Manny Chirico - CEO Mike Shaffer - EVP, CFO and COO.

Bob Drbul - Nomura Michael Benetti - UBS Christian Buss - Credit Suisse Erinn Murphy - Piper Jaffray Omar Saad - ISI Group John Kernan - Cowen & Company Dana Telsey - Telsey Advisory Group Joan Payson - Barclays Eric Beder - Brean Capital Howard Tubin - RBC Capital Markets David Weiner - Deutsche Bank.

Good morning everyone and welcome to the PVH Corp First Quarter 2014 Earnings Conference Call. This webcast and conference call is being recorded on behalf of PVH and consists of copyrighted material. It may not be recorded, rebroadcast or otherwise used without PVH’s written permission.

Your participation in the question and answer session constitutes your consent to having anything you say, appear on any transcript or replay of this call. The information being made available includes forward-looking statements that reflect PVH’s view as on June 4, 2014 of future events and financial performance.

These statements are subject to risks and uncertainties indicated in the Company’s SEC filings and the Safe Harbor statement included in the press release that is subject of this call.

These risks and uncertainties include PVH’s right to change its strategies, objectives, expectations and intentions and its need to use significant cash flow to service its debt obligations. Therefore, the company’s future results of operations could differ materially from historical results or current expectations.

PVH does not undertake any obligation to update publicly any forward-looking statements, including without limitation any estimate regarding revenue or earnings. Generally, the financial information and guidance provided is on a non-GAAP basis as defined under SEC rules.

Reconciliations to GAAP are included in the referenced earnings release, which can be found on www.pvh.com and the Company's current report on Form 8-K furnished to the SEC in connection with the release. At this time, I'm pleased to turn the conference over to Mr. Manny Chirico, Chairman and CEO of PVH..

Thank you very much, Jennifer. Good morning everyone and thank you for joining us. Joining me on the call is Mike Shaffer, our Chief Financial Officer; Dana Perlman, our Treasurer and Head of Investor Relations and Ken Duane, our CEO of Heritage Brands and North American wholesale.

Looking our results for the quarter, although we came in-line -- we came in in-line with our earnings guidance for the first quarter, we were disappointed that we needed to lower our EPS guidance by $0.10 for the year. To be specific, the guidance take down is a reflection of the near terms sales and margin pressure in our North American businesses.

I strongly believe that our long term growth strategies for our Calvin Klein and Tommy Hilfiger businesses remain intact and that the planned strategic investments we are making in our Calvin Klein business will accelerate sales and earnings in the second half of 2014. Let me get into each of our businesses by geographic region.

In North America, our business in the first quarter was clearly negatively impacted by the unseasonably cold weather. As the weather improved in April, we saw an improvement in sales and store traffic trends. Our Calvin Klein and Tommy Hilfiger businesses were on plan for the first quarter.

In our retail business, the Tommy comps were up 2%, while Calvin Klein comps were flat to last year. Our wholesale businesses performed well and achieved plan, and delivered 2% to 4% sales increase for the quarter. Our Heritage businesses struggled in the first quarter in North America.

With retail comps down are disappointing 11% and our wholesale EDI replenishment businesses negatively impacted by weak store traffic trends at our key accounts. We have seen our North America sales trends improve the second quarter across all of our businesses.

Our retail comps at Calvin and Tommy are running up 2% to 3%, well, our Heritage comps have improved to minus low single digits. We are planning the second quarter to be promotional given the macro regional environment, and have lowered our second quarter margin expectations to reflect this.

Moving to Europe, our Tommy Hilfiger European business continued its strong performance with overall revenues up about 8%, driven by strong retail comps of plus 6%, as well as retail square footage growth. Strong sales trends have continued into the second quarter with comps sales up mid-single digits.

At wholesale our business came in on plan for the first quarter. We continue to plan our full holiday sale up about 5% based on our order books for the season. Our early selling of the pre-spring season is indicating a continuation of these strong sales trends and could positively impact our fourth quarter sales plan.

The Calvin Klein European business continues to be under pressure, particularly our jeans business. We are planning this business down low double digits for the first half of the year, as we eliminate off price sales and reposition the business for the new full jeans product launch in the second half of the year.

Moving to Asia, our Calvin Klein business continues its strong performance in the first quarter, posting a high single digit sales increase despite the lack of a Chinese New Year in the first quarter. This performance was driven by strong sales performance in our China and South East Asia businesses.

