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At this time, it is now my pleasure to turn it over to your host, Mr. Manny Chirico. Please go ahead, sir.
Thank you very much. Good morning, everyone. Joining me on the call is Alan Serkin, our President and Chief Operating Officer Mike Schaeffer, our Chief Financial Officer and Pam Hootkern, our Treasurer and Director of Investor Relations. I guess I'd like to start the call by saying how happy we are with the results for the Q2. We posted a 20% increase in earnings per share over the prior year and we significantly exceeded the top end of our earnings guidance.
We beat our earnings guidance at the top end by about $0.20 a share. And I'd just like to characterize that and put that into 3 major categories. Tommy Hilfiger business significantly exceeded both its sales and its operating profit expectations in the quarter. I'll put more color on that in a moment. On an earnings per share basis, the Tommy business exceeded our previous guidance by about $0.15 a share.
Our Calvin Klein and our Heritage businesses, the combination of our standalone PVH business also had a very strong quarter and on an earnings per share basis beat the top end of our guidance by about $0.12 a share. On the corporate line, we had a favorable benefit on interest, which was a couple of pennies. And then on the tax line, we had a miss of about $0.09 a share, which was really driven by the significant outperformance of our U. S.-based businesses, which drove our 2nd quarter tax provision effective tax rate to be about 5 points to 6 points higher than we initially anticipated for the quarter. Mike will talk about that in more quarter.
Mike will talk about that in more detail when we are and get into his conference call comments. I'd like to touch on the 3 main components of our business. Let me start with the Tommy Hilfiger business and start with the largest business, which is our wholesale European Tommy business. It represents about 35% of our business on an annual basis, a little bit over $800,000,000 in sales. Our sales commissions for Tommy assume that revenues will grow about 6%.
Our full order book, which we began shipping in May and will continue to ship through probably early December is running up about 10%. In addition, our current basic replenishment business are very strong and business is very healthy. If you look out on a product category basis, our footwear business is up about 15% and that's a category that Tommy took in house a little bit over 2 years ago and is running well in excess of $100,000,000 this year. Our denim business is up about 10%, men's sportswear is tracking up about 12%, women's is running ahead about 7% and our children's business is flat compared to the prior year period last year, spring period. If you look out on a country basis, let me start first with our countries where Tommy has a very strong leading position and the local economies are relatively stable.
This tends to go there and center up our largest business Germany, which represents about 25% of the European business. Overall business is up, sales are up about 15% in Germany. If you look at some of the other major countries, Scandinavia, Austria, Belgium and the Netherlands, businesses anywhere up from 5% to 17% in those countries. On average in those countries, businesses ahead about 10%. In countries where we underdeveloped as a brand and we have targeted for growth, we're seeing significant growth in those countries.
In France, we're running ahead about 25%, in the U. K, we're running ahead in excess of 50%, our Middle East and Russian business is running ahead 10%, and our Italian business, which is clearly an economy that's being challenged is running up 8% for the spring season. I guess if you move to second group of countries, it's countries that we have a very strong position in, but where the economy is being challenged pretty significantly and our market share there continues to grow even though we're posting some negative comparisons. In Spain, which is clearly an economy that's been challenged, our spring business is down about 5%. In Ireland, another economy that's very challenged, our business is down about 7%.
In Portugal, which similar to Spain and relatively small business is down about 10%. But overall, as we look at the fall bookings, we're seeing business up in excess of 10% against the sales plan that's planned at about 6%. So clearly, we see upside as we go to the balance of the year. As we look out to spring 2011, which will begin to shift in this year's Q4, our spring order book is running ahead about 9% over spring 20 10. And just focusing on the 2 largest countries, Germany is running ahead about 8% and Spain, which is our 2nd largest market has really the market has stabilized there and we're seeing a resumption of our growth there in business and orders there look like the spring it will be up about 8%.
Overall, growth is very consistent on a country by country basis as we look out to spring 2011 and we're seeing growth in every major European market that we're operating in. Moving on to our European wholesale business. During the Q2, our European like for like sales were down about 1%. We were up against a significant amount of clearance sales from last year. Retail inventories on average during the quarter were down about 10% and gross margins are running ahead about 500 basis points ahead of the prior year.
As we have come into August with the prior year clearance sales behind us, we have begun to see a dramatic improvement in the European comp store sales. For the 1st 5 weeks of Q3, like for like store sales in Europe are running ahead about 10%, which is well ahead of our Q3 sales plan of about plus 2%. Inventories levels are very much under control and gross margins continue to be very strong in the retail component. Moving to North America, in our retail component, which is the largest component of our North American business, we saw a very strong performance in our Tommy retail business. Comps were up about 8% in North America.
Margins and profits were significantly ahead of plan for the Q2. This strong trend has continued into the Q3 where comps are running up about 9% for the 1st 5 weeks of the quarter. This business is being planned up about 5% for this Q3. So we're clearly running ahead of projections here both from the sales and gross margin performance. At wholesale in the U.
S, our Macy's business is planned up about 5%. Are consistently running ahead of plan at Macy's. We are seeing strong sell throughs at retail and margins for the Q2. We also are seeing for the 1st month of Q3 those business trends have continued. We continue to see good performance at Macy's and we believe our long term growth prospects with Macy's continue to be very positive as we move forward.
