Good day and welcome to the Phillips Van Housen First Quarter Earnings 2010 Conference. This webcast and conference call is being recorded on behalf of PVH and consists of copyrighted material. It may not be recorded, reproduced, retransmitted, rebroadcast, downloaded or otherwise used without PVH's expressed written permission. Your participation in the question and answer session constitutes your consent to having any comments or statements you make appear on any transcript or broadcast of this call. The information made available on this webcast and conference call contains certain forward looking statements, which reflect PVH's view of future events and financial performance as of May 24, 2010.
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 any forward looking statement, including without limitation any estimate regarding revenues or earnings. Information made available also includes certain non GAAP financial measures as defined under SEC rules. A reconciliation of these measures is included in company's earnings release, which can be found on the company's website, www.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, it is my pleasure to introduce Emmanuel Chirico. Please go ahead.
Thank you very much. Good morning, everyone. Joining me on the call this morning is Mike Schaeffer, our Chief Financial Officer Pam Butkin, our Treasurer and Investor Relations point person and Ken Duane, our Vice Chairman running all of our wholesale business company. I'm going to focus my comments at the beginning of the conference call
on the Tommy Hilfiger acquisition. I'll try to give you a
sense of the business trends. The Tommy Hilfiger acquisition. I'll try to give you a sense of the business trends and our financial outlook for that business. As we indicated in our earnings release, we're projecting that the Tommy Hilfiger business will generate about $1,800,000,000 of sales this year and about $180,000,000 to 100 and 90 this year and about $180,000,000 to $190,000,000 of operating income for the 9 months, May through January 31, 2011. Let me put those projections into perspective for you.
On a revenue basis, we're estimating revenues to grow about 5% in a local currency on a local currency basis from theory. I characterize the Tommy revenues projections as conservatively prudent given the actual much stronger current trends in the business, offset against the backdrop of a very chaotic world. To date, we have not seen any pullback in the positive sales momentum in the Tommy business, both domestically and overseas. The business has stayed very strong, both from a sales point of view and from a margin point. I'm going to try to talk about each of the businesses and try to put some color on it for you to give you a sense of it.
The Tommy Hilfiger Europe Wholesale Business represents all in about 45% of the total volume of Tommy Hilfiger. Our projections assume revenue growth of about 5.5% on a local currency basis. Our full order book in Europe is running up over 10% and our replenishment business in spring is very strong. To give you a sense on that on a product by product category basis for fall, footwear is up over 20%. Footwear was a category that was taken in house about 2 years ago and has had very strong growth for us.
Denim is up about 15% for us. Our men's and women's businesses are up 8% to 9%. Our kids business overall is up 4%. So on a category basis, we're seeing growth in all categories. On a country by country basis to put it into some perspective, I'm going to break the countries down for you in a couple of key areas.
I'm going to focus first on the countries where Tommy has a very strong leading market position in the country and the relative economy in Europe is strong there. So, I would put Germany, Scandinavia, Austria, Belgium, the Netherlands, Switzerland in that category. All of those businesses are showing growth in the full order book of between 10% 15%. Germany, which is our largest country and represents a little bit over 25% of the total European volume, its full orders are up 15%. Now, I'm going to focus on in Fatami on those countries where the Fatami market share is significantly underdeveloped and where we are targeting growth.
That would be France, which is up full orders 25%. The UK, which we're back in a more significant way the last 2 years is up 50% full order book for last year. Italy, whose economy is under pressure, but where Tommy is seeing growth throughout is we're planning that business to fall up 5% and Russia is up 10% over last year as we go forward. Finally, let me Finally, let me both touch on the countries where we are see where clearly there is an economic challenge going on and even there the time of business is seeing some contraction. Our 2nd largest country is Spain, that the flow orders there are down 6%.
To put that into perspective, last year, the business was down 15%. So clearly, we're seeing a deceleration in the negative trend there, but Spain is a country, obviously, it's under pressure. Ireland, which is a very healthy business for us, we're seeing our haul orders down about 7% and Portugal, which is a very small country for us, obviously, is down about 12%. Moving to our Tommy European Retail business, we're planning the comps in this business for the 9 month period May through January to grow 1.5% for the period. The last 6 weeks trends in our retail business has been about plus 4%, with stronger than planned gross margins.
Inventories are very clean and we're seeing good sell throughs on all products. We're chasing products both in wholesale and retail from a sourcing point of view. And our retail business, if you look at it country by country, our largest countries, Germany in particular and some of the Netherlands, some of the other countries are posting in the low single digit comp basis. So we're seeing good retail performance out of the retail business in Europe. The retail business represents about 25% of our European business and the wholesale business represents about 75% of our European business.
Moving to North America, North America represents about just about 45% of Tommy's global business. I'll start with the retail business. Retail represents about 75% of our volume in North America. We're planning the comps at a plus percent comp store growth. Been posting very strong sales here and stronger than planned gross margins as well.
So clearly, we're feeling very good about the U. S. And Canadian retail businesses for Tommy Hilfiger. On a wholesale basis, in the U. S, Macy's business represents about 90% of our volume in wholesale.
The business is planned to grow this year about 3%. We've been consistently ahead of our retail plan at Macy's for the last 3 months. Our orders for fall in holiday are running slightly ahead of our plan levels. We're seeing good sell throughs at retail and our margins are right on plan with Macy's. The Macy's relationship with Tommy is very strong.
We have agreed to extend our exclusive relationship with Macy's for another 3 years, which will take us through 2013. We feel very good about the long term prospects of the Macy's business and believe that we can double the size of the Tommy business at Macy's over the next 3 to 4 years through growth in existing categories
and the expansion of product
categories through new licensing arrangements. Categories through new licensing arrangement. When we roll up the Tommy business on a local currency basis, each of our businesses are projected to exceed our original estimate. However, when we convert to U. S.
Dollars and consolidate, we continue to estimate that the Tommy Hilfiger acquisition will contribute $0.20 to 0 point $5 of earnings accretion in fiscal 2010. Let me put some color on that to you when we think about the Tommy business for the year. Our previous earnings guidance on April 20 1 for Tommy assumed a euro to dollar conversion rate of $1.30 to 1 $0.35 Our current estimate assumes a euro to dollar conversion rate of $1.20 to 1 point $2.5 Each $0.01 change in the euro to dollar conversion rate is worth 1p in earnings per share. The euro to dollar
euro to dollar conversion rate
is negatively impacting our consolidated results by $0.10 to $0.12 per share. We have been able to completely offset that hit through a stronger trend in the Tommy businesses both
domestically and internationally and
also now on the Q2, because I think our estimates there caused some concerns for some of our investor base. Overall, we haven't changed any of our projections for the Q2. We hadn't given guidance for the Q2. If you look at the Tommy Hilfiger business on a seasonality basis, the 1st fiscal quarter is their strongest quarter on a wholesale basis in Europe. Their spring shipping sales plan for the 1st 6 months of the year is approximately €300,000,000 €200,000,000 is shipped in the 1st quarter and 100 euros 100,000,000 to ship in the Q2.
