs at retail has been very good across the board in Europe, Asia and the Americas. I'm going to move on to our heritage businesses. Our heritage businesses had a very strong quarter. Our heritage businesses had a very strong quarter, sales increased for the quarter about 10% and operating income was up 20% for the quarter.
At our heritage retail businesses, 4th quarter sales posted a 2% increase. Our comp sales trend has continued to be running plan for 2011, it's running about minus 1.5%, which is being impacted by the negative Easter calendar shift in March. Sales at our wholesale businesses in the 4th quarter grew 17%. Our dress for earnings businesses posted a healthy 7% increase, while sportswear posted an increase of over 25%. We saw significant growth in our is being driven by 1, delivering great product at a great value proposition to our consumers and 2, our consistent eyes on and venues in marketing spending over the last 4 years, which we believe is clearly paying dividends for us with our consumers.
Moving to Tommy Hilfiger, let me start by saying our integration plan is running, it's on target. We are on target to 2011 and we should be complete with the integration of the North American system platform by May of 2011. From a marketing brand building perspective, we had some key milestones in the holiday season. 1st, we launched our holiday marketing campaign centered around Meet
the Hill figures.
We could not be happier with the execution of the campaign in print, outdoor and on television, both in the U. S. And globally. The response from the consumer and our retail customer account has been extremely positive. 2nd, we opened a 12,000 square foot store in Paris.
We opened a flagship store on the Champs Elysees and are very happy with the way the execution of that store has come out and the related market reception to it. France is a major growth market for us and we believe the flagship store will solidify our position in the market and help us to drive future growth. Moving to the Q4 business results, overall the Tommy brand had a very strong quarter. We exceeded our revenue guidance by about $20,000,000 and our operating earnings came in ahead of guidance despite spending an additional $5,000,000 in the quarter focused on European marketing. That wasn't planned for the quarter and we were able to cover that and still deliver our earnings.
The brand's performance in both Europe and North America has been particularly strong. The European wholesale business has posted very strong Q4. We saw sales growth of over 10% over the prior year in the wholesale business. On a product category basis, we are seeing double digit growth in menswear, denim, body wear and footwear. From a geographic perspective, our strongest growth markets were the UK, Germany and France.
In fall, given the difficult economic conditions in Spain and Ireland, these are the only 2 countries hosting a low single digit single digit negative sales trend. As we look to spring 2011, the momentum continues and is actually accelerated. Spring sales are running ahead about 12%. We are seeing strength in all product categories. All of our European countries are experiencing growth with the biggest turnaround occurring in Spain, where spring sales are up about 10%.
Our key growth markets, France, the UK, Italy and Russia are all seeing spring order growth of over 20%. We are also seeing growth in orders for fall 2011. Our full order book is running up over 15%. We are seeing strong double digit sales growth in most countries. By product category, the strongest areas are coming from footwear, body wear, men's sportswear and women's sportswear.
Moving to our European retail business, sales were very strong in the Q4 with comp stores exceeding 10%. That trend has continued very strongly into March with comps up in the high single digit area despite the Easter sales shift. In our North American retail business, we've posted a strong comps in the 4th quarter, which were over 10% and that sales trend of plus 10% has continued into the Q1 of 2011. We are seeing strength in all regions of the country with particularly strong performance in geographic areas that cater to international tourists. The Tommy retail results are very consistent with the strong sales performance we are seeing in our Calvin Klein retail business in the United States.
At our U. S. Wholesale business, our Macy's business continued to see good performance in both men's and women's. Sales ran ahead of last year and sell throughs at retail were on plan. So the Macy's business is running on plan right now.
I'd like to focus now on Japan to give you an update of where we are. We have over 1,000 associates in Japan and I'm very happy to report and very importantly that all our associates are safe and that their families are safe. We operate 2 businesses in Japan. We have a Calvin Klein business that's a licensing division in Japan. And in order to be prudent for 2011, we are planning this business at contractual minimum royalty levels, which results in our projecting the CK Japan business down about $4,000,000 from 20.10 level.
That's
10 level. That's included in our earnings
projections for the year. Our second business is a larger business and it is Tommy Hilfiger retail business in Japan. We operate about 185 stores and shop in shops throughout Japan. 177 of these locations are opened with about half operating with curtailed store hours due to power outages throughout the country. 4 of our stores experienced moderate damage and should open in the next 2 to 3 weeks.
And 4 of our stores in the earthquake area were heavily damaged and will remain closed for an extended period of time. They put the Japan business into perspective. In 2010 on an annual basis, our Japan Tommy business had revenues of about $230,000,000 with operating income of about $20,000,000 For our earnings projections, we are planning earnings down for the year about 20 our earnings projections, we are planning earnings down for the year about 25 percent or $5,000,000 In total, Japan is negatively impacting our 2011 earnings projections comparisons compared to 20 10 by about $0.08 to $0.10 per share. Finally, just to put the entirety of the Japan business into perspective, from a revenue point of view, Japan represents about 4% of our total consolidated revenues and about 5% of our consolidated earnings before interest and taxes. Lastly, I'd just like to touch on our guidance for 2011.