So in sum, I'd just say that the Tommy business clearly outperformed our expectations for the Q2, both on a top line and a bottom line basis. We beat the top line somewhere in the neighborhood of $15,000,000 to $20,000,000 and we beat the bottom line by about $17,000,000 on the guidance that we gave. So clearly had a very strong performance and those trends continue into the Q3. Our Calvin Klein business also continued its strong growth momentum in the Q2. Total revenues for our combined Calvin Klein businesses were up 14% for the quarter and operating profits increased over 20% for the quarter.
Focusing on our licensing segment, revenues were up about 13% on a constant currency basis and I'm going to put some color on some of our larger businesses. I'm going to start with our underwear business, which is by Wanaco. The business was ahead about 20% in the quarter. In constant dollars all regions Europe, Asia and the Americas posted double digit increases. The growth was driven by a continued expansion of retail square footage and the very successful launch of Calvin Klein X in men's.
We are very pleased with the result of Calvin Klein X to date and the strong sales performance is contributing to significant market share gains. In the U. S. For the 1st 6 months of the year, Calvin Klein picked up 2 full share points in men's bottoms based on the strength of this program. The second phase of X business and the strength of the men's underwear business in the X business and the strength of the men's underwear business in both U.
S. And internationally. On the women's side of the business, we are just shipping the new ENVY program and the advertising campaign featuring Zoe Saldanha will break in early September. The campaign includes significant print, outdoor and an exciting digital component. We're also exploring the addition of TV and cinema for the Q4.
The preliminary selling of Envy is very encouraging and we believe the marketing campaign could be breakthrough. So we are very optimistic about the customer response and feel very strong about the way this product is being positioned at retail and the initial sell ins. So the underwear business very strong performance in the Q2 and those trends continue into the Q3. Our jeans business, which is almost single category business was up about 8% in the second quarter led by double digit growth in Latin America and Asia. Growth was fueled by the expansion of retail square footage in international markets, principally internationally in Asia and South America.
The whitewash jeans campaign, which was introduced for spring 2010 had a very strong response as reflected in our second quarter results. We are currently delivering our 4 Calvin Klein jean product anchored by our introduction of X Jeans targeted for a slightly younger men's and women's customer, as the fit of the new jean represents our slimmest and sexiest fitting jean. This introduction will be supported with powerful in store signage, product of the business and we believe particularly internationally that this growth will continue and it's really being fueled both by product introductions and the significant increase in square footage for Calvin Klein throughout Asia and South America. Moving on to our fragrance business, we had a strong second quarter in fragrance. We posted a 12% increase in revenues.
The major news in fragrance is the launch of Calvin Klein Beauty, which starts shipping in September. The selling at retail has been very strong both in the U. S. And in international markets. Coty is planning to spend some amount in excess of $40,000,000 on the launch of Calvin Klein Beauty.
The campaign features Diane Kruger as our celebrity spokesmodel. The campaign will have a major print and outdoor component as well as a significant television buy for the all important Q4 holiday period. We're very excited about the initial selling of Calvin Klein Beauty. We are excited about the marketing campaign that Coty has and we believe that this growth will continue to fuel the resurgence of our fragrance business. Moving on to our U.
S. Women's Apparel business, our licensee G III saw its royalties grow over 30% in the quarter. The performance was driven by strong growth in women's sportswear and women's dresses in particular. And we continue to believe that this growth will continue into the 3rd Q4 of this year. G III has done an outstanding job in the product categories dresses, sports wear suits and in both men's and women's outerwear for us.
So we have just really seen a resurgence continues to grow and we believe we're very well positioned, particularly in the women's sportswear business over the next 2 to 3 years to see a significant amount of growth in that women's sportswear category. Moving on to our Calvin Klein apparel businesses that we operate directly, our retail, our wholesale sportswear and dress furnishings business. We saw our sales in this component of the business grow 17% in the 2nd quarter. The strong performance was driven by our men's sportswear business, which saw a 20% sales increase in the quarter as well as a very strong performance in our own retail stores. Our Calvin Klein retail business posted a 14% comp store increase in the Q2.
That strong trend into the 1st 5 weeks of Q3 with comp sales posting a 12% increase compared to our plan of plus 7% to 8% for Calvin Klein. So here Calvin Klein momentum continues. We continue to believe we can outperform our 3rd Q4 projections and there's a lot of momentum behind the Calvin Klein brand and significant advertising and marketing campaigns associated with new product launches for the 3rd Q4 that we feel will help all of our businesses. Moving on to our heritage business. Our heritage businesses also had a very strong second quarter.
Sales for the quarter were 4.5% with operating profits up about 11%. Our wholesale businesses continue to have very strong performances at retail and we are projecting our overall wholesale businesses to grow about 15% in the second half of the year. We are projecting significant growth for Izod, then using Arrow and Timberland in with our key customers. We believe this growth is being driven by delivering great product with a great value proposition to our consumers. And we also believe we're getting significant payback for our marketing investments, particularly in Izod and Van Eusen, where we've consistently been spending marketing dollars over the last 4 years and we believe those marketing dollars paying dividends as we are gaining market share with all of our major customers.