The split in the back half of the year is much more balanced. It's 60% to 65% 3rd quarter, 35% to 40% 4th quarter. So, it's much more balanced. 1st quarter has a significant amount of shipments that go out. It's the nature of the European business.
The retail accounts there take the goods early has set the full store up and it is a very, very profitable quarter for us. And that is the reason why the Q2 only with $100,000,000 of wholesale shipments, we're only projecting for the second quarter $40,000,000 of operating income for Tommy. When you layer on top of that the capital structure, the additional shares outstanding and the interest costs associated with the financing of the transaction, it creates about a $0.12 dilution in the quarter. That means that the 3rd 4th quarter are actually $0.37 accretive for the second half of the year. The other hit in the second quarter is a shift in the spending of our advertising associated with the ISOC sponsorship of the Indy Racing Car League and our decision to really heavy up the marketing spend in the second quarter in connection with the Indianapolis 500, which is coming up this weekend.
That's about a $10,000,000 shift, about $0.08 per share in earnings per share that is coming out of the 4th quarter as an expense and is shifting into the Q2. So our guidance of $0.50 to $0.52 if you would add back to $0.20 that I just described would take us to $0.72 and that would be in excess of 20% growth year over year. So there's been no slowdown in our business in the Q2. We feel very positive about the trends as we go into that business. I want to move on to our PVH standalone businesses and focus on Calvin Klein.
In the first quarter, our Calvin Klein licensing royalty business was up 13%. On a constant currency basis, it was up 10%, clearly ahead of our plan for the year, clearly continuing the momentum that we saw in the Q4, where there we also saw double digit revenue growth for the Calvin Klein business. As we look at the product categories in the Q1, the positive change was in fragrance. We were up over 9% in fragrance category, strong growth out of euphoria and also in our CK businesses internationally. We are really planning for a very aggressive marketing year in fragrance.
We have a major launch plan in the Q3 of this fiscal year with Calvin Klein Beauty. Diane Kruger is our celebrity spokesperson there that we expect that business to really have a positive impact from a marketing point of view on the global Calvin Klein franchise and are expecting strong growth out of fragrance as we go forward. Our Wannaco business was up on the U. S. Dollar basis about just a little bit under 9%.
On a constant local currency basis, it was up about 5%. They've spoken about in the Q1 some U. S. Shipping changes by channel distribution. So we were right on plan with their projections.
The business is being planned up for the year 8% to 10% overall. We've got some significant marketing and product initiatives going on. 1st in underwear, in the spring we have the X Underwear campaign, it's getting terrific public relations exposure and excellent exposure for the brand. We're seeing excellent sell throughs at retail and we're seeing strong placement in the goods at retail for our underwear business. In the fall, on the women's side, we'll be launching a new foundations business with our ENVY bra business.
It should be a very positive launch as well, significant marketing campaign around there. The reaction in the market has been very positive for us as we go forward. On the jeans side of the business, jeans business has been healthy, continues to be healthy. The strong suit there continues to be our international growth, but we are seeing some strong growth, particularly in the second half of the year associated with our domestic U. S.
Business. In the second half of the year, we'll be launching an ex jeans campaign and product category program.
The jeans will retail
at $99.50, continue to drive the business as well. Moving to some of the other product categories, G3 continues to outperform in the quarter. We saw just very strong performance from our G3 business. Their business is up over 25% against last year. Strong, very strong growth in dresses, very strong growth in the women's suit business and the performance business.
And we're also seeing although it's not impacting royalties, which we're still on a minimum basis, we're seeing very good growth and strong placement of our women's sportswear business, particularly with Macy's. We're growing doors there and we're expanding offer. So that business will benefit all of being such a key product category for us women's sportswear for the Calvin franchise. We think it's going
to lift all businesses as we go forward.
We're seeing good growth in our accessory businesses, our watch business and our footwear businesses in particular. Our footwear business in the quarter was up 15% and we're expecting strong growth for the balance of the year. Our watch and jewelry business was up over 20% in the quarter. We're expecting strong growth for the balance of the year. The Calvin, we're expecting royalty growth rates to continue in the 12% range for the Q2, for the full year about 7% to 8%.
We feel very strongly about the Calvin business and we believe after a tougher 2,009 with the business only grew and I put that in quotation marks 5%, we think we're back on track where we can continue we can exceed the guidance that we've given here of 7% to 8% growth and get closer to double digit growth in the Calvin business. That business is very strong and very healthy for us. Our legacy businesses in the Q1, our combined legacy wholesale and retail business was up 11%, our comps were up 12%. We're planning the business in the 2nd quarter to be up 5% to 6%. We are being conservative in our estimate for comps in the 2nd quarter with about a 5% to 6% growth rate for comps in the 2nd quarter.
Overall, through the 1st 4 weeks of May, we're seeing the business if you shift out to late for the Memorial Day weekend, that's coming up. We see our business up closer to 10% to 11% on a comp basis. So the trend that we saw for the 1st 3 months of the year has continued into May and we feel very good about that business. For the year, we're planning comps at about a 4% to 5% growth rate that would translate into about a 2% to 3% comp store growth for the second half of the year. We think that's a prudently conservative estimate.
We start to comp estimate. We start to comp come up against much smaller comps beginning in September October of the upcoming year where we in the Q4 just to remind you, our comps were up 13%. But given the strength of the business, the tone of the business, how we look at the business on a 2 year basis, we think we are being conservative in our 2% comp store growth for the second half of the year. So that's retail. On the wholesale side of the business, we had very strong growth in the Q1 of the year.
We were up 10% overall in our wholesale shipments, strong performance across the board dress furnishings and sportswear. The Q2 we have pegged in for growth of about 5%. Overall, the pulling of goods continues with retailers moving up shipment dates. If the trend were to continue, we would expect to exceed the 2nd quarter sales estimate that's in the plan. And if trends were to continue, we'd expect to exceed the guidance that we've given for the year on the wholesale business as well.
Business is healthy across the board. In the dress furnishings area, we started to ship the Walmart business in the neckwear area, good reaction to that product at Walmart. In fact, a big area for us. On the sportswear side of the business, the Calvin Klein business continues to outperform plan, continues to outperform just about all collection businesses on the floor, but we're seeing very strong performance out of Calvin. Our eyesight business across the board is running well ahead of plan at all retailers, particularly Macy's.