As I think you all know, 2011 is a chaotic market, truly being driven by the sourcing cost increases that all of our industry is experiencing starting in the first half at about 5% to 6 percent and moving into second half of the year where we're seeing cost increases in the neighborhood of 15% to 20%. We've tried to be very prudent with our estimates. Given the positive forecasting that we've been able to do on our effective tax rate, we really feel we've put together operating margins and sales guidance that not only we can meet, but if things break in a proper way that we can actually exceed as we go forward. We've tried to be as prudent as possible with
the guidance and try to give ourselves
room to outperform the guidance that's there. So with that, I'm going to turn it over to Mike to try and give you some color and quantify some of these results. Thanks, Manny. We're coming
some of these results. Thanks, Manny. The comments I'm about to make are based on non GAAP results and are reconciled in our press release. For the Q4, we delivered revenues and earnings above our guidance and significantly than the prior year. Our revenues for the quarter were $1,398,000,000 a $784,000,000 increase over the prior year and about $25,000,000 greater than our previous revenue guidance.
Driving the increase in revenues to last year was Tommy Hilfiger at $700,000,000 and a 13% increase in our Calvin Klein heritage businesses. Versus our previous guidance, all businesses performed above plan with Tommy Hilfiger revenue approximately $20,000,000 greater than planned and the Calvin Klein and Heritage business is $7,000,000 greater than planned. Operating income for the quarter was $129,000,000 a $68,000,000 increase to the prior year. Driving the increase over last year was our Tommy Hilfiger business, which delivered $56,000,000 of operating income combined with an increase in our Calvin Klein and Heritage businesses of $18,000,000 or 25%. Impacting the quarter comparisons to last year and plan was an increase in incentive related compensation of about $6,000,000 as a result of our significant earnings per share increase over the prior year, which was in part driven by our tax adjustment, which I'll discuss in a minute.
We delivered earnings per share of $0.93 for the 4th quarter, which was $0.11 greater than our guidance of $0.82 Our earnings per share beat breaks down as a 0 point 0 $1 beat in Tommy Hilfiger, a 0 point $1 beat
in Tommy Hilfiger, a $0.03
beat in our heritage and CK businesses, offset by a $0.06 corporate charge in incentive compensation, which primarily relates to the favorable tax expense. We also picked up 0 point 1 0 point 0 $1 in interest expense and $0.12 in taxes for a total of $0.11 beat versus our guidance. Moving to taxes. In the Q4, we completed the Tommy Hilfiger federal tax return for the pre acquisition period. In conjunction with that filing, we finalized the transfer of certain brand intangibles to our European subsidiary.
The effect of the transfer was to reduce our effective tax rate for the to 31.9 percent from our previous guidance of 36.5% to 37%. The impact for the year was approximately $0.31 per share. For the Q4, the impact of the tax change was $0.12 As noted in our press release, we've revised our previous quarters to reflect the tax change. For the year, our earnings per share was 4.2 $6 and reflects the effects of the tax change as well as the favorable 4th quarter results I described. We expect this favorable tax benefit to continue indefinitely into the future and would expect our effective tax rate to continue to decline over the next few years as our international income is expected to grow faster than our U.
S. Based income. Moving to our guidance for the year. Our revenues are planned at 5.5 $1,000,000,000 to $5,655,000,000 or an increase of 20% to 22% over the prior year. Tommy Hilfiger revenues are planned at $2,800,000,000 to $2,850,000,000 as compared to the 9 months in 2010 at $1,950,000,000 Calvin Klein royalties are planned to increase 7% to 8% and combined sales for our heritage and Calvin Klein businesses are planned to increase 3% to 4%.
As a result of gross margin pressures due to increased product costs, we planned our overall operating margins in 2011 at 11% to 11.5% versus the prior year's 11.8%. We're planning our Tommy Hilfiger and Calvin Klein operating margins relatively flat to the prior year. Our heritage margins are planned down 100 to 200 basis points at 8% to 9%. Our consolidated gross margins for the year are planned down about 150 basis points to 200 basis points, reflecting the impact of the increased product costs. Our expenses will be down 100 basis points to 150 basis points, reflecting expense reductions in SG and A leverage.
Interest for the year is planned at 100 and $34,000,000 to $136,000,000 and reflects the benefits of the repricing we completed in February, offset by planned costs associated with converting our variable debt to fixed debt.