Moving to our heritage retail business, 2nd quarter store sales comps posted 11% increase. This strong sales trend continued into the 1st 5 weeks of Q3 with comp stores posting 8% increase against our plan of about plus 5%. So our heritage businesses both home and retail, the momentum continues in those business. We feel very positive about the trends in those business and we feel strongly that it will support our growth as we go. Looking at our total year guidance that we gave, we've taken our guidance up to $3.70 to $3.80 a share.
That's a $0.15 increase in the per share, includes a couple of components that I just like to bring you up to speed on. We've increased our marketing spend, a big portion of that about 70% of it focused on Tommy Hilfiger brand. So we've increased our advertising commitment for the second half of the year by about $15,000,000 or $0.15 a share. Our Tommy Hilfiger business excluding the advertising expense is up about $10,000,000 compared to our original guidance. Our client and our heritage businesses have seen significant growth.
And as I mentioned, our wholesale businesses in particular are performing very, with orders and sales going out for the 3rd Q4. Those two businesses, CK and our heritage businesses, will contribute about $0.25 more from a guidance point of view from where we were initially. Interest will be about a $0.05 savings for us. And then taxes will cost us about $0.10 a share as again the U. S.
Portion of our revenues are exceeding our initial tax rate guidance. Our overall tax rate should be about 34% compared to our initial guidance of about 32%. So with that, I'll ask Mike to quantify with a little more detail some of the businesses and then we'll take some Q and A as we go forward.
Mike? Thanks, Manny. The comments I'm about to make are based on non GAAP results and are reconciled in our press release. Total revenues for the Q2 were $1,000,000,000 or $574,000,000 greater than the prior year. Driving this increase was our Tommy Hilfiger businesses, which were 5 $32,000,000 as well as an increase in our combined Calvin Klein and Heritage businesses of Avac.
Our Tommy Hilfiger businesses performed ahead of plan, both domestically and internationally in both wholesale and retail. Our Calvin Klein outlet comp sales were plus 14% for this quarter and our wholesale business had a comp of 11%. Our wholesale businesses were on plan and 2% ahead of last year. In addition, our Calvin Klein licensing segment and royalty revenue growth of 11% as virtually all product categories exhibited strong performance. Our earnings per share for the quarter was $0.72 versus last $0.60 We were 20% ahead of last year at $0.20 ahead of the top end of our previous guidance.
Tommy Hilfiger earnings for the quarter were very strong. We were $16,000,000 ahead of our Tommy Hilfiger guidance. Earnings were driven by strong U. S. Comps and strong gross margins both domestically and internationally.
Also a good increase was a shift in the timing of certain Tommy Hilfiger expenses of approximately $5,000,000 that we plan to occur in the second quarter, but are now expected to be incurred in the second half of the year. Our Calvin Klein and Heritage businesses also had strong performance with the combined EBIT improvement of 17% versus the prior year. Strong revenue growth coupled with strong growth margins drove the increase. Our heritage business also recognized an additional $10,000,000 of planned advertising in the Q2 as eyesight continues to support and grow relationships with the Indy Racing League. Our tax rate for the quarter was 37.6%, significantly higher than our guidance, which was 30%.
Our tax rate was driven higher primarily as a result of our domestic operations, which are taxed at a higher rate than our international operations, generating a larger portion of pre tax income in the Q2 than we had anticipated. Just to put some additional color on taxes, we had made some original assumptions at acquisition in terms of how revenues and expenses recognized geographically. As we got into and laid out the numbers, we did have shifts in our revenue, our EBIT recognition in the U. S. Got stronger and North America got stronger at a quicker pace than Europe.
But we also have revised our assumptions on how some of the expenses, marketing and some other big categories of expenses would be shared geographically. And that was also a factor in how our tax rate changed for the quarter and for the year. On the balance sheet, our inventories are very clean and on plan. Inventories related to our Calvin Klein and Heritage businesses ended the 2nd quarter, up approximately 13% over the prior year and are in line with our Q3 revenue guidance. As a result of increased demand and anticipated delays in production, we've taken a position in dress shirts to accelerate the intake of core or basic product, which carries no markdown liability.
If we exclude dress shirts, our Calvin Klein and Heritage businesses, the inventories are up about 6% at the end of the second quarter. Our receivables ended the quarter clean both domestically and internationally as well. We made a $100,000,000 debt repayment against our newly issued term loans prior to the end of the second quarter. And we plan on making additional repayments in the Q4 of approximately $300,000,000 which is ahead of our original plans. As we look forward, we're continuing to feel very good about the balance of the year.
For the Q3, we're estimating our revenues to be approximately $1,420,000,000 to $1,440,000,000 The 3rd quarter, which is an increase of $730,000,000 over the prior year. Driving the revenue increases, the revenues associated with Tommy Hilfiger at $655,000,000 and a 12% to 13% increase by our heritage and Calvin Business. Comp sales for our combined heritage and Calvin Klein outlet retail business are projected to increase 5% to 6%. Calvin Klein royalty revenue is planned at plus 7% or 9% on a constant currency. Earnings for the 3rd quarter is projected to be $137,000,000 to $142,000,000 Our earnings reflect Tommy Hilfiger EBIT of $75,000,000 to $80,000,000 or an operating margin of 11% to 12% and an improvement in operating income in our combined heritage and Calvin Klein businesses of about 10% to 11%.