We're seeing good, very strong performance there. This is a big weekend for us with eyesight from a marketing point of view. It's the I mentioned at the beginning of the conference call. The Indianapolis 500 is this week. There's major PR events going on in New York today and throughout the next 3 weeks at Macy's Square.
In Boston, yesterday, we had a major campaign going on with celebrities, spokespersons there. And obviously, at Indianapolis, at the Indianapolis race course, there's a lot of marketing going on. You'll see us all over the television this weekend on the Indianapolis 500 race, both from a marketing point of view, advertising. And from a PR point of view throughout the race, you'll see the eyesight logo just about on all race cars, on all drivers, and you'll see it prominently displayed on ABC and at one of the largest sporting events in the world. So that's a very positive for the iPad brand and continues to have a lot of momentum.
The Van Usen business, the Van Usen business at wholesale, both the dress shirt and wholesale business, sportswear businesses are very strong, particularly at JCPenney's where we're seeing just excellent sell throughs. We're seeing an increase in our plans there and growth as
we go forward.
So we're when we look at our business and we see how the all of the when we look at our business and we see how all of our businesses are trending both in the U. S. And internationally, the Tommy business as well as the Calvin business in Europe and Asia, our trends would tell us that we should be much more aggressive on our earnings projections for the year. The one big question mark that's out there is what's going on in the macro environment. I don't need to tell you the pressure the euro is putting on just purely from a translation point of view of our earnings, as I mentioned that at these levels is negatively impacting us to the tune of about $0.10 to $0.12 this year at a range of $1.20 to 1.25 clearly, we feel good about our business and how that's performing.
And if we were just projecting off of that, we would be more aggressive. But given the backdrop that
we're estimating against, we've made the decision to be conservative to
beat go through. With that, I'll turn it over to Mike to talk about the business.
Thanks, Manny. The comments I'm about to make refer to non GAAP measures and are reconciled in our press release. We're very pleased with our Q1 results and our current projections for the balance of the year, which include the Tommy Hilfiger acquisition. Revenues for the Q1 were very strong, up 11% and fueled by all business. Our CK licensing business delivered strong licensing revenue gains of 13% overall and 10% on a constant currency basis.
Our wholesale and retail businesses also performed very well and were plus 11% for the prior year. Comp store sales in our retail stores was plus 12%. Our strong retail sales have continued to gain momentum through May. Gross margins for the quarter were also strong with our wholesale retail businesses delivering gross margin rate improvement of 2.90 basis points over the prior year. Clean inventories and better than planned sell throughs drove the increase.
Total company expenses were also favorable for the quarter. Expenses were down to the prior year as a percent of sales 120 basis points as a result of the team leverage on sales. EBIT for the quarter was $0.83 versus last year at $0.53 and reflects 57% increase over the prior year. On the balance sheet, our inventories were on plan, very clean and relatively flat for the prior year. Cash was $791,000,000 and reflects the proceeds of our equity offering, which was completed prior to the end of the quarter.
The proceeds $365,000,000 were used to fund the Tommy Hilfiger acquisition, which was completed on May 6. As we're looking as we look forward, we are projecting full year earnings per share to be $3.55 to $3.65 Our earnings per share guidance reflects our previous earnings per share range of $3.25 to $3.33 plus the Q1 upside to our previous guidance, which was $0.03 plus the Tommy Hilfiger accretion of $0.20 on the low end of the range and $0.25 on the high end of the range. Lastly, we added accretion from the core PVH businesses of $0.07 on the low end of the range, dollars 0.04 dollars 0.04 on the high end of the range. The Tommy Hilfiger accretion remains unchanged from our previous guidance, while absorbing approximately a $0.10 impact from the devaluation of the euro. The Tommy Hilfiger businesses are exceeding plan, performing very well and have allowed us to absorb the currency impact.
$4,350,000,000 to $4,401,000,000 and reflect approximately $1,800,000,000 of revenues from the Tommy Hilfiger business. Calvin Klein royalties as well as our wholesale and retail revenues are planned to increase 7% to 8% for the year. Comp store sales are projected to grow 4% to 5%. For the Q2, earnings per share we are projecting earnings per share of $0.50 to $0.52 Included in our guidance is a shift in marketing expenses into the Q2, primarily from the Q4 of $10,000,000 or $0.08 per share as a result of the PVH Pizot Indy sponsorship. Also included in the 2nd quarter is dilution from the Tommy Hilfiger acquisition of $0.12 per share as primarily as a result of the seasonality of Tommy Business.
Revenues for the Q2 are being projected at $1,080,000,000 to $1,100,000,000 which includes Tommy Hilfiger revenues of $520,000,000 We're projecting another strong quarter of revenue growth for Calvin Klein with revenues projected to grow 12%. We're also projecting strong
growth in our wholesale retail business with revenues
planned to grow 5% to 5% strong growth in our wholesale retail business with revenues planned to grow 5% to 6%. Outlet store comp sales excluding Tommy Hilfiger are planned at 5% to 6%. We're now going open it up for questions.
Ladies and gentlemen, the question and answer session will be conducted electronically. You. And we'll take our first question from Bob Drbul with Barclays Capital.
Hi, good morning. Hi, Bob. I guess the first question that I'm interested in, it's a little bit longer term for next year. I think when you announced the transaction, you had talked about $0.75 to $1 of accretion for next year. Do you still feel comfortable with that?
How should we think about that at this point in time?
Sure, Bobby. I guess I would say, first of all, we've owned we've closed the transaction on May 6, and we literally own the business for less than 3 weeks. Our focus at this point has been obviously has been on integration, which is moving ahead very smoothly. Management team is working together and it's been focusing on re projecting fiscal 2010. We've not attempted to try and take the 3 year plans that we put together and re project those at this time, it would be premature to do it.
So we're seeing a stronger tone in business right now than was originally than the numbers we use to originally project the Tommy business, but I don't know how that really flows through to 2011 at this point. I will say to you that the $0.75 to $1 was based on a euro of about $1.35 and that are if we were doing it again, we'd be projecting something between $1.20 $1.25
On a
full year basis in 2011, each $0.01 change in the euro to dollar conversion rate is worth about $0.01 on a full year basis as opposed to this year on a 9 month basis. So to give you a sense of that, I guess if you added that up, it could be net if we weren't able to offset any of the the currency hit at the current rate, it would impact our earnings accretion by about $0.15 a share. So that range of $0.75 to $1 might be $0.60 to 0.85 so just to put it into some perspective.
Okay. And then and Manny, I was wondering if you could go into just on the Tommy piece versus the PVH piece, the opportunities that you see on the sourcing front, you haven't really talked too much about that. I was wondering if you could maybe give us some examples of where you think the opportunity lies, what they do better than you and what you guys do better than them?