Sales trends in the second quarter in China and South East Asia have continued their strong performance. However our business in Korea has weakened driven by the ferry accident, which has significantly impacted the total consumer spending in Korea.

We have seen this business improve over the last 10 days and are continuing to closely monitor the situation in Korea. In Latin America, our business in Mexico and Brazil continue to post high single digit revenue increases in local currencies. We are planning this business to grow high single digits in local currency for the year.

However for the second quarter, we are planning the business flat due to the World Cup Soccer tournament that is taking place in Brazil during the month of June. We expect consumer spending to negatively impacted in that month, because of the tournament due to store closures that are in the matches that will occur in Brazil.

Let me update you on some of the integration that’s going on in the business. We continue to execute our plans and are on track with all our processes and system conversions. Let me give you an update on some of the strategic investments we are making to build a solid foundation for our Calvin Klein Jeans and Underwear business into the future.

These strategic investments fall into six board categories. On the people side we have filled all key positions across the Calvin Klein Jeans and Underwear global businesses.

On the systems and infrastructure side, we have completed all system conversions in North America and Europe and over the last three months have successfully converted a number of systems in Asia. There have been no surprises in this area since the last time we updated you and we are very comfortable with our integration timetable.

Moving to the off price area, we are in the midst to significantly reducing our off price sales and warehouse club sales in North America and in Europe, to bring that overall jeans and underwear sales distribution in-line with a healthy mix of our other Calvin Klein businesses. We expect this process to continue through the end of this fiscal year.

We are also in the midst to upgrading quality and design of the Calvin Klein Jeans product. We should begin to see the benefits of these initiatives in the second half of this year with product hitting the stores in August and September.

We are also elevating the presentation and point of sale marketing of the Calvin Klein Jeans and Underwear presentations at retail. This will be an ongoing process. Let me give you a few examples of our new shops of Calvin Klein. In North America in the Jeans and Underwear area, we’re touching over 200 doors throughout North America.

We are specifically hitting Herald Square and Union Square in the Macy stores, the key Lord & Taylor flagship stores here in New York. And in Canada in Toronto at the Bay and some of the significance stores.

Just to remind everyone, in jeans area in a number of the top doors and our key partners in North America, the Calvin Klein Jeans presentation was eliminated from the sales mix both in men's and women's jeans. That is in the process of being rectified as we go forward.

You just start to see those new doors coming on board in the third and fourth quarter this year into the first and second quarter of 2015. We’re spending in total in capital in new shop expenditures in Jeans and Underwear an access of $12 million. So clearly investment spending there in North America.

Moving to Europe, we’re seeing across Europe new jeans presentations with some of the key retailer accounts, just a few examples, Harrods in London, a new men jeans shop will be opening there in the third quarter of this year. In Paris, at Galeries Lafayette in Printemps will be opening new jeans men’s and women shops.

Peek & Cloppenburg will be opening their flagship stores in Cologne and Vienna. And there will be various other key doors that we will be opening. We're clearly making significant investments there.

And we continue to make investments in new shops and stores throughout Asia, in China with new stores opening and new concepts opening in Shanghai, as well as in Korea and in Hong Kong.

Finally, we’re making investments as well in our e-commerce business at both Tommy and Calvin Klein in order to support the significant growth we are experiencing in these businesses for both brands. We continue to make these planned strategic investment in Calvin Klein in order to unlock the full potential of this business over the long term.

As we have said, 2014 continues to represent a year of two stories. The first half is pressured by our strategic investments, while 2014 will be the first season we order product by our newly established design sourcing teams which will be presented in enhanced retail environments.

Despite the first half pressures, we feel we are well positioned with solid underline business fundamentals and have not changed our outlook for the second half of the year, where we expect second half earnings per share to grow 20% over the prior year.

We believe that the strength of our global growth brands Calvin and Tommy Hilfiger and the strategic investments we are making today will allow us to drive ongoing earnings per share growth of 50% plus in 2015 and beyond. And with that, I’m going to turn it over to Mike Shaffer to quantify some of the results for the first quarter and our guidance..

Thanks, Manny. The comments I’m about to make are based on non-GAAP results and are reconciled in our press release. Revenues for the first quarter were $1.96 billion, a 4% increase over the prior year when excluding the Bass business, which was sold to G-III in Q4 of last year.