Our tax rate for the
year is planned at 29% to 31% and reflects the Tommy Hilfiger business for a full year as well as the benefits of the intangibles transfer we previously discussed. For the Q1, we're planning our revenues at $1,320,000,000 to $1,350,000,000 Tommy Hilfiger is planned at $675,000,000 to $700,000,000 for the quarter. Our Calvin Klein licensing revenues are planned at 6% to 7%, with total revenues for Calvin Klein and Heritage Businesses planned to increase about 4%. Earnings per share for the Q1 is planned at $1.14 to $1.16 Reflected in our earnings guidance is $8,000,000 of additional advertising in the first quarter, primarily related to the Calvin Klein CK1 campaign. Operating margins are planned down in the Heritage and Calvin Klein businesses about 150 to 100 to 80 basis points and reflects about 120 basis points of impact from the additional advertising.
Tommy Hilfiger operating margins are planned at 11.5% for the Q1 and our overall operating margins will be about 12%. Our tax rate for the quarter is planned at 32.5% to 33.5%. On the balance sheet, we're planning to pay down $450,000,000 of debt this year, million was paid in March in conjunction with the repricing of our debt. Our inventories reflect a growing trend of longer lead times to take advantage of cycle production and opportunities to reduce product costs. We believe this trend will continue for the year and maybe beyond.
Our inventories in the channels and in our stores are very clean, on plan and we have no inventory problems for obsolete products. Lastly, on Japan, we reflected the reduction Manny described for our Tommy and Calvin businesses, which totaled in excess of 25% of the EBIT. We continue to monitor the developments in Japan, but have reflected reduced forecast
for the balance of the year.
And with that, we'll open it up to questions.
Thank you, sir. The question and answer session will be conducted electronically. Our first question will come from Bob Drbul with Barclays Capital.
Hi, this is John Connor with in for Bob today. Just a question on the drivers of Tommy profitability. Can you get into that a little bit more and how you were able to offset the extra marketing expense during the quarter?
Sure. I think it was really 2 things. We had about $20,000,000 of additional revenues for the quarter against our plan and also our gross margin rate was about 50 basis points higher than we initially projected. That offset more than offset the $5,000,000 of spend that we had in January for the brand. So the and geographically, I think if you look at it, I'd say about a third of that revenue beat came out of North America and 2 thirds of
it came out of
Europe on an overall basis. So we were very happy with the
performance overall. Okay. And so you're projecting it flat for 2011, but let's say going forward beyond that into 2012, do you think there's still some more upside there or that marketing expense, there would be additional marketing expense that's something you think that's
permanent or ongoing? Okay. I guess
just so we're clear, we are
neighborhood of 40 plus percent given the quarterly given the Q1 add. So our operating revenues for the Tommy business will be up somewhere in the neighborhood of $100,000,000 So just to keep it in perspective, our operating margins at Tommy are being planned at 10.5%. We cost increases are probably in the area cost increases are probably in the area of 13% to 15%, given the more expensive product at Tommy. And we are assuming some level of price increases offset that, but we're trying to be cautious on that. And looking at it all in, the operating margin of 10.5% we think are reasonable.
Going forward, all things being equal, we would expect that the type of growth that we see going forward that we'll be able to grow the business top line in the high single digit range and by the
Tommy business that
we see going forward. Okay. And then just a follow-up on the growth for the Tommy business that we see going forward.
Our next question will come from David Glick with Buckingham Research Group.
Mike, just looking at your guidance, your assumptions on the low and high end imply a wider range than your EPS guidance of $4.70 to $4.95 Can you walk us through how you get to that range and which of the assumptions you feel are more conservative than others? And then Manny, if you can touch on the pricing environment and how you see the gross margin unfolding as the year goes on and your ability to get pricing in the first half versus the second half?
Okay. I guess, David, just to make sure I answer the question, let me answer it. If I don't get it, you'll come back. If you use all the low end assumptions in our press release and in our guidance, you will get something lower than our guidance. If you use some if you use all the top end guidance, you'll get something higher than the top end of our guidance.
The guidance we gave is not all lower or high, it has to be mix and match. We feel there's opportunity in the Calvin and Tommy businesses. We feel that's where the opportunities would be for next year. There's a variance on the tax rate of about 2 points and if you pick the lowest or the highest, you probably have a profit. We would never be at the low end or the high end unless we hit the extremes.
So you have to use something more towards the middle. So it's not meant to be picking all lower or high.
I guess, David, I just jump in is before I talk about sourcing is, I guess, when we look at the opportunities for next year and you take your range of estimates that you have there and then you apply your judgment it, we see opportunity clearly from a top line point of view. We see continued opportunity in Calvin and Tommy as Mike mentioned. But I think we also see opportunity on the margin line, particularly on the gross margin line. If the our strategies play out the way we would like to see them play out from a market from a positioning point of view on the floor, how we feel will be positioned against the competition. Our financial projections assume a more conservative out the door AUR than any than we're projecting in our sales ladders with our department store accounts and our sales ladders in our own retail stores.
So we clearly are giving ourselves some room to try and be sensitive to how the U. S. And the international consumer react to particularly the fall price increases that are going to be on the floor in 2,000 and in the fall season. The other issue that presents itself is how do you plan your unit growth when you're also dealing with a retail sales growth. And we've tried to be prudent there.