Sure. I guess both of companies use different business models just so everybody on the call. We do our sourcing internally. We have a foreign office. We do use agents in certain countries, but we have foreign offices based in the Far East, China, Hong Kong, India, Pakistan, Bangladesh.
In the Middle East, we also have a record presence and in the Caribbean, we have a presence and we manage that and we think we do that very well. Tommy uses Lee and Fong to do it's a non exclusive basis to do about 70% of their sourcing and then 30% they'll go direct to other agents or by themselves directly. So what we've decided to do is keep both business models in place. Clearly, our sourcing model works for us. Their sourcing model works exceedingly well for them, particularly in their international
markets. What we have seen is, as
you would expect, given our heritage in woven shirts, dress shirts and sportswear, I don't think anybody can source that product better than us, just given our heritage from the manufacturing point of view and our positioning around the world. And clearly, we I think that's an area where PVH itself. The Tommy business, just to give you one product category in the sweater area, Tommy has a huge sweater business and we found their quality and their pricing to be superior. And what the strategy will be is to take the best practices of both companies, utilize the sourcing base as most efficiently as possible in order to take advantage both from a costing point of view, a speed to market point of view, efficiency point of view in order to take advantage of all those opportunities. So I think from a competitive point of view, we couldn't be in a better position both given our size and scale and given that we have these 2 business models parking as well as they are.
Thanks, Meny. And Mike, I just have one question for you. When you look at the back half of the year, the Q3 versus the Q4, are there any major calls that we need to think about from a modeling perspective around the Tommy business specifically?
Dave, I'm sorry, you broke up on the last part of the question.
Is there any on the Tommy piece for the 3rd Q4, are there any major callouts that would have a big factor in terms of impacting the estimates in the 3rd Q4 that we should know about now?
The Q3 for Tommy similar to our business tends to be a bigger quarter for Europe. And on the U. S. Business, it's a business that is primarily retail and runs pretty much like our retail business.
And I guess that will be the best guidance I can give. And I'd say and just to think about it, I think, if you're thinking about the back half of the year, I'd say 60% to 65% of their profit will be in the 3rd quarter, 35% of their profit will be in the 4th quarter, very similar to how our business tracks. Great.
Thank
We'll take our next question from David Glick with Buckingham Research Group.
Just wondered, Manny, if you could update us on your thoughts now that you've actually owned the business for 3 weeks. What the cost savings opportunities are? Do you think you could recognize them sooner or in a greater magnitude than your original guidance? Some early progress you may have made in harvesting
some of
the revenue synergies for your heritage Phillips Van Housen brands?
Sure. I'll take the easy one first on the cost side. I think from the beginning, we basically said this transaction is not about day, we're $40,000,000 We're very comfortable with that number. At the end of the day, could it be a little higher? Yes.
But we're very comfortable with $40,000,000 We've said for the 1st 12 months, 9 months this year and the Q1
that these these savings will
be somewhere in the $12,000,000 range. We're still comfortable with that
as well.
And just such 2 large businesses that are operating so well, it just doesn't make a whole lot of sense to us to go and try to save $5,000,000 to $7,000,000 and do something that might move too quickly. So we're trying to move judiciously as we go down the street. So from a cost point of view, I think we're very comfortable with it. We've layered in no savings for sourcing at all. Clearly, the opportunity is there.
If it's not savings given what's going on in the world in general, I think we will be in a position to manage whatever cost increases we might see coming forward as well as anyone in the market. On a revenue synergy basis from heritage point of view, I turn it around instead of PVH, what we see is what the autonomy management team has seen in Europe. They're very they seem to be very excited about the prospects for IZOD in
Europe and IZOD in Europe
and seem very excited about the potential for taking over some of the ARO businesses where ARO has a relatively strong presence in Europe at much higher price points. Given their infrastructure, they look at that business and believe that they can very efficiently potentially take markets in house and operate very cleanly by setting up a separate division, but utilizing the internal back office of the Tommy E. Hilfiger European operations. So the eyes on opportunity, they just love what the brand stands for in North America. We all recognize that the brand is not well known in Europe, but given its price positioning, given its U.
S. Heritage, there's a belief that we can really take that to Europe and over a period of time, and I would say 3 years, develop a meaningful business there with the IGZAR franchise. So we are more enthusiastic about the long term prospects and some revenue synergies, particularly with
Harrow.
Great, thanks. And just one quick follow-up. If you comment on the mindset of in the U. S. Here of your big department store accounts, a lot has been made of post Easter trends slowing down.
I mean, your comments suggest that retailers are still pulling forward orders and order books are intact. Can you kind of give us a sense of what you're seeing outside of your strong outlet comps, what you're seeing and what you're hearing from your big customers about their business?
Ken, go ahead. Ken, do you want to see your side? Hey,
Ken. Our business at wholesale, we continue to see our customers are pulling forward the orders in all tiers, whether it's at the mid tier, department store tier, etcetera. Our business continues to trend along with their business in the men's area, the men's collections area as well as men's main floor. So we see opportunity as we go through into second quarter and certainly into 3rd Q4 in pulling the orders forward. So we have not seen a slowdown in our sector.
Okay. Great.
The only other thing I'd add is on the replenishment side, on the dress furnishing side, that business has stayed healthy for us. So that business is 75%, percent replenishment in the neckwear business is such a quick turn business. We see momentum in that business as we go second into third quarter and we really see a 4th quarter opportunity against last year's business. So again, that's not reflected in our guidance, but we'd like to see this trend continue for a couple of more months before we start to pull it up.
Okay. Thanks very much for the commentary. Good luck.
And we'll take our next question from Credit Suisse. We'll move to Omar Saad.
Thanks. Good morning.
Good morning.
Mike and Manny, could you remind us in Tommy Hilfiger in their kind of transaction side of their currency business on the sourcing side, are they sourcing in euros through Lianfeng and their other agents and selling in euros or given the American heritage of the brand, are they sourcing in dollars? Can you help us understand the dynamic there? What the transaction impact could be like in that business?
Sure. It's a great question. About 2 thirds of their inventory purchases are in U. S. Dollars.
I think like most European companies in Asia, they all buy in U. S. Dollars. It's more efficient for us to hedge and to have the local factory, the local vendor. So we our strategy is to hedge out anywhere from 8 to 12 months.
Historically, the company has decided on the fact that we hedged closer to 12 months out on its inventory purchases. And we believe that's the right strategy to lock in your costs, know what they are, plan your European business in local currencies and then deal with the translation as we go forward. So, about 2 thirds of
the purchases are in U.
S. Dollars. And obviously, as that gets impacted, it has some impact on our cost of sales. Right now, we're projecting that that also at between 120 and 125.