Driving our revenue increase over the prior year was a 6% and 4% increase in our Tommy Hilfiger and Calvin Klein businesses respectively. Our Heritage business revenues were down 2% excluding Bass for the quarter. Our earnings per share for the first quarter was $1.47, at the midpoint of our previous guidance of $1.45 to $1.50.

While we were at the midpoint of our range, we were disappointed with the performance of our North America businesses which were negatively impacted by the environment and fell short on gross margin for the quarter. The earnings shortfall was predominantly in our moderate Heritage North America businesses.

For the second quarter we are projecting earnings per share of $1.40 to $1.45, or an increase of 1% to 4% over the prior year, and revenues of about $2 billion, or an increase of 4% over the prior, year excluding Bass.

Or second quarter guidance reflects the continuation of a highly promotional environment in North America in most channels of distribution which will negatively impact our gross margin as our customers and competitors move through higher than planned inventories. Our second quarter EPS guidance reflects a take down from our initial plans.

Additionally or second quarter comparison to the prior year is negatively impacted from the Calvin Klein investment spend and $10 million in additional marketing spend, always planned in the second quarter and for the full-year. Or earnings per share for 2014 are now planned at $7.30 to $7.40, a $0.10 decline to our previous guidance.

Our change in guidance is the result of the takedown in our first half EPS reflecting the difficult North America environment. Overall, our 2014 earnings continue to be negatively impacted by the incremental spending in the acquired Calvin jeans and underwear businesses.

We have not reduced these investment plans from our initial budgets and will continue to make all the necessary investments to continue to grow these businesses for the future. Our second half EPS estimates remain unchanged and reflect growth of approximately 20% over the prior year.

This growth will be heavily weighted to the fourth quarter due in part to anniversarying swing on investments in the acquired Calvin Klein businesses. Our revenues for 2014 remain projected at about $8.5 billion or 5% increase over the prior year excluding Bass.

Tommy Hilfiger and Calvin Klein are planning to have revenue increases of 7% and 4% respectively. Our Heritage business revenues are planning to increase 4% excluding Bass.

Our full-year operating margins will be down about 60 basis points versus the prior year, a 10 basis point decrease from our previous guidance resulting primarily from the first half North America gross margin pressure.

Versus the prior year the 60 basis point decrease reflects an increase in gross margin that will be more than offset by an increase in SG&A expense, due in large part to the increased Calvin Klein investments. For the year, we are projecting our Heritage and Tommy Hilfiger businesses to have operating margins flat to the prior year.

Calvin Klein operating margins will be about 14%. Finally debt pay down continues to be projected at about 400 million for the year. And with that, we’ll open it up for questions..

(Operator Instructions) And we will take our first question from Bob Drbul from Nomura. .

The first question that I have is around the back half outlook, and you are sort of reaffirmation on your beliefs of the growth, given some of the challenges of the business thus far, what gives you the confidence in the ability to sort of reaffirm what you think is going to happen in the second half and specifically the fourth quarter?.

I think, Bob, a couple of things. We are making these significant investments on the Calvin Klein side of the business. We have seen good order flow from our retail partners. We’ve opened up in North America new doors, some of the top doors as I was mentioning in the jeans business and significantly adding square footage in North America.

We’re adding about -- on the men’s side -- we have an increased plan for the second half of the year in square footage of over 50%. And most of that is in top doors. And on the women’s side we’re looking for an increase of about 35% from a square footage point of view.

So that really positions us, I think well as we go forward getting repositioned back in these stores. I think it is an endorsement on the product itself that the retailers are getting behind it now. Clearly the consumers got to vote and we have to see those sell through. So that’s in North America.

Europe, we have also seen our order book up double digits as we’ve gone into back half of the year. That’s being offset by the elimination of the off-price and warehouse club sales that we're going on, but clearly we’re seeing doors opening there that we’ve been before in new markets.

The challenge there will be again the same thing, is positioning the goods, getting them in place. I think that’s all in front of us, and then seeing how the goods sell through and transact as we go forward, that’s the open issue as we go forward, how we perform at retail in Europe specifically in our own stores and as the department store level.