For the year, we're projecting revenues of $4,440,000,000 to $4,470,000,000 Our revenues reflect Tommy Hilfiger revenues of $1,810,000,000 to $1,830,000,000 and an increase in our combined Calvin Klein and Heritage businesses of 10% to 11%. Comp sales for combined Heritage and Calvin Klein outlet retail businesses are projected to increase 7% to 8%. We're projecting Calvin Klein royalty growth of 8% to 9% or 9% to 10% on a constant currency basis. Earnings per share is projected to be $3.70 to $3.80 which is $0.15 greater than our previous guidance and includes an additional $15,000,000 in marketing expenses. The Tommy Hilfiger businesses are projected to have EBIT of $180,000,000 to $190,000,000 or operating margin of about 10% to 11%, inclusive of the higher ad spending.
Our tax rate for the year is projected to be 34% to 35%, up from our previous guidance as we've discussed. One last note, we've made great progress on integrating the Tommy Hilfiger U. S. Operations. Our PVH and Tommy teams have laid out a solid plan and we're very much on track to attain our $40,000,000 in synergy.
Overall, our savings are still being generated from elimination of duplicate functions in the U. S. We're very much on target for those savings. And with that, we'll open it up to questions.
Thank you, sir. And we'll take our first question from Bob Drbul from Barclays Capital.
Good morning.
The question that I have, Manny, could you first maybe just address on when you look at what's all done for the new numbers, the accretion like the $0.20 to $0.25 that you had planned for Tommy, could you just give us an update when it's all flushed out, where you see that for this year now in the new numbers? And I guess could you also just provide any more insights around the accretion expectation for next year or updated thoughts? Sure, Bob.
I guess for this year, given the significant amount of cash flows that are being generated in the business and the associated earnings interest savings that go along with that and the price of the transaction, the $0.20 to $0.25 looks more like $0.30 to $0.35 right now. And it's really being driven and that includes spending
the extra $10,000,000 or $11,000,000 on
marketing expenses on the timing of it. So we feel good about that business and the accretion. As I look out to next year, we haven't done another path at next year's earnings. We'll probably do that in the Q4, which is planning.
But I guess I'll make a couple of
points to try and put it into some clearly from an operating point and from a performance point of view, we're outperforming the business plan and that should be a benefit as we go into next year. The big negative against the $0.75 to $1 is the $0.75 to $1 was put together when the euro was much closer to $1.40 Today, it's more like $1.27 So that impact has to be weighted in. And when you put it all together, I don't know exactly what it's going to say, but we would expect the quarter we're missing from this year is a very strong profitable quarter for the Tommy business as well as the PVH business. So that would clearly be a significant additive. So each penny of our credit for the full year next year is worth about $0.015 to $0.02 So it gives you a sense what the currency could be on us this year something like $0.20 does offsetting that is the stronger performance in the business itself.
Got it. And when you look at the acceleration of the European retail comps, Manny, can you provide a little bit more flavor to where the biggest deltas were over the last 5 weeks versus the prior quarter? And so what were the biggest levers that you saw change?
Well, I think I would say the biggest lever is driven by geography, was driven by inventory position, not only of our business, of the Tommy business, but also of what the competitive set was like a year ago. If you go back to May, June, July 2009, clearly, that was the probably the height of the pressure that was gone from a consumer point of view in the European market. And there was an over inventory position overall in the market and Tommy was dealing with liquidating inventory as well. So there was this tremendous there was significantly more sales going on, sales periods extended longer. The promotion call outs were higher, deeper and more intense.
I mean that clearly reflected itself in the business. Last year, we were up against those tough comparisons from sales point of view, but clearly got the benefit on the gross margin at about 500 basis points. As I look at comps, I could tell you that the comp performance for the month of August in Europe was pretty consistent to what you would have expect. The Northern economies of Europe and the Central European Economies, those are the areas where we had our strongest comp store performance, Germany, Holland, Netherlands, Scandinavia, those are some of our best performances. But as I look at the screen, it's hard find any real red numbers of any significant screen for the 1st 5 months 5 weeks of Q3.
So it's been a complete turnaround in Europe, very positive sales performance and it shows no signs of slowing up.
Great. And then, Meny, my last question is essentially when you advertising and marketing plans, when you look at this year's full number, is the level that you're now planning at the level that we should think is an ongoing basis or how should we think about that sort of expense piece of the business?
Well, Bob, I think so far this year besides the we've increased the margin more than we did in the prior year in the PVH legacy businesses. We've intensified the Calvin spend. They did that concern and we've added to it. I think if the business continues its momentum, we will continue to invest in marketing. If we were to see whatever set of circumstances some potential pullback in the business, there's clearly room if we started to feel tightness or if we saw the consumer significantly back off.