And then can you also remind us for Tommy, which of the European countries and also maybe some of the non European markets, whether it's Asia or other parts of the world, do you all see and does the Tommy management see as being having the holding the most opportunity for
growth? Sure. I think I tried to cover in my comments. Tommy has a very strong position in Central Europe, if you think about Germany, Austria, Belgium, the Netherlands, strong position in Scandinavia and is continuing to see growth there. Their business has continued to gain market share in those strong markets where Tommy really performed.
Markets that they're significantly underdeveloped in would be France, the UK and Italy overall. Those businesses are all planned significantly up. As I mentioned, France's order book for fall was up 25%.
We continue to see
strong growth there. We'll be opening a new position to even stronger visibility in that market. We'll be we're continuing to grow in the U. K. And opening direct retail in the U.
K. As well. Italy for us has been a very positive market overall and continues even with the pressures of that market, that market is planned for the second half of the year to grow about 5%. Those are very large markets with Tommy's positions in comparison to say Germany or Spain is very underdeveloped. The other area when you go to the Middle East.
When you focus there, it's the Middle Eastern markets, it's Russia in particular and Turkey, which was which we took back our distributor there and have been running that business very successfully directly there.
And I
guess from a in Asia, I guess we operate directly in Japan. The Japan business has been challenged, as I think everyone is aware. That business we're planning down 5% for the year. 2nd half comparisons are much easier as we easier as we go forward in that business. So that business is a very profitable business for us that we operate directly.
It represents about 9% of our business, but it's a business that's being challenged overall. I would just add that there's a couple of product categories in Europe in particular, footwear, which has been growing in the 20% range for the last 2 years and we are discussing potentially taking back the handbag and accessory license and bring that in house. That has the opportunity to be a very big business as we go forward. So clearly, we think there's significant growth in Europe. We recently announced that we've taken back China from our licensing partner, extended them throughout Europe, Asia and Southeast Asia, but have taken back the Chinese market.
We think that's a market that could be very big for Tommy going forward. We'll take that business back in the middle of 2011. So I think that's a real long term growth opportunity for the Tommy Hilfiger brand in China. Thank you. Good luck.
Our next question comes from Chi Lee with Morgan Stanley.
Hi, good morning everybody.
If I could ask a follow-up question just on Tommy sourcing, beyond the hedges, are there any operational initiatives in place to really help offset potentially some of the transactional headwinds that could be coming if the euro stays as weak as it is?
Well, I guess, 2 things. The operating expenses, as you know, are natural hedge against the business. They are all paid in local currencies to create a natural hedge against the business. We've taken or we've also taken we've tried to look at our capital structure and €400,000,000 of is euro denominated. So that interest expense, which is approximately $20,000,000 to $25,000,000 is also a natural hedge against the business €20,000,000 to 25,000,000 sorry, is a natural hedge against the business as well.
We've tried to build that up as best as possible, but we're still exposed as you know, like every company that is operating internationally, profitability into U. S. Dollars as we look forward to it. And I don't I'm not aware of any way that I hedge against that.
Okay, that's helpful. And then Manny, can you just talk about as you look at the different wholesale markets within Europe, how your visibility may be different one market versus the other based on our one more mom and pop based, our one more large department store base? And presumably, differences in the level of EDI in each region would also help you monitor those businesses. So just trying to get a better sense of how much visibility you have into trends in the wholesale channel.
Okay. So I would say to you
the biggest visibility we have is unlike the U. S, when you get an order in Europe, it's really an order. It doesn't get canceled. Somebody writes a piece of paper, retails in the United States are notorious for writing paper and then saying, oops, and now you have to deal with the inventory. So when you get orders in Europe, 90 5% to 90% to 100% of the time, those are real orders that the retailer stands behind unless there's a financial problem.
So you have a it's a much ease I'm going to say it's easier business to plan that you have a forward order. The Tally business being sportswear and unlike our business, which is a big dress furnishings replenishment business, they have replenishment in their categories, but a big part of their business is really is forward orders and then them making a decision to back up some inventory to potentially get reorders within season. When business is good, they're more aggressive. When business is tight, they're less aggressive. So the EDI component of the business is probably 15% to 20%, 80% is full order driven.
The best barometer is their order book and their order book, as I said, is a real order book and it's running ahead for fall in excess of 10%. We feel very positive how that translates. As they discussed as that management team has discussed with me, a 10% increase in the order book should translate into something north of 12% to 14%, given the reorder that you usually hope to get on top
of that.
That said, if you think about the markets, I don't think anyone who's a student, you know the markets. The UK has a strong department store base. Bain with Delclote and Glace is a strong department store base. Germany is mixed, but has a strong department store base, but also a strong specialty store base. Italy is really a much more of a specialty store driven market.
And I think we go through market by market. But the way the business is also organized. There is a Managing Director for each country, they're on the ground in country. We tend to also operate retail stores in just about we operate retail stores in every country.
Some of them
we operate directly and some of them directly and some of them through our franchise partners. So we have strong visibility into the market. I guess what I'm saying is we feel really very comfortable about our plans for the second half of the year when we start to ship fall beginning July, that we have a good handle on the business and the visibility into the business.
Perfect. Thank you very much.
And wholesale in Europe represents about 75% of the overall business. Thank you.
From Bank of America Merrill Lynch, we'll move to Helen Asey.
Hey, guys. Can you just talk to me about the comps between the legacy and CK brands? And maybe if you can talk about sort of the traffic versus ticket trends you're seeing for those brands as well as Tommy? And then as a follow-up to the Tommy retail outlets in the U. S, can you just tell me what the comp comparisons you guys are going to be faced with in the back half?
Is it sort of similar to your CK comparisons?
Okay. I'm going to try I mean, that's a multipart question. So let me try and
take it easy.
Let me talk about traffic and conversions first. The traffic in the outlet centers in general, that I'd say is down to up slightly. If our comps are running on average in the Q1 were up 11%, our Our traffic was only up 2% to 3%. We're seeing a couple of things. Conversion is much higher in our stores than it was this time last year and at total retail tickets, both from a quantity point of view, units per transaction and for the average unit retail out the door, both of those two metrics are also up.
So traffic, I'd say, is on center basis I think is actually down. We're seeing it up slightly in our stores, but the real comps are really being driven by conversion and retail prices
at the
store. If you look at the legacy businesses for this year, our legacy business in the Q1 ran up overall ran 11%, Calvin was up 16% and all legacy business were up about 7%. The Tommy business comps that we are that they're up against mirror pretty closely the Calvin Klein comps as well. So their business will see their comparisons will start to get more challenging October, November. They're up against negative comp stores through September through middle of October.