So we feel positive about that. We have the orders in hand to do the business we feel and then obviously in jeans and underwear, there's a big reward of the EDI business that goes on.

We need the sales flow through to follow that, but based on planning and where we are and working closely with our retail partners, we feel that’s all in place as we go forward.

I’d also say -- last thing I’d say is as we work our way through this second quarter, the comparisons are much tougher for us first half of the year versus second half of the year and I think you see that throughout all retail as we go forward.

So clearly I think there is opportunity in the second half of to outperform both our Calvin and Tommy businesses as well as our Heritage businesses.

So getting paid back to the investors we are making today, getting paid back for the additional marketing and presentation we’re putting in and getting paid for the new product; that gives me confidence as we forward and now we have to earn that as those goods hit and sell through..

And then the second question I have is just the promotional environment currently, first quarter, second quarter, how much of it is wholesale promotional concerns versus your own retail business in terms of the promotional cadence?.

I think it’s two things, Bob. I think if you take -- if you view the business comparably and I think that’s really have to do, comparably to where it was last year; last year’s first quarter, from a weather point of view, from a business point of view was very, very strong.

And as everyone came in including us, came out of the first quarter into the second quarter, everyone was chasing inventory. We’d have to outperform sales across the board. There was less clearance pressure, less promotional pressure.

What we’re seeing now is across the mall, particularly in the middle of the mall with specialty retail we are seeing in each as sales were being missed on a macro level in January February March, despite a strong April that didn’t make up for some of the sales misses that took place in the beginning part of that -- first three months of the calendar year and I think in general, inventories are heavier than they need to be and there is more promotion going on.

So we are seeing a higher promotional volume at the outlet stores here in North America and the regular price stores internationally and we’re also seeing at the department store level prices -- AURs that are lower than this time last year, anywhere from 3% to 5%..

And next we’ll hear from Michael Benetti from UBS..

So just to get one thing out as far as our modeling goes and thinking about the cadence in the quarter since you guys are so helpful with how you’re planning it, I think there's a lot of pressure on to hit the guidance for the year.

In the fourth quarter you’ve mentioned that well over 20% but I think there is some noise in there related to the way you guided taxes and interest and the interest expense benefits.

So just to avoid a boogieman, can you help us think about the growth rate that’s implied in the back half for the third quarter versus the fourth quarter, given those two there variables?.

Sure. So I guess just to say, the growth rate for the third quarter, we’ve talked about on EPS was about -- is mid-single digits which -- and then of course for the second half of the year 20% total. So that is the plan. To get there taxes and interest do play a part.

Our tax rate benefit for the year is greatest in the fourth quarter and then secondarily in the third quarter. So those are two quarters with the biggest benefit in taxes and interest because the deal was done to refinance in the first quarter, pretty flat second, third, and fourth quarter..

And then Manny, could you talk to us a little bit about -- as you look at -- you’ve taken down your assumptions for second quarter based on promotionality in that -- how are you thinking about promotionality in North American in the second half as you set the guidance maybe relative to what you’re thinking for the second quarter that you just hear about?.

We’re looking for a more -- a less promotional environment that we've seen in the second quarter, that we’ve seen in the first half of the year of this year.

I think a couple of reasons, I think is -- on a comparative basis, last year’s third and fourth quarter were more promotional than last year’s first and second quarter, in general, as you look at what transpired particularly in the fourth quarter.

So I feel there is more opportunity in the third and fourth quarter from a margin point of view to outperform we were last year than there was in the first half of the year.

And then secondarily, looking at the plans that are out there, I think everyone is really focused on executing to get inventory levels down in the second quarter and position themselves back to school.

So all of our key retail accounts are moving through goods with a strong incentive beginning of month August to be in a position that inventories are clean and moving forward have an appropriate level of clearance but not to be overly, overly weighted in that area. So, I think the plans are all in place.

We know we are moving aggressively to do that in our second quarter and I think the industry in general is doing it..

Okay. And then just if I could follow-up, one last modeling question as you look at second half guidance. Can you help us think about what type of comp sales and replenishment trends are you implying there, since it’s such a big variable? Thank you..

Well I guess in the second half of the year, we are looking for comps in general to run -- in North America we're looking for comps in our own retail somewhere in the 2% to 3% range. We're looking for Europe comps in our Calvin business to be up somewhere around low to mid-single digits.