We've taken units down across the board and given ourselves a chance to chase some of that business, particularly on the core side of the business. We've also built into the plans as we go forward some level of sales cancellations given the environment. If those things don't materialize, clearly, we would have upside on the top line as well, which would drive profitability as we go forward. So we clearly believe we've positioned ourselves depending on what happens in the market to deliver the results and hopefully exceed those results. The initial reaction to the sales increases, we tried to react very quickly on the floor and for spring, did a fair amount of the price increases, particularly in the United States on the floor.
So we've raised our MSRPs in spring 8% to 10%. And we are seeing it's very early and it's very hard to read the business given the early Easter, the amount of clearance that's on the floor, private label in particular, but we are transacting in the 1st 2 months of the year at a higher AUR for our spring goods than is in our financial plan. Does that hold itself as we go forward? That's a big question. As we move into the Easter selling season, will it become a more promotional environment?
I can't tell you right now. We'll have a better picture of that when we report Q1 at the end of May. So that's a broad strokes as we see it. So we've tried to give ourselves the opportunity to outperform some of this guidance.
I'm seeing a lot more percent off signing on the floor in department stores. Is that kind of the strategy is raise the MSRP and more focus on 30 off, 40 off?
Look, I have the same general reaction that you have. So I'm seeing the same kind of percentages off at higher MSRPs and what's that doing in our business, I could speak to with authority is what that is doing is it's driving a higher out the door retail. Now, I think that's the door retail. Now, I don't know if that's across the board, but I know in our sportswear businesses and our dress furnishings businesses in the United States that we're clearly seeing that now. But it is really 6, 7 weeks into the season and I don't want to get too far ahead of Los Angeles.
And lastly and then I'll let others ask questions. The UK business, we've been certainly reading that the UK retail environment is getting more difficult. Are you seeing that in your current retail business and in your order book?
No, we're just the opposite. We're seeing the big double digit increases. Now, in fairness, we
also have an underdeveloped UK business compared to the size
of the market, which developed UK business compared to the size of the market, which is which we view as a tremendous growth opportunity over the next 3 to 4 years. The UK business round numbers is about $50,000,000 market for us and that would compare to Germany that's well over €50,000,000 and that would compare to Germany, which is well over €300,000,000 There's no reason why the UK business shouldn't be approaching the size of the German market. So again, that's our opportunity and we're seeing over 20% growth in that market. So feeling good about how we're performing there.
Great. Thank you very much. Good luck.
Thanks, Steve.
Our next question will come from Kate McShane with Citi.
Thank you. Good morning. Can you tell us what's included in your guidance for the launch of ARO and iZOD in the back half of the year? And also how much in synergies we are seeing from Tommy that's contributing to the bottom line in 2011?
Sure. Let me start with the we're not launching Izod. Izod for 2011. Izod may be a 2012 initiative. We haven't finalized that decision.
We are launching ARO. We've seen nice reception, but it's totally immaterial and it actually has a start up loss as you would expect given the marketing investment and the people investment as we go forward. So the I think we're planning somewhere in the for the back half of the year of €10,000,000 to €15,000,000 business with a small operating loss for the year. So that's all in our numbers as we go forward. And I guess the what's your question?
Yes, Michael will talk about synergies.
On the synergies, we had talked about getting about $5,000,000 of synergies last year and we did. This year, we're looking at $20,000,000 of synergies and we are on track. The plans we have we are slightly ahead of. So we will get the $40,000,000 that we had talked about at the end of 3 years. We're on track to deliver that.
Okay. Thank you. And then with the heritage business, it sounds as if it slowed slightly. I just wondered if you could give a little bit more detail about traffic you're seeing at the outlets and average ticket?
Well, I think it's right on plan. Our 4th quarter comp trend was in Heritage was about plus 2% and we're now running minus 1.5%. But you have to remember that Easter is four weeks later. We the last 2 weeks have been big negative weeks given the Easter calendar shift. So I think prior to those 2 weeks, we're running about plus 2% to 3%.
So I think we're right where we're supposed to be from a first quarter point of view in our retail business. Traffic is off, conversion is up, AUR is higher. I wouldn't read too much into the traffic yet because I think a lot of that is being driven by the fact that
Easter is later, vacations are a
little later and spring break vacations. Is later, vacations are a little later and spring break vacations are a little bit later and we haven't cycled those all. So I think it would be much more meaningful statistic at the end of April. So we're not at all concerned about the heritage businesses. Margins are good there.
Inventory is in a great position and no concerns about the retail business there.
Okay. Thank you. And my last question has somewhat been asked, just asking it in a different way. I know you're not passing all of the cost increase through in the back half of the year, but how are you addressing the different products categories that you sell in terms of pricing?