There's clearly room for us to back off to some degree on marketing spend since we are spending on a brand by brand level, what I would consider record levels. So we really feel good about spend. We think we've demonstrated both in dress, shirt and dress furnishings area where we've seen dramatic market share gains over the years. And in the sportswear area, the 2 brands where we've invested heavily, Van Nuysen and Izod, we've clearly seen strong market share gains with our major customers, Macy's, JCPenney, and really abroad with our department's group. We've really been able to maintain market share.
The marketing campaigns we have are really not only national campaigns, they're also regional campaigns and that we do it at point of sale with eyesight. We bring drivers into the store to really try to promote the events that are going on around the store. We believe it drives business and we see it in our results. Our results. Our second half order book and as we're filling in those orders, we'll be up well over double digits in our heritage business, which if you think is supposed to be
a slow growth
business. We're very positive about the marketing investment and return on that investment. Thank you.
And we'll take our next question from David Glick from Buckingham Research Group.
Congratulations on the quarter and the progress in Tommy Hilfiger. Many of some helpful thoughts on the accretion for next year. I just wondered if you can update us on your thoughts on the cost inflation question and the pressures there and what you see is the puts and takes on the operating margin line for 2011. Obviously, you have your highest margin businesses growing at a very rapid rate. So you have some mixed benefits, you got the negative of cost inflation.
Can you kind of give us some thoughts on how you're thinking about the opportunity to continue to expand operating margins going forward?
Sure. I think let me just in all world by ourselves. I mean, look, I think we have an audience that really knows the industry. There's been a number of investor conferences and conference calls, so I'm not going to take you through why cost increases we're seeing in the product. I think you all know it well from labor, raw materials and transportation issues would be examples.
I'll just take a step
back. I guess just to
think about us, we are depending on the product category, we are looking at cost increases 2011. There will be somewhere between 3% 8%,
and I
guess on average around 5%. If you think about the big categories, I think wovens will be under less pressure than knits and will be under less pressure than, let's say, the bottoms businesses. And I think we tend to be a very strong woven house, so
that plays to our event.
I think if you think about bringing together 2 companies that were large to begin with, both doing about $2,500,000 in sales, bringing those together, there's cleanse efficiencies from a logistics and a sourcing point of view that will bring to the table that can mitigate some of that cost increases. And I think pricing will also be an area where we'll be able to mitigate some of the pricing cost increases that we're seeing. We're going to be very selective there. We understand the consumer is under pressure. We are testing price increases with a number of our brands as we go into the fall holiday season to see how that moving MSRPs and
moving promotional cadence to see how we react to that and
see what benefits may come from promotional cadence to see how we react to that and see what benefits may come from that. So we're clearly experimenting with all the levers. I believe that from a positioning point of view, competitively, we have to be in one of the best positions going forward on a comparison basis. Just from the fact of putting $2,000,000,000 $2,500,000,000 companies together, the leverage we get, the size of our pencil and
the way we can
intensify our order flow to key factories in order to maintain pricing or mitigate against the pricing increase puts us in a great position. And I think our exposure from a currency point of view is significantly less than what probably our competitive forces have to deal with as we go forward. So I think that coupled with pricing, it's clearly going to be a challenge for next year, but I think we're in a very good position to deal with.
And as far as some of the mix benefits owning Tommy for a full year, obviously, that's a benefit as well?
Well, yes, look, on a comparative basis, being able to take probably the 2nd strongest quarter that is not included this year and putting that into the mix next year, that'll be a big benefit for next year, clearly the cost savings that we're talking about that Mike spoke about the potential $40,000,000 that's going to intensify and accelerate as we go forward next year. It's
not on
the operating profit line, but on the EPS line, clearly, instead of paying down what we estimated was closer to $200,000,000 and now we're seeing in excess of $400,000,000 That clearly has not only a balance sheet benefit, but that also has an earnings per share benefit as we go forward. So I think we clearly have some arrows in our weapons to offset some of the price increases as we go forward.
Great. And also, Manny, thanks for that color. A follow-up on bookings. You talked about Europe being very strong. What are you seeing in the U.
S? You've been through most of your markets now. And are those market share increases extending into your bookings in Calvin and your Heritage businesses in the U. S. For the spring of 2011?
We're seeing a strong follow-up for spring 2011 and beyond indications from our retail customers. I guess just a couple of things. We don't tend to talk about North America, U. S. Order books because of the lack of certainty that goes with that business in general as an industry.
So we have projections, we've got orders and we have a significant amount of very significant amount of EDI, basic replenishment business and just furnishings. So we never really talk about that in a great blend, but it's running in the mid single digit up somewhere in the 5% to 7% range as we look out when you factor in Calvin and kind of increases we're seeing in North America. So we feel good about that. The momentum is good. When you talk about orders in Europe, orders are real orders that customers stand behind and it's very unusual to get cancellations.
I
can't say the same for the U. S. Market.
Okay. And last but not least, Mike, on the tax rate going forward, how should we think about that? And any help on projecting gross margins for the second half versus last year, obviously, very strong performance in Q2? And how do we think about gross margin versus SG and A in the second half?
Okay. Tax rates for the second half, obviously, the way our taxes work is for the Q3, we tend to recognize statutory reduction. So our Q3 tends to be the lowest quarter of the year. I think of that quarter somewhere around 35% to 36%, bringing the year down to some I'm sorry, I think of the 3rd quarter about 31%, bringing the year to about the 30%, the 34%, 35% we talked about.