And we are looking for the Tommy business in Europe to be up about mid-single digits. That’s pretty consistent. All of that is pretty consistent with where the trends are today, with the exception of the Calvin Klein Europe business, which has been playing down now low double-digits.

But I think that we are really looking for the third quarter to be an inflection point, new product, new presentation up against soft results from last year that we should start to see a better comp performance in our Calvin Klein Europe business with all the initiatives that are in place..

And we will take our next question from Christian Buss from Credit Suisse. Christian are you there? Okay, we will go to....

Yes, sorry about that. I was wondering if you can provide some color on the cadence of new product introductions in the Jeans wear and Underwear business.

And also where we should expect to see the store environments change first?.

Well I think the store environments will be changing throughout third and fourth quarter. You will see it in Europe, particularly Northern and Central Europe, you will see in third quarter and throughout the UK, Paris and Germany, big markets to give you a sense and I mentioned some of those key retailers.

Here in North America, it’s an ongoing process, third and fourth quarter but I think that you should start to see -- at September 1st, you should really be in a position if you went to Herald Square, if you went to Union Square, if you went to some of the big doors, you should see some significant improvement in the jeans presentation in those departments, as well as in the underwear presentation in those stores as well.

So I will be ongoing but I think it clearly will be visible to you as you visit those doors going forward.

And from a product point of view, some of the new product launches, underwear there will be some key launches both on the women side, on the broad side of the business with key marketing campaigns, third quarter supported by some significant marketing, and on the men’s side as well.

So we've got some real initiatives going forward that we haven’t totally made public yet from a marketing point of view. So there will be more about that but be assured there will be significant marketing supporting the launch here in North America, Europe and in Asia..

And next we will hear from Erinn Murphy from Piper Jaffray..

Manny, I was hoping you could just follow-up a little bit more on the Calvin Klein Europe side of the business.

As you talk about trends kind of being down double-digits in the first half and then starting to improve as we get into the second half, first question where should we start to see that off price product levels start to be closer to where you need them to be? And then as we think about just kind of longer-term, I think on the last call you talked about the brand, it’s kind of reaccelerating back to that high single-digits range beyond this year.

Is that still how we should be think about Calvin?.

Let me start with the first point. I think from the elimination of the off-pricing in Europe, I think that it should become almost invisible by the end of third quarter that you will see in market. And I think you might see some product of CK MAX but besides that it should be much cleaner, significantly cleaner than it’s been.

And more importantly, I think you will start to see more of a presence particularly in Northern and Central Europe of regular priced Calvin business in some of the key department stores that I laid out before. On the second part of your question..

Just on the overall Calvin Klein brand, I think you have talked about it being closer to high-single digit grower over time.

Should we still think about that for beyond this year?.

Yes, I think these key product investments that we're making -- I think what will be critical for us is that we really feel that there is significant growth in the Jeans business here in North America and in Europe as we get to a more healthy base as we go forward. I think that will continue to drive growth.

We won't have the burden of cleaning up as we did this year, cleaning up the off-price sales that we had carry over. So as that gets cleaned up, we wouldn’t have that in the base and that’s worth 200 to 300 basis points by itself.

So I think clearly not having that headwind in front of us, we’ll start to see -- will get us much closer to high single digit kind of a growth rate and if we can get some momentum in the European business to along with the momentum we see in Asia and Latin America, I think that’s when that we could really start to get closer to that double digit kind of growth again..

Great, that’s helpful.

And then just the last question from me, just sticking on kind of the European theme, could you just speak to how you are viewing the European consumer currently as we kind of get out of the spring and into the falls season? And then just any other context on regional performance within Europe would be really helpful?.

Sure I think the story continues. The one market that we have not seen any significant improvement in is the Italian market. It continues to be a challenging market. It continues to be a market, as you know -- it is a market that is dominated by specialty stores as opposed to launch department stores.

So there is clearly pressure in the -- a credit point of view to continue to sell into that channel, worrying about getting paid. So that puts some pressure on as well. And then the issues that are going all over the consumer in general.

We are seeing Spain -- for the Tommy Hilfiger business this is the first season we’re actually seeing some growth off of a base where we’ve gone through now 3.5 years of contraction in that market. So we think that market is leveling off.