So we think that they have a real there's real momentum in that business and they should exceed the guidance that we have now.
That's great. And then just a quick question on your U. S. Wholesale business. Are there any key additional categories you're focused on in expanding on the near term for Tommy?
And then also ex Tommy, how are you planning your inventories year over year for the balance of the year?
Sure. We're looking initially we're looking at 3 areas. We're looking initially at kids. We'd like to have we have a very, very, very profitable healthy business in our own retail channel. And we're looking at the opportunity we're probably we're looking at an internal and external, but I would think it would be through a licensing model that we'll look at the kids business and to grow that particularly with Macy's as we go forward.
We're also looking at the footwear area. We do some business there today, but we're really looking to return that up. We're not sure whether we'll use the licensing model there or potentially do some of that in house. And then finally, the home area, which we definitely do through a licensing is an area that we're looking to expand and we're looking at some of our licensing partners on the Calvin side to really grow that business as well. And the last category, speaking about accessories, handbags.
And again, there we're looking at the choice to take it in house or to do it through 1 of our 3rd party licensing partners. So those are the 4 categories that we're focused on. I think you I don't believe you will not see any of that growth this year. That's a 2011 fall initiative.
Awesome. And then just the inventory plans ex Tommy?
You're going to start to see our inventories grow along with our sales growth. In particular, in the Q2 with the I guess, I haven't gotten I've been waiting for the sourcing question, I haven't gotten it yet. So there's a bit of chaos out there in the sourcing market, in the supply chain. And we are taking all precautions given the strong focus of our business, strong trends in our business to make sure we have the goods that we're not going to get shorted at factories. We're in factories.
We're taking goods in early, a little bit earlier. I'm talking about 15 to 20 days earlier to make sure we have the goods in house, in country. So we're really trying to move the pipeline forward. We don't want to be caught where we don't have the goods and we lose out on some production. So we're being very judicious about taking goods in a little earlier than planned to catch the sales trend.
And potentially, if there's upside, we could catch some of that upside. So long answer, you'll see our inventories on the core PVH business probably up in the 2nd quarter in the 10% range with a sales plan that's up 5% to 6%, the difference being that we're just trying to get behind the goods, catch some of the upside, but also secure the production and the merchandise.
Awesome. Thanks.
We'll move now to Christopher Kim with JPMorgan.
Hi, thanks. Manny, you highlighted some pretty compelling revenue opportunities at the Tommy Hilfiger business. I was wondering if you could talk about what you see as sort of a sustainable growth rate at Tommy globally over the next several years? And if you could put that into some sort of operating margin perspective, where do you see that longer term, I guess, ex currency, that would be great. Thank you.
Again, let
me take a step. As we've discussed on when we were discussing the transaction with Street, we're outselling equity, my position with the market has been, we are looking for top line growth in Tommy in order to drive sustained bottom line growth of 15% earnings 15% to 18% earnings per share growth. We're looking we need top line growth of about 5% to 6%. The strong cash flows that we generate that will pay down debt coupled with our legacy business growth, particularly Calvin Klein business growth, coupled with Tommy's top line growth of about 5% to 6% will drive 15% to 18% earnings per share growth. That being said, the management expectations for the growth of the business is much closer to 9% to 11% top line growth driven by the international markets going forward and all the opportunities that I've tried to lay out.
But clearly, as we're projecting the business, we think there's an opportunity to grow double digits top line, but we'll be planning and guiding the business more toward mid single digit growth. And that's the way it's been laid out.
Okay. That's great. That's great. And also, just in regards to the debt pay down, how should we be thinking about that for the Q2 and back half?
I think this fiscal year we'll pay down somewhere between $2,000,000 $250,000,000 of outstanding debt. We'll pay a portion of it down at the end of the second quarter
and we'll pay the balance
down probably in the
Q4. Okay, great. Thanks so much. Best of luck everyone.
Our next question comes from Jeff Klinefelter with Piper Jaffray.
Yes. Thank you. Most have been answered and Manny you started answering mine before I asked it on that sourcing. Is there anything else you can add to the all in cost logistics, fabric, labor, etcetera, kind of trend wise what you'd anticipate going into 2011 barring any other geopolitical changes? And then just one more on Europe.
Given the team has had a lot of years managing the Tommy brand now across the European markets, any sense for the range of volatility that they've experienced historically? I know there's better visibility on wholesale in Europe, but can you give us some sense of the range of volatility they've experienced any given year relative to plan for just for some incremental level of confidence here as we go into the back half?
Okay. Let me just on the sourcing side, fiscal 2010, we see little or no pressure through December on margins, on costs. It's all factored in and there's minimal cost inflation going forward. Spring 2011, I don't want to get too far ahead of ourselves. It's still too early, but we are seeing between cotton shortages, between factory shortages, if demand continues to be strong relatively throughout the world, anywhere from cost increases of 5% to 10%, depending on the product category.
Woven shirts less at 4% to 5%, bottoms and sweaters closer to 10%, just to give the range. There's a lot of strategies to potentially mitigate some of the costs and there are some potential strategies from the pricing point of view at retail to raise some of our retail prices, which will be a benefit across the board both for us and our retailers and what it really have. I think the brands that have the ability to raise prices and have strength are clearly Tommy and Calvin given there's more elasticity at those price points. But given the strength of our brand, eyes on the marketing dollars we've been putting behind those
brands, I
think we have a stronger position to move some prices. Anyone, we're in the middle of looking at that. I can't quantify it for you now except to say we are all over it and understand whatever issues are going on. We're looking at replanting and resourcing in different areas to try and mitigate against it and we're on top of it. I guess, Jeff, what you the second part of your question, which was basically, please help me understand and make sure nothing bad could happen.
I don't know how to make you do that. The world out there it's a crazy backdrop that we're up against. With Tommy guys would tell us, as we looked at their businesses from 1997 through 2,007, all they've ever experienced as a brand during that period was double digit strong growth. They managed through the recession. They managed very well.
Their business during that period of time was flat year over year. Some of that was self imposed on that they did to themselves that were so tight on their inventory purchases and manage the issues that surrounded that. And what they were able to do is top line was flat and they were able to actually generate some additional bottom line profitability. Right now, we're talking to them, they don't seem the same type of chaos that they saw in 2,008, 2,009 in their business as they go forward. Their business has dramatically turned around second half of 2,009, the positive results we talked about.
And they don't see anything on the ground right now that would change that. But then with that backdrop and one of the reasons we're being prudent on our go forward projection.
Okay. Thank you very much.
Our next question comes from Kate McShane with Citi Investment Research.
Hi, good morning. Good morning. Good morning. A little detail more detail on gross margin for Tommy versus PVH and the seasonality of that PVH standalone, sorry?