Okay. And then in terms of gross margin and SG and A?
Yes. Gross margin and SG and A, we had a phenomenal second quarter in terms of gross margin. We were up about 500 basis points. As you move through the 3rd Q4, we'll see those gross margins continue to improve, but not to those levels. We'll look at something closer to 200 to 300 points as we move into the 3rd Q4.
Okay. And then as far as tax planning for next year, any improvement on this year?
We get there's a lot going on there. We've got ups and downs. We get European business, as Mandy said, the 2nd strongest quarter of the year. So we're working through it, David. I feel good about our I feel good about the rate holding in that in the range we're at this year for now.
Okay, great. Thanks a lot. Really appreciate it. Good luck.
And we'll take a question from Omar Saad from Credit Suisse.
Thanks. Good morning. Great job. Tommy Hilfiger margins, I was a little bit surprised that the U. S.
Margin was above the international piece this quarter. Is that a currency issue? Is that a seasonality issue? And if you could update us on the profitability outlook for the Tommy Hilfiger business. I know one of the things that attracted you was the high level of margins and the lack of discounting in the Europe and international pieces.
Can you just give us an update and help us understand the margin dynamics in the Tommy business?
Sure. We talked about this on the last conference call. The Q2 by far is the seasonally is from a seasonality point of view is the international businesses weakest quarter. It is not indicative of the overall profitability. Clearly, the business is 75% wholesale.
And when you think about the months that are included May, June July, those aren't the largest shipping months that we have. So there's a fixed income expense component in there that impacts the business. As we look out for this current year, we're planning the international business at about a 10% operating margin to 11% in the U. S. At about a 9% to 10%.
So we'll be someplace around
a 10% to
11% operating margin overall. And when we think about next year when we have the full 12 months in, I think it's much closer the European business will be closer to 12% to 14% operating margin. The U. S. Will be closer to 9% to 11%.
When you put it all together, we should be about 11% to 12% operating income margin for the business.
Got it. That's very helpful. Did you guys sorry if I missed it, but did you guys talk about the currency impact on sales or profitability coming out of my business this quarter?
Well, it's hard to talk about it because there is no we're only showing 1 year on the Tommy business. Originally projected currencies to be in the $1.20 to $1.25 range. We were on the high end of that on average for the quarter. So it was a slight benefit, I would say a couple of pennies the segment against guidance. And since we're not comparing against the prior year, it's hard
to really talk about that any further.
Okay, great. One last question. There's been a lot made about switching gears to the Calvin Klein piece, the denim cycle and there's some worries that there's a lot of discounting going on out there and that we have the strong denim trends that we've been in. Did you think do you have a view on how that could impact the Calvin Klein Jeans business?
Well, I think it's I think you have to break the markets and you think about it. I think in U. S. In particular, I've read the same stories and heard the same type of focus on jeans and denim being under pressure. I think you have to remember that the medical jeans business about 50% of it is hot and that portion of the business is exceedingly strong and I think that continue.
So I think it's into our projection. On an international point of view and I think our price positioning where we target retail is at 59%, 69% and 79%. I think we're in the sweet spot of the market from a designer gene point of view and are gaining market share in the U. S. In a tougher market.
We also kept paid on royalties on sales, we don't get paid on gross margins. So we don't have
that exposure that if you were operating the business,
you might have gross margin. Exposure in our business for the talent business. Internationally, I think it's a different story.
And I think
the positioning of the Calvin Klein brand internationally at the think the positioning of the Calvin Klein brand internationally at the price points that it's at, it's clearly a fashion driver. I think that business will continue to be very strong. It's being driven by goods wholesale business, but retail square footage growth overall that's probably in excess of 25%. We're adding in total for Calvin Klein probably close to 150,000 square feet worldwide globally for the brand and in jeans that's a significant portion of that expansion.
Thanks very much. Congratulations.
Thank you.
And we'll take our next question from Kate McShane from Citi Investment Research.
Thank you. Good morning. It appears your guidance that you gave today is taking into account the beat for the quarter with the offset for the ad spend and the taxes and it doesn't seem like you've changed your outlook for the back half compared to when you gave guidance back in May. Is this the right way to think about it? And what are you thinking about the back half now to what you're thinking back in May when perhaps there was a little bit more consumer confidence?
We haven't I guess I would say a couple of things. If you factor in the $15,000,000 of additional advertising and if you factor in the hit that we took on the tax rate against our guidance about $0.10 I think you'll see that we clearly have not only we've taken up overall the 3rd Q4. And I want to be honest, not to the level or the trend the current trends that we're seeing in the business, but we've taken it up against the guidance that we gave 3 months and tried to factor in some improvement. And we've rolled through all of the beat that took place in the Q2 and then anticipated some additional benefit of that in the 3rd Q4, clearly not to the level that we're seeing in the actual business on a quarter to date basis. And part of that is conservatism, part of that is we're going to start the cycle and we've just started the cycle last week or so, much tougher comp store comparisons.
Our comp stores in 2,009 improved significantly in the 3rd Q4 of last year. We're up against that. We seem to be cycling that pretty well and putting on increases on top of that. But again, until we can get a little bit more history there, we're not going to get too far ahead of us. I think I answered your question, Kate.