And then our Tommy business, as you can just see from the results up 8% for the quarter in Europe, that’s really being driven by Central Northern Europe, the UK business as well, continuing to grow that business both from a retail point of view, square footage growth but also wholesale bookings and I mentioned the bookings that seem to be trending again as we go into Spring ’15 in a more positive way and consistent to what we’re seeing in fall.

I'd say only other the only other risk out there and we included in Europe is the Russian market. With what's gone on in the Ukraine, we don’t have a big business in the Ukraine and Crimea area but we have a big business in Moscow and that whole territory, Eastern Europe there.

And that business for the last month and a half has been under more pressure. We’ve seen it level off as the crisis -- and the heightened nature of the crisis has also leveled off. But it’s an area that we've watching very closely and we have a big business there with both Tommy and Calvin Klein and that business is very profitable for us.

So we’re watching it very closely..

And our next question comes from Omar Saad from ISI Group..

You guys talked a lot about the new product, the new presentation for Calvin Klein going into this fall. Can you maybe elaborate on it little bit, what’s new, what’s new about the product, what’s new about the presentation. I know you're going to do some more marketing spend.

Is it different styling? Is it different quality? What’s the presentation going to look like versus what it used to look like? Maybe just help articulate some of the things that we could expect to see in the stores this fall?.

Okay. Omar, on jeans side it’s in Europe and in North America. It’s a complete region. It is completely different sourcing base. It is designed -- instead of being designed by central design group in North America we’ve gone through a regional approach for Europe, Asia and North America.

We think that’s more appropriate and with the centralized control the key items and as we go forward we believe that’s significant. There's been an upgrade in peace goods, there has been an upgrade in make. We believe that the design aesthetic is more in tune with the Calvin Klein consumer. It’s a more modern shape, it’s a more modern styling.

So, on the Jeans side it’s a complete makeover; new packaging, hangtags, branding on product that we think is enhancing for the presentation and will warrant higher price position that the brand warrants and we talked is how challenged particularly in North America the Jeans business has been from an average unit retail point of view.

We’re just looking to get back it’s where the brand historically has transacted and I think we have done that from a design point of view and now the consumer has got a vote to see how that’s being presented. So from that point of view on the Jeans side it’s been a total remake.

On the underwear side of the business it’s been -- it's always been a successful business.

The big improvement that we’ve done is retail [ph] packaging has significant cheapened and the presentation was significantly cheap and that’s where we’re making the investments on the Calvin Klein Underwear business, really going after the business in a big way. You could see that from Macy's Herald Square, new shop, men's shop, 2,400 square feet.

On the Calvin Klein women’s intimates business, the big focus for us a bra business. We’ve always been a major player in the bottoms, panties business. And we believe there has been a lack of investment in the actual technical designs of product that is not needed; as universal as it should be to fit all women.

So we’re re-launching Perfectly Fit for the third quarter and fourth quarter of this year. That will be a big initiative for us as we go forward. That’s been a successful product category and I think with the packaging, with the point of sale presentation that we have there, I think it’s very significant.

Just to reiterate, we will be spending in the third and fourth quarter of this year in excess of $12 million in North America on shop presentations for jeans, underwear, our men's sportswear business.

We will also be spending about $5 million to $6 million in Europe in capital expenditure in presentation in our own stores as well as in our partners' stores in key accounts.

So that’s -- its night and day from what it was and we believe that’s going to really drive the business back and get the Calvin Klein brand repositioned in designer jeans back to where Heritage has been as a brand that started designer jeans around world.

So I think we’re highly confident of our initiatives and where we’re here in North America and as we’ve discussed, Europe is just more of a challenge because of the brand positioning there and what needs to happen and how far we need to move the brand.

But we’re making all the right moves and all the right investments from a long-term goal to the Calvin Klein business there..

And Manny marketing spend, incremental marketing spend to get the word out to let consumers know that -- come back to Calvin Klein, it’s different, it’s new, it’s kind of back to where it should be.

Is there that kind of spend lined up to support those?.

Yes. So we spend every year -- it’s never been an issue about not spending marketing money because thankfully especially on the jeans side that was a contractual requirement that Warnaco had to spend in jeans. So that spend is continuing. We believe now it’s more focused, more brand right and it’s also coupled with retail presentation.

So it’s great to marketing the brand, but if you don’t have, if you’re not presented well and if you’re not presented in an appropriate environment of retail, the marketing by itself is not going to drive it.