Very carefully. I think is when you think about it is, we've tried to what we've really attempted to do on the floor is in our fashion product on the sportswear side of the floor is we feel there we have more opportunity to raise price points as opposed to some of our core more basic products. When you look at the fashion product, I think you'll see our fashion product on average is up our MSRPs and our planned AVRs would be up over 20% for fall holiday. And when you get to more of our core basic product, I think you'll probably see that more in the 6% to 8% range of cost increases.
And I think it's that combination having a sensitivity to the consumer.
I think don't have to mark don't have to mark the goods exactly the way we think it's going to be going out the door. So if we go out with the higher MSRPs, if the consumer is reacting to those goods, we don't have to hit the point of sale markdown as hard. But if we see any kind of softness, we can hit the promotions harder and try to drive the business through percentages off. So I think it gives us our best opportunity to maximize the retail given our system capabilities, the analyst team that we have in place, our coordinated program that's in the store, we are able to really react within days of what's happening at wholesale and at retail we're able to react in our own stores to at wholesale and at retail we're able to react in our own stores immediately the next day. So our systems are that sophisticated that allows us to do it.
Okay. Thank you.
And our next question will come from Adrienne Shapiro with Goldman Sachs.
Thank you. Manny, congratulations. Just maybe following up, if I understood your comments on the spring, it sounds like MSRP up 8% to 10% in the spring. I understand costs up only 5%. Maybe help us walk through what that means for gross margin opportunity in the first half.
Is that being baked into your estimates? And are we assuming first half
better than the second half when
you talked about that 150 to 200 basis point contraction for the year?
Adrian, given the fact that if you walk the retail floor today, I think very few vendors or very few brands have moved their MSRPs significantly. So competitively on the floor, we've moved Calvin, we've moved Tommy, we've moved our heritage brands and we've moved the MSRPs. I think some other players have followed, but I think we've reacted very quickly. But given that dynamic from a financial projection point of view and given the fact that the floor hasn't really changed, we've not assumed any significant improvement in the AUR for the spring season. So now the fact that the MSRPs are higher, the 1st 6 weeks of the selling season, we are transacting at a higher AUR for our spring goods makes us feel good about what's going on, but we need to see more before we'll get ahead of those numbers.
So there is an opportunity in the first half to capture some additional gross margin rate in dollars, but we'll see how that plays out as we go forward. In the spring, in the fall, we've baked in that we are attempting to pass on depending on the category in Tommy and in Calvin, we're looking to pass on 70% to 80% of the price increase. And in Heritage, we're looking to pass on 50% to 60% of the price increases cost increases through on AUR. That's what's built into the models.
Okay. Makes sense. That's helpful. And then just you talked about opportunities where or the way you deemed guidance is deliverable and maybe even beatable. But maybe help us think about a lot of fear out there, a of fear out there, a lot of uncertainty, what the consumer is willing to bear.
What if things don't turn out as you would expect, where there's room, some flexibility, some cushion that if passing these on get more challenging, how you can what's the plan B to be able to deliver these numbers?
I guess there's 2 areas. I think we've given ourselves room in the gross margin to and in the average unit retail that we're planning based against the ladders and sales ladders that we've built for wholesale and retail. We've given ourselves room to misplan and still deliver our gross margin. Secondarily, there are some areas in discretionary spending. We are planning advertising for the year given that Tommy's being now included for the Q1 was out last year.
Advertising expense for the year was up about $30,000,000 included in these projections. There's room of between $10,000,000 to $12,000,000 of that discretionary spend that we could pull back on and still have reached our consumers in an effective way if the reality of the situation is the consumer is not willing to step up and pay additionally for the goods that are on the floor. So we've tried to manage it, giving ourselves some room on the operating expense line and also giving us some room on the gross margin line from a percentage point of view. I think if the trends in the business continue, if the trends of the business were to continue in our wholesale in our U. S.
Based businesses and our European cancellation against the order books that we have. And if those don't materialize, we've tried to give ourselves some room. So we've tried to put together a very prudent plan. We've tried to give ourselves rooms on a couple of levers that we can still deliver the guidance and deal with a very tight environment. If the environment were to be a little less tight, I think we could we clearly would deliver this and we would exceed this guidance.
Great. And then just not that long ago, everyone was intently focused on the euro translation, what it meant for your earnings. Maybe what you factored in for the euro into your guidance?
Mike? Our euro guidance is about for the year, we're looking at about $135,000,000 to $137,000,000
Okay. So below current rates?
Yes. It's
since the current rates
have only jumped in the last 2.5 weeks, but right now $135,000,000 to $137,000,000
Okay. And then, Manny, just lastly on the inventory front, it sounds like you're being prudent units you're planning down and you're looking to chase business. It looks though when you look at the inventory year over year, some pretty big increases. So maybe walk us through and give us comfort that we've got a clean inventory situation and maybe any sort of granularity in terms of where you're placing the bets across brands and divisions?