Yes, you did. Thank you very much. And the second question I had was, I think I heard you say, Manny, that you saw 20% growth in the Calvin Klein men's sportswear business. What is that being driven really by? And are you selling into any channels this year that you weren't selling into last year?
No, there's no new customers. There's a few new doors and existing customers with Dillard's and Macy's adding a few doors, but it's really driven by it's being at the door level by comp stores. We're also gaining some square footage in key doors. And we had an if you just go back, we had an outstanding Q4 last year and a very strong first and second quarter this year. So it's good performance really fuels itself, particularly when you control the space.
And with Calvin, we're totally in control of the space, the shops, the marketing environment. We can intensify the inventory build in partnership with our key retailers. It's much easier to control. So we've really been able to get behind the sales growth quicker in that business than some of our other businesses where we've outperformed at retail to really capture the sales even quicker. I think you're seeing it also in the eyesight and Van Eusen business, but it's actually happening in a quarter later because we don't contribute because those are our classification main floor brands.
We don't control the square footage. It takes a little bit longer to cycle in the inventory to get your open to buy dollars opened up to really commit to it. And Calvin Klein is Calvin Klein. It gets most favored nation treatment everywhere as a brand. So we're able to when we see strong selling, we're able to react even quicker to that brand.
Okay, great. And then my last question is on inventories. Now we're up about 13% during the quarter. Are there certain categories where inventories were higher than others?
Yes. Kate, it's Mike. The big driver there was the dress shirt inventories. We were chasing goods all last year. We made a decision this year that we were going to be more in stock on the basics, the core products, the products that carry no markdown liabilities.
We've been heavier throughout the year and the investment has paid a nice return for us. We continue to invest in that business. When you pull out the dress shirt business, the inventories are legacy and Calvin business up 6%. The 13% in total against an 11% sales increase, I think it holds on its own, if you pull out the gestures, we're up about 6%.
Okay. Thank you.
And we'll take our next question from Jeff Klinefelter from Piper Jaffray.
Yes, thank you and congratulations on a great quarter. Just a couple of quick questions. One would be on the European business, Manny, noting the trends
for your 2 largest markets,
Germany and France, going into spring and France going into spring 2011 bookings both being up high single digits. Could you touch on Spain specifically? I mean that's quite a reversal from the trend this year. Are you seeing just
lapping tough comparisons is helping?
Are you seeing an actual increase in an actual increase in floor space, in doors? With the wholesale side of it, the retail side of it, is it traffic pickup? Is it AUR stabilization? Just a little bit more detail around the Spain recovery. And then the other question would be on Asia.
Could you touch a little bit there for the Tommy brand, what you're planning for Asian expansion over the next year or 2?
Thank you. Sure. Let me the 2 launches just to clarify are Germany and France. Germany and Spain, you said France and I said it too. It's Germany and Spain, I apologize.
Germany about 25% of the business, Spain about 15% of the business. And I think, Jeff, you answered the question probably better than I could, you really hit the high points. We are lapping 2 seasons of tough business and tough comparisons. So the comparisons get much easier. The business in Spain has stabilized.
So we are back now to starting to grow off of the lower base. The business for those two seasons combined are are down for spring of 2009 and spring 2010 combined the businesses were down somewhere in the high single digits and we started to see that trend reverse. I think very similar to what happened in the U. S. As retailers have gone through tough business, they really come back to buy back into proven winners like the Tommy business.
El Corte Ingles is our largest retail account in Europe. It's we have a great relationship with them. We perform exceedingly well at retail for them. So we are gaining floor space. We are gaining market share in that store.
So it's a combination of cycling some poor business, the whole business stabilizing us, stabilizing and at the same time was gaining market share in a tough economy as some weaker competitive players fall off the landscape gaining that business. So it is a significant turnaround. It's something that we were planning and hoping for and it's materializing as we go forward. The Asian business, we just to remind everyone, we operate directly Japanese business, it was a business that was brought in house about 2.5 years ago from one of our licensing partners and that we run it directly. It's a business, Japan in general, the economy has been tough.
It's a business that's very profitable for us. The comps are tougher in that market, but our business in Asia, in Japan in particular continues to be very profitable and we continue to perform. The other markets that we're in, we utilize the licensing model there throughout all Southeast Asia. We have a very healthy business in India. We have a very strong business throughout Southeast Asia excluding China.
And we have a developing business in China, which is being done in a licensing arrangement today, which we announced that we'll be taking back in house sometime during the middle of next year. I think it's June of near 2011 that we'll be bringing this in house. We'll run it either through venture or operated directly as an operating unit. We're in discussions right now to finalize that. We think China should be a very strong growth area for Tommy.
We would imagine it's also it's an area where our Calvin Klein business is in excess of $200,000,000 and our Tommy business is about $30,000,000 We see an opportunity there and position ourselves we can really enjoy that market as
we go forward. Manny, just one other quick question on your marketing spend plan, your plans for Europe versus the Europe, the brand has a little bit different today or based on how it was historically established in terms of infusion. Can you about the marketing spend differences between the two markets or how the marketing is utilized and what you might be leveraging back and forth across the 2?