For PVH and for
gross margin.
Okay. Overall, our margins for the wholesale and retail group and the PVH for the balance of the year will be running flat, slightly we'll running up to the prior year about 40 to 50 basis points. We keep as many talked about the price pressure and some of the pressures out there, but we are costed through the balance of the year. We're comfortable we'll be able to deal with those increases and we are feeling good about margins as we go through the balance of the year. The Tommy business because of the European wholesale business runs a few points higher than us.
It's a much stronger business. The business does a the European model in general does better in terms of gross margin. And the U. S. Outlet business also has margins, it just tends to be a better brand, it does better in the outlets and it does have a base couple of basis points better
in terms of gross margins. Yes, Kate, I think what I would say is just to put a little more color on that, the economy business is going to have significantly higher gross margins closer to 55% to 57% all in higher operating expenses, the European model. It's also the fact that they're much more retail than we are. Their wholesale retail mix is closer to 50% as we are with 35% to 65% retail to wholesale. So I think that will change as well.
But I would think as we go forward, their margins all in will be closer to 56% to 58%. Their operating expenses will be closer to 47% to 48% and get you that 10% to 12% operating margin from our wholesale retail businesses combined.
Okay. That's really helpful. Thank you. That's for the 9 months.
On an ongoing basis, I think it doesn't change that much except we're missing such a very, very profitable first quarter that 10% to 11% operating margin is much closer to 11% to 13% operating margin standalone. So just the fact of that is.
Okay. That's great. Thank you. And then my next question is on advertising. We're going to see as you mentioned in the Q2 the $10,000,000 increase year over year.
What about the Q3 just with the launch of CK Beauty? Are we going to see a notable increase that quarter as well and then 4th quarter will see a notable decline?
There will be an increase, but it won't affect earnings because 100% of that is being funded through Coty's. So you'll see it won't flow through our P and L. Cody's advertising goes direct and they pay it directly. We not hedge it, but they pay it directly. So it doesn't flow through Calvin.
So that piece of the advertising, although there'll be a big step up is totally funded by CODI. So you'll see it from a brand perception, marketing point of view, you'll see it in the market, but it will not be hitting our P and L. In the Q3, our advertising expense all in will be about $3,000,000 and in the Q4 will be down about $15,000,000 just had a very heavy up spend last year. If business continues to be very strong, we could invest a little bit in the Q4, but that would only be if earnings were really driving, exceeding where we were. But right now, it's really playing down about 2%.
Okay. That's great. And my very last question is about the opportunities for revenue synergies going forward. What are your what is the biggest opportunity for revenue synergy?
I think on our heritage look, I guess, I'd say 2 ways. I think when we think that there's an opportunity that we can't get out as a company as a standalone with IZOD and ARO in particular throughout Europe and then potentially Asia that the Tommy operating platform and business gives us. So we think there's a real opportunity there. We believe given our very, very strong position in North America that we have an opportunity to really enhance some of the Tommy businesses in North America, particularly in Canada, where they're 100% retail today. And we have a pretty large wholesale business.
We think there's an opportunity to take the Tommy brand and utilize our operating platform in Canada and take the business to some of the key retailers there that we have great relationships with. And to just maximize the potential for the brand, particularly with our licensing network through Calvin Klein, some of our partners to take that those partnerships to potentially grow some of the Tommy licensing opportunities in North America. So those are the top line synergies. But Tommy Business in North America was running very well, had great management team, particularly in the U. S.
Retail and wholesale. So we think we can improve it, but it's really taking it from a high level.
Okay. Thank you so much.
Our next question comes from Evelyn Kaufman with Wells Fargo Securities.
Thanks, Zohi. Good morning, guys. I had a question on European wholesale. You said basically when the orders and it doesn't get canceled or less likely to get canceled maybe compared to the U. S.
Market. Can you talk about do they also have a culture of markdown allowances where if things go south, what happens at the end of the quarter, especially with maybe a different mix of department stores versus specialty stores there? Can you touch on the dynamics of that in Europe?
The dynamics in Europe are they understand what we do in the United States. It's not even part of their language. There is no there really is no such thing as markdown allowance agreements. You sell the goods in, you perform, if you perform, you get orders for the next season, you don't for any material purpose, you don't support through agreements, any type of markdown support that goes forward. Now, if your products aren't working, if there's something that you want to make the retailer right for because you're sure you're doing some of that, but there's no pressure like there is in United States.
There's not a culture where the retailers come back and look for gross margin support either at the specialty level or even at the department store level with some of the bigger accounts. There's much more sense there's much more partnership going forward and try to work out of problems to get their goods back up to make the goods to help them work through the goods and make them disappear. But there is not a culture where you support lockdown.
Okay. And then a follow-up on that. So what how do you how do they manage excess inventory there? I guess there is not an outlet channel like you have here for the Tommy's stores. Can you talk a little bit about that?
Well, there is an outlet business in Europe. It's not as well developed as it is in the United States where we have 150 outlet centers. But over there, there's probably 40 to 50. It's they're positioned outside of the major metropolitan areas much more there's much more sensitivity. But again, it's usually more than enough to deal with whatever excesses come up in the market.
They're just but like any other business, there's also the T. J. Maxx's of the world overseas that will take care of some of the liquidation issues. But if the business is really managed well, given the Tommy outlet stores that they do have and the type of volumes that go through that at a very profitable clip, there's much more of an opportunity there to make the goods disappear. There is a sense with some of those goods that you hold them for a little bit longer.
You wouldn't take current goods and put them right into the outlet stores, the specialty stores. You would hold them for a period of time and liquidate them, but they do it very, very profitably in their outlet stores throughout Europe. So that's the strategy they've used. That's worked in all seasons. The only issue that they had was Q4 of 2,008, 2,009 where they used some of the secondary channels in order to liquidate some goods.
So the outlet business is very healthy there.
Okay. And what are the operating margins for Tommy in Europe versus North America? How do they differ?
They're about 200 basis points higher.
Okay. So 200 basis points is the difference Europe versus North America. Okay. And then lastly, can you give us a little bit more color on the chaos you mentioned on the sourcing side? Maybe what are the drivers behind the shortages?
And being having been in the business for a long time, kind of how what do you see going forward in terms of what happens?
I think the look, right now, it's there's a raw material cotton shortage in the market. And when I say that it's putting price pressure on it. The availability of cotton is there to support the business, but you're really chasing after it. We are a large both businesses, Tom and Mitch, are very large providers with long term relationships. So we are well secured in the factories that we're in, but it's putting more and more cost pressure on the business, particularly as we look out spring 2011.