Sure. Look, I think there's 2 things going on. I think is on core replenishment businesses, we are being a little bit more aggressive on our inventories and taking very little risk from a markdown perspective, so that we are in a position to outperform our sales plan and chase the business. So white dress shirts, blue dress shirts, the core business that drives 50%, 60% of the dress shirts and business, we really got we're behind those we got behind those inventories and really trying to maximize the sales on the Florida game market share. On the other businesses in our sportswear areas, what's going on in the industry and I think you're going to see it across the board is the lead times for all practical purposes are up about 45 days.
And we're trying to capture better costing on some goods and we've made the decision to bring in some of our goods earlier to the 2 and up 45 days. And what that's causing is probably causing a 5% to 10% increase in our inventory for the and that will continue through the 1st 3 quarters of the year. By year end, it'll level itself out because we'll start anniversary that. But given the sourcing dynamic that's out there today, the limitation on production, the ability to try and reduce costs, we've moved in, we've done some sourcing realignment, gotten in a stronger we've gotten in a larger position in some developing countries that we have good networks there, but the lead times in those developing countries are much more are anywhere from 60 days longer to that what they might be in say China. So in those markets where we can get a cost advantage, we've made the determination that it's appropriate to bring those goods in earlier.
And that's what Mike was talking about in his opening comments that it probably represents about 20% of the increase of the inventory that you're seeing in the inventory. So that's how we're planning it. I don't think it all expose us to a markdown risk. It's a carrying issue and it will be built into our interest expense as we go forward.
Thank you. And I just wanted to send my congratulations to Pam. Best of luck. We'll miss you. Thank you.
All right. And our next question will come from Robbie Ohmes with Bank of America Merrill Lynch.
Thanks. Good morning. And Pam, I want to extend mine as well. You will be missed. Thanks.
And
Thank you very much.
Robbie, she's crying now.
I just had a follow-up question on sourcing. And the question is Manny, given the challenges that you've talked about, I would think that you guys handle them better than most other people.
Are there situations where you think this sourcing issue is
creating some market share sourcing issue is creating some market share opportunities for you in any of your brands, especially maybe either versus private label or anybody else out there? And also related to that, can you just remind us what the sort of plan is? I think Tommy Hilfiger was mostly with Lee and Fung. Is there an opportunity to sort of improve the cost of the Tommy Hilfiger business over the next several years as
you bring some of that in house? Okay. Let me take the last part first because that's the easy part. We have no plans to move the sourcing from the pennies in order to put anything at risk. So that is the plan is to stay in place.
It works for that business. We're not looking to save look to save pennies in order to put anything at risk. But that management team has that well in hand. If there's opportunities, we'll work together potentially on the dress shirt area. We've talked about maybe doing something in that area.
Source. On the yes, Robbie, I think your first part of the question is an excellent question. There is I think there's a couple of things that are going to happen this year. I think first is we're going to I think first and foremost is we're going to see competition potentially some of the smaller players default on deliveries. I think it's in this sourcing environment, I've heard a lot of people now that we're moving to low cost production areas, they're moving to Bangladesh, Pakistan, Egypt, and they've never been there before.
I can assure everyone that sourcing goods in Bangladesh, Pakistan, and Egypt, just to pick a couple of countries is not the same as shipping goods out of Hong Kong. So I think that late deliveries are going to be a major issue for the fall selling season and just the full thing on deliveries will be an issue. Issue. And those always pretend well from a market share point of view. Secondarily, I think it's when business gets tough, I think the larger players with the scale are the winners in that.
The better operators tend to win and are logistically able to really outperform the market. And I think that gives us a big opportunity in the second half of the year as we go forward, particularly in those market areas where we are dominant like in the dress furnishing areas and in the opening price points in moderate sportswear areas in classification and department stores. So clearly, I think that's an opportunity. And I think retailers are by no way deemphasizing private label. That's not what I'm about to say, but I think there are some pockets where they've made a decision that is better for the branded experts to play in those categories.
And I think that in the Q4 in particular, we are picking up some holiday orders away from some private label categories. So I think all of that a market share win as we go forward. And always a chaotic environment I think plays to the strength of the big players like ourselves.
And our next question will come from Jeff Klinefelter with Piper Jaffray.
Yes, thank you. And also Pam, congratulations and good luck with the next stage. Mandy, I just wanted to ask you a couple more questions about Japan in terms of your ability to kind of forecast given the significant uncertainties in that marketplace. Can you kind of walk us through how you attempted to forecast the change in business this year and kind of what to expect as we move forward in terms of monitoring that situation from your business standpoint?
Sure. Look, I think on the Calvin side of the business, just to we just I don't want to say we reached for the bottom, but we just given the $4,000,000 swing, we just decided that was prudent to do. We don't actively manage those individual businesses. We actively manage the brand, but not the businesses. On the Tommy side of the business, we have management in place locally.
Our head office there is over 100 people managing the business day to day from the sourcing point of view, from the logistics point of view and from a sales point of view. The trends as you would expect is starting to 1st week we were down 60%, 70%, the next week we were down 40% and then last week the business was down 25% to 30%. So clearly we're starting to
see the business start
to come back. I 30%. So, clearly, we're starting to
see the business start to come back.