Yes. I think the additional marketing spend is being split between Europe and between international and the United States, the B50, the incremental spend and where we've seen it. I think the spend is you'll see a lot more of the European's back point of sale in the retail market. We operate about 200 stores in Europe direct. Having those flagships, having those full price stores in some of the best markets in the world are some of our best marketing and communicating with our consumers on that level is some of the best way to communicate the brand.
The positioning internationally of the Tommy brand and the percent of the brand is higher outside the U. S. Than it is inside the U. S. We've talked to the confusion over the last 4 or 5 years with the Tommy brand as it's been stabilized.
We have 4 years as we've tried to be much more consistent in our presentation on our pricing and our distribution channels that has been much more consistent. But there I think in the U. S. What's clear is we need to continue to invest, we need to continue in marketing, we need to continue to invest to keep the brand positioning consistent and we need to be true of what the brand heritage is. And I think clearly the previous management for the last two and a half years and we will continue that as we go forward.
The change you'll see is hopefully a consistent marketing spend. Marketing spend will be high tail partners, particularly Macy's will be really working very closely both on presentation at point of sale and in marketing throughout the U. S. Market. So I think you'll see a step up in it.
We're very excited about the new campaign, Meet the Hill figures. I think you'll start to really see it in a more visible way. I think it's really gone off to a great start and I think you'll really start to see a 3rd Q4 as we go forward with some exciting new marketing that I think will lift the brand perception. That's our goal is to move the brand perception as we go forward particularly in the United States.
Thank you very much.
And we'll take our next question from Helena Tse from Bank of America Merrill Lynch.
Thanks. You mentioned the share gains in your heritage wholesale business, Izod and Van Housen. Is that increased floor space or increased store counter, a combination of both? And who would you be taking share from? Is that private label?
The growth is coming from principally square footage growth with some of our largest retail customers, getting another program, another table, adding some new product categories, big initiatives for IZOD is bottoms business and we've been adding that throughout our customer base. We're seeing a rollout of Van Eusen at Macy's over the
last 12 months that will continue both in
dress shirts and in sportswear and the IZOD business continue both in dress shirts and in sportswear.
And the Izod business continues to expand product categories with Belk's and some of our
other leading departments. So it's really less of a door expansion and more of a square footage growth within the door count. And the retailer is allowing us not necessarily to run as a collection business, but allowing us to pull together our eyes on positioning on the floor, taking our wovens, our knits, our sweaters and our bottoms business and presenting them together as a pull together classification businesses where we really can get some intensity on the floor for the brand, coupled with our marketing and just improving our sales productivity at retail, principally our sales per square foot growth at retail with our major customers. So that's where it's being driven from. As far as the competition, look, I think value is winning and we're taking away some of the positions from some of the tertiary brands that were on the floor that have been eliminated out of Matrix and I'm not necessarily going to get into it all, but either one that I think is public and I will be speaking in attorneys, clearly Claiborne and department stores has taken full position and moved away for J.
C. Penney focus there. And between Van Usen and Iglot, we haven't lost any force back with those two brands, in fact, gain at JCPenney. So clearly, Claiborne moving out was a win for us overall
in the department store.
That's great. And then some other questions. One, I know that the U. S. Order books for spring are obviously subject to change, but can you comment on sort of your spring opens by relative to, I guess, industry and sort of how is inventory in the channel right now?
Guess, I'll speak on inventory levels at retail. I think the retailers we went through a series we went through 9 months starting in the Q3 of last year where retailers were chasing inventory consistently from suppliers. And because of the availability of production piece goods, we were really in that time frame, you were able to react quicker. There was production availability. We were able to get it in.
You were able to do what's necessary, fly goods, do whatever. It was transportation available. That as demand really started to dramatically improve in the Q4 of last year coming into 2010, clearly production started to fill up. You know all the stories about all the transportation issues. We were very clear with our retail partners, if you want goods, it's going to be very difficult to chase in the second half of twenty ten.
You're going to have to get the orders. So the retailers were forced to really get ahead of the sales trends and they're buying into whatever their planned sales comp trends are. We're seeing that in our business. And right now, I'd say the inventories are in good position. We're in excellent shape at retail.
The sales plans with our key customers seem to be running ahead. So clearly, inventory is in good shape. And when they have bought into their be it a 2% or 4% comp store increase depending whatever it is, the retailers have basically bought into that one.
That's great. And then one last quick question. You guys mentioned sort of the fluctuation of the euro and sort of the hit to the 2011 EPS accretion. Can you talk about any accretion you might expect to achieve by increasing your debt pay
down? Sure. I think the best way to look at that is our average borrowing rate on a term debt is about 5%. So as we pay down $200,000,000 or $400,000,000 or whatever the number is of debt, the savings will translate that. So on $400,000,000 up to down this fiscal year, dollars 100,000,000 which is in the first which is in the was in the second quarter, we'll probably have an interest expense savings somewhere in the $15,000,000 to $18,000,000 range next year.
That's good. Thanks so much, guys.
And we'll take our next question from Howard Tubman from RBC Capital Markets.
Thanks guys. Maybe just a related question. In terms of uses