And I've talked about trying to manage that and it's in that 5% to 10% range. There as you this time last year and into the 3rd Q4 of last
year and into early spring, there was
factory availability that you can constantly chase good. There was factory availability that you can constantly chase goods. So business was strong and you were able to get your lead times and if you had raw material availability, you could get your goods produced and you could get some turnaround in 2 to 3 months and it was factory capacity availability. With the demand that's changed as we're going forward with the pull forward of goods, in fact, there isn't that flexibility in the market that was there 12 months ago and was there in spring that created a lot of buying opportunities for everyone in buying opportunities for everyone in the industry. So that supply and demand getting that equation to work out, the demand right now is starting as we look into spring 2000, starting to outstrip the demand and that's putting pressure on prices, it's putting pressure on deliveries and it's forcing us to be very flexible and to move very quickly and aggressively.
Great. Thank you.
From Breen Murray, we'll take Eric Beder.
Good morning, let me add my congratulations.
Thank you, Eric.
Could you talk you extended the Tommy contract with Macy's. What is the opportunity there in potentially adding more doors or adding more space to the Tommy footprint there?
I think the we're in about 6 80 doors. I don't think we we don't believe that there is a significant door expansion opportunity at Macy's. What we do think is there is lateralization of the brand at Macy's. We believe the opportunity for the brand in certain categories, we should be bigger in women's sportswear than we are today. We believe our denim business should be bigger than it is today.
And we believe men's sportswear, which is performing very strong, we still believe should be bigger than this today's presentation. We believe product categories overall give us the opportunity to expand by using both the licensing model as we go forward and we'll continue to be in the same doors as appropriate for the brand similar to Calvin Klein, similar to Ralph Lauren.
So we think that there's
an opportunity to really grow that brand. Over the next 3 to 4 years, we believe there's an opportunity to double the size of the business. I don't think it necessarily will be more doors. It will be broader presentations within those doors.
Okay. And in terms of your budget for iZOD, I saw you recently expanded that into horse racing.
Kind of talk to me
a logic on that and where are you looking for in terms of just in general in terms of potential additional marketing opportunities?
Yes, I guess I wouldn't call it force racing, I would call it sporting events, major sporting events, the madness, Aspen Invitational, we got a great opportunity through our connection in New Jersey with the Eyes Wide Sports Arena. And the if anybody I'm a bit of a horse fan, racing fan. So if anybody is a horse racing fan,
the way it's shaping up
is the Kentucky Derby winner and the Preakness winner are supposed to be the rematch is supposed to be at the Haskell in New Jersey at Monmouth Racetrack. It is going to be probably the premier summer event in horse racing. And for a very economical transaction, we were able to get IDOT as a sponsor of the Haskell Invitational. So it will be the IZOT Haskell Invitational, which we think has got a we'll just add to the exposure that we have in Motor Speedway, in with basketball, with the New Jersey Nets, with baseball, with the New York Mets, with our connections throughout the major leagues as we go forward. So we think the eyesight connection in sports is a big positive and we'll continue to focus on that.
Great. Thank you.
We'll take a question from Jennifer Black with Jennifer Black and Associates.
Good morning. And let me add my congratulations. I wondered if in the international outlet area, is that an area that you would want to grow your business? And then in the past, I think you've said that Canada is not a big opportunity and I wanted to know your thoughts there. Thanks.
Sure. Thanks, Jennifer. The I would say is on the outside on Continental Europe, there is more and more expansion going out in the outlet environment. It's becoming more and more recognized as an appropriate channel distribution for fashion brands in Europe. It is a very profitable channel of distribution and I think we'll probably be opening 5 to 7 stores a year over the next 5 years as the real estate becomes available, as we strengthen the brand in key markets.
In the U. K, there's a real very well established outlet channel of distribution. We don't want to jump into it until the brand has more pressure more presence at regular pricing. But over the next 3 or 4 years, I think you'll see us start to develop that both as a liquidation channel and as a profit opportunity as lower in the BUK. So clearly, there's a big opportunity for that growth and it is very profitable.
Canada is becoming a little bit more and more interesting. One of the things we've learned with the Tommy transaction is how profitable their Canadian retail business is, both the outlet and the regular price business in Canada. And we are looking at some of our brands, particularly Calvin's, but maybe some of our legacy brands have very strong presence in the Canadian market that there may be an opportunity to utilize the Tommy infrastructure from a retail organizational point of view in Canada to support some of our retail expansion with some of our brands in Canada to support some of our retail expansion with some of our brands in Canada. Again, I think that would be a fall 2011 beyond initiative, but it's just another area that through the acquisition that come up. Operator, we'll take one more question.
It's well past 10, 15. We're already 15, 20 minutes over. So we'll take one last question.
Okay, certainly. Our last question comes from Karru Martinson with Deutsche Bank.
With the debt pay down here of $200,000,000 to $250,000,000 this year, I mean is there any change to the longer term goal of getting back to 2 times by the end of fiscal 2012?
No, I think that's right on, that's consistent with what we've consistently said. Consistent with what we've said throughout the time we were on the road. We're looking to delever the balance sheet. We think over a 24 month period, we clearly could get our EBITDA to leverage ratio down below 2.5 times with cash flows this year to 2.50 and next year in excess of 3 100. So I think that all works to our advantage and positions us well as we go forward.
Okay. And with 3 weeks under your belt, are there any changes in terms of the CapEx requirements of the business as you see Tommy being integrated?
No. We continue to see that that CapEx will probably run-in the $100,000,000 range. Our CapEx is in the $40,000,000 to $50,000,000 range. Those are the type of numbers we've used in our projections, maybe a little bit higher than that in our years as the business is continuing to business is continuing to expand. Clearly, there's an opportunity if things get a little tighter that we could cut back on that.
The maintenance capital is probably 40% to 50% of that. So there's a real opportunity if we needed to cut back. But in order to continue to fund the growth and the type of momentum we see in the business, those targets we talked about stay. Okay.
And just lastly, I know it's a small part of your business, but the Walmart private label neckwear that you're adding, how is that rollout going?
It's fine. It's early. We're probably 2 months into it. Good initial sell throughs. We'll get a real good read on that business with Father's Day coming up in the next couple of weeks.
It's very the product looks great. It's very well positioned in stores. We haven't rolled out to all doors. I think we're in about 300 doors today going to 6 and then hopefully expand to 4 and expanding on that. So we'll get a good read on Father's Day, but I know the 300 doors that we're in are outperforming the doors that we're not in that have other neckwear in it.
All
right. Thank you very much guys.
Thank you. Thank you everyone. We look forward to getting together for our 2nd quarter earnings release in early September. We'll continue to keep you informed about how the business is projecting and have a very nice day. Thank you.
Once again, ladies and gentlemen, that does conclude today's conference. Thank you for your participation.