I think if the there's a lot of uncertainty out there. And at this point in time, we made our best estimate in consultation with the local management in Japan. Again, I don't think it's by any means the worst case scenario, but it's a very reasonable scenario built up and it assumes over the next 4 to 6 months that business will start to get back to some level of analysis. Even if we don't reach the sales levels of the prior year, that we would be within striking distance of 5% to 10% of that. So I think there is that's how it's been built.
We'll continue to monitor the situation. It's too soon to make any major calls, but I just remind you again, it only represents about 5% of our consolidated EBIT. Okay.
Thank you. And then secondly would be on Europe, some great increases that you're seeing in Tommy business now for spring. And as you also already noted on the U. K, you're probably taking some significant share off of your current base of business. But maybe using
Spain as an example and others where you're seeing
those double digit increases and a as an example and others where you're seeing those double digit increases and a turnaround in the business. Pointing to anything in particular gaining some new distribution, is it same store sales gains, new doors that you're opening? Maybe just a little bit more color around that.
I think you have to say, in the mature markets that we've had that we really have a very significant position in like Spain and Germany. I think there it's not new doors per se, but it's an increase within those doors, an increase in square footage. It's some new categories. The footwear and accessory business, both of which are still relatively new, continue to grow significantly as we go forward as does the body wear and the underwear business that we're in. Those businesses continue to give us strong growth as we go forward.
So that's more in the mature market. In our growth markets, which we've identified particularly focused on, which is Russia and the Middle East, which is Italy, France and the UK, clearly there it's a combination of new doors, combination of comp store expansion as well. And it's category growth across the board. So there it's really the brand just growing into what the market potential is for the brand in those markets and benefiting as we open regular price stores as we open, we talked about the flagship in France. Clearly, we have regular retail throughout the U.
K. And we're really positioned very well there. And the brand just keeps gaining strength in Italy where we have a very nice regular retail business. We continue to gain with more and more specialty doors there. So overall, it's more of that kind of continuous very thoughtful growth.
And the other thing that in the second half, and let's just a sheer math the way it works is our AUR, our selling price into our wholesale accounts is probably up about 8% and our units are up year over year. So when you put that combination together, it drives a 15% growth overall. So I think it's the from a sales top line point of view, the higher costs which are driving higher selling prices to our wholesale accounts is really benefiting that business.
Okay, great. And just lastly, you hit it on already with the pricing, but I was going to ask you to sort of compare and contrast your price increases in Asia and Europe relative to the U. S. It sounds like as a starting point, they're all in that 8% to 10% increase range. I believe pricing has been less sensitive in Europe and Asia for most brands.
So maybe you could just touch on that lastly.
Yes. I think how I would say it is, in the European market in particular, they don't have what we have is, which is the bouncing up and down in retail prices at point of sale. So you set your you need to set your MSRP and that's your selling pricing season. And as you go through the season, as you get to our clearance point of view, you'll start to take permanent markdowns as opposed to what we do in the United States where you have weak sales and you'll go 50 off, you'll go 25 off, you'll go 30 off and you'll bounce back and forth. In most markets throughout Europe, that's not even and against the law to actually do it.
So obviously, you need to make an earlier call on retail selling prices and the judgment of our local management was as we're dealing with these market dynamics is to raise prices about 8%, both ticket and selling prices in. So again, we'll see how that is. In the U. S, we've assumed for the fall season about 7% to 8% increase in AUR, but the MSRP is up close to the 15% to 20%. So we will manage how that really plays itself out as we go forward and see if there's more opportunity and what kind of elasticity.
I think what the spring 2012 as we really start to look out to the Q4 and beyond is clearly an opportunity in Europe if things hold the way they are to raise our prices once again given the market dynamic that's going on in sourcing. I hope that answers what you are,
Joe.
And our next question will come from Howard Tubin with RBC Capital.
Thanks very much. Mehdi, maybe just when looking at the Tommy business in the U. S, what opportunities do you see there maybe near term both within Macy's and outside of Macy's?
Okay. I guess, on the wholesale side of the business, I think we really look at that business in our goal, not our financial projection, but our goal is to double our footprint at Macy's. So to take a business that's doing round numbers $275,000,000 in sales directly from not including the license sales, but directly, our goal is to get that over $500,000,000 over the next 4 to 5 years. As we grow in, we think we should have a larger position in women's, we should have a larger position in men's, we should have an accessory business that's much larger than it is today and it gives us the opportunity to grow those footwear categories across the floor. We don't necessarily have a meaningful kids business on the floor.
That's a licensed business and we think that should be a much larger business at Macy's. And those are the areas we're going after. From a financial projection point of view, we focus on the U. S. Business.
We look at it as low to mid single digit kind of
growth, 2% to 5% depending on the year.
So we're not planning for dramatic growth there, but we are Ken Duane and his team are clearly going at that market share more aggressively. But I think given the dynamic of the business, we don't want to get ahead of ourselves and given the exclusivity until we have it in hand, we don't want to start projecting that kind of growth. When we look at what we really think is the opportunity for us as we go forward in the United States and North America is within our retail footprint. We operate about 175 stores. We will continue to open stores as appropriate.
We think the combination of new stores and comp store growth will drive mid single digit growth for us
in the
retail side
of our business as well.
So that's the U. S. Market as we present it. It's very important for us that as much we need to grow, we need to keep the brand positioned at the collection price points. We don't want to see the brand being dragged down into classification price points.
So this is a very similar to Calvin and Polo. This is a $40 brand out the door. We want to position that the $40 brand on the floor. We're on a we continually are improving that AUR out the door and we're on our way to do that over the next couple of years. So that is as important as growing the business because the U.
S. Market to a great extent, the Tommy brand being a U. S. Brand sets the tone for what the brand stands for around the world. And the renaissance that the brand has enjoyed since 2,006 to 2,007 in the U.
S, we don't want to go back on that just for the sake of growing.
Okay. We'll move to our next question that will come from Karru Martinson with Deutsche Bank.
Good morning. When we look at the incremental advertising cost that you're going to be doing this year and the campaign here that's launching in the Q1, is that going to continue into the Q2? Should we see some depression of numbers there and then ease up in the second
half? No. I think what you'll see is you'll see advertising level off. And in fact, I think in the second half, depending on the market conditions and what goes on, you'll actually see I think in Q4 as we've got a more balanced spend this year, just a little bit less in the Q4 of 2011 than we saw in 2010 since we're making such a meaningful spend in spring. We've started to be a little bit more balanced spring fall than we were last year.
That is one of the reasons. But I think you'll see an even analysis going forward. Okay. And then when we
look at the debt reduction for this year, the 450 million you guys have definitely brought down your leverage as you said in the original deal. When you look out, where do you kind of make that shift from debt reductions to looking to for tuck in acquisitions or beyond that?
I think we have to get through this year, pay down the $450,000,000 of debt that we're projecting for this year. That'll take our leverage probably below 2.5 times. And I think that's an area we start to be much more comfortable looking at other capital uses other uses of our capital as we go forward. So again, not until we get there. So this is again a critical year for us to to deliver the operating results, but also deliver the cash flow so that balance sheet is in good shape so we can really use it as we've done in the past as an asset for us to drive the growth of our business.
And I realize it's very early, starting to hear that spring of 2012 and beyond, cotton prices will be coming down in a meaningful way. Are you seeing anything in actuality in the market as we look forward?
All I'm seeing is that the spot rate is moving around coming down, but actual volume of goods hasn't happened yet. We see the same thing you see and now it needs to materialize it actually materialize at
the factory level. So we're
not out buying spring anywhere yet. We'll see some less pressure on cost going forward.
Thank you very much guys.
We'd like to take one more question. It's already after 10. It's been over an hour. So this will be our last question operator.
We do have a follow-up from David Glick with Buckingham Research Group.
Yes, just a quick one Manny. You really haven't touched on the China opportunity. A lot of your peers obviously growing their business very quickly and becoming meaningful businesses for them. Can you give us an update on the Hillfigure effort in China and when that could be a real meaningful contributor?
Sure. I guess just to remind everyone, we have about $40,000,000 Tommy business in China today, nicely positioned. The brand is very well regarded. The consumer knows the brand. Its price positioning is perfect.
It's not as expensive as the Calvin price positioning, which is bridge pricing with CK. So it's just under that. But so it really has got it it's in a sweet spot from a growth point of view. And what is the situation that we have is we are in the process, I think it's August 1, second half of the year. We take the we are buying that business and taking it in house.
Now by that, I mean is we will continue to receive royalties, but we're establishing a joint venture with a group of partners and we'll operate the business back from a joint venture point of view. We will own just under 50% of the business. So we won't be consolidating it, but we'll be having operating profits associated with that, including our business as well as the royalties associated with that, including our business as we go forward. So there's a real we think China is a real opportunity to put into perspective. The Calvin Klein business as of the end of 2010 of all categories is about $125,000,000 and growing at a double digit rate.
We clearly think that Tommy could grow at a similar rate and can have some type of similar accelerated growth that will benefit us. The deal that we have struck gives us an opportunity to buy the full joint venture going forward in year 4 or year 5 of the agreement. So we have that opportunity as we go forward and we'll play that out as we see fit. So a lot of flexibility with the business and China as we look at it continues to be a very strong growth market for us both for Calvin and Tommy.
Very good. Thank you very much. Good luck. With
that, I'd like to thank everyone for joining us. We look forward to speaking to you again on our Q1 press release call at the end of May. Thanks for a great day. And one last time, we just want to thank Pam for all our extraordinary service over the years and we are surely going to miss her. Thank you.
Have a good day.
Thank you, sir. That does conclude today's teleconference.