So we think to a great extent the investments we’re making are point of sales and capital and marketing at point of sale are as important as our marketing campaigns..

One last question, that’s really helpful Manny. On the digital side, on the e-commerce side -- it’s not as big a percentage of your business as maybe some of the peers out there, where there is a traffic issue going on in retail generally because the rise of e-commerce.

Can you just give us an update? You've got a lot of balls in the air especially around Calvin Klein but an update on how you are strategically thinking about really entering the digital side of the business in a much more material and significant and focused way?.

Sure, I think there are two stories. I think the Tommy Hilfiger business which is about $85 million business today and profitable has been a business that’s been growing 20% to whatever is high double-digits.

That’s been a business that with the control of the brand, we have been able to make the investments and pull the goods together and make a real statement about the brand and the product and transact well there. And the focus has been Europe and North America.

On the Calvin Klein brand, being a -- us running a licensing model, it was very difficult for us to really pull together an economic model that worked. We had a significant brand statement on the internet and we had a $20 million business that transacted and lost a couple of million dollars.

But now that we have control all over jeans and underwear and a much bigger control over sportswear, we’re able to -- going forward we’re able to make a much more solidified cohesive message going forward. And we’re making investments. We’ll be launching calvinklein.com to sell and transact the commerce side in Europe.

We’ll be launching throughout Asia in the second half of 2014 into 2015 and we’ll be also launching in Brazil a site for spring 2015. So a significant amount of investment going on with -- the technical capabilities are there. We’re investing in the brand site at itself as we go forward. That’s all built into our numbers.

And we think it’s an opportunity for us as we go forward to grow all direct to consumer business with Calvin Klein. We have a very big third party ecommerce business with our partners where we are significantly penetrated at Macy’s and our partners throughout Europe and Asia. We have a significant business with some of the pure play retailers as well.

So we know there is demand for the product and now that we have control of it, I think we’ll be able to, given our retail presence in all of those markets, we'll be able to really take advantage of the e-commerce opportunities there as well for us as we go forward..

And our next question will come from John Kernan from Cowen & Company..

Just can you quantify the investments made specifically around Calvin Klein jeans and underwear on the SG&A side of things that you expect to roll off next year.

And then Mike with CapEx right around $300 million, how sustainable is that? Do you need to push CapEx higher given some of the expansion of e-commerce and a greater push internationally?.

Mike will touch CapEx first. .

Yes, $300 million this year, I do think we'll see a decline in that as we move forward. I think somewhere close to the $270 million to $275 million would be the number as we go forward. Part of this year does include some one-time investment spend, particularly for infrastructure..

Okay, just from an investment point of view, we have talked about $55 million to $60 million in strategic investment spending in those areas that I laid out, combination of spending and elimination off-price sales at profitable margins and overall profitability to be somewhere in that $55 million to $60 million range.

Being spread over the second half of last year into the -- through the first two or three quarters of this year; those expenses don’t go away but they need to invest at that level above our normal growth rates. That’s what falls off.

So we’re up against $30 million or so this year of spend associated with the investment spending that’s going on with Calvin Klein. Principally in the first two quarters of this year, a little bit in last quarter but principally in the first two quarters of this year.

And we were up against that with the second half of last year to the tune of about $20 million to $25 million in the third and more significantly in the fourth quarter of last year..

Okay that’s super helpful. Just one final question.

Can you talk about some of the opportunities you have in emerging markets to bring back some of your joint ventures and licenses internationally?.

Sure, I think as, I guess the opportunity to bring back licenses in categories long-term is the -- our Tommy Hilfiger business in Asia is principally a licensed model. It's about a $550 million business today. Some of that business in China, where are a joint-venture partner, where we own about 45%.

There is opportunity over the next two to three years if we can make economics work that we would, potentially could bring that back in-house.

In the similar way, the Korea business and the rest of south-east, Central Asia there's two license agreements that have varying terms between three and five years to go on those license agreements -- that clearly as the Calvin Klein businesses in those markets are fully integrated and established, give us the opportunity to potentially bring those businesses in-house and operate them directly ourselves.

Moving to Latin America, there’s a developing business for Tommy in Brazil today that’s going very fast, but it’s basically $35 million - $40 million in this year.

That business, we believe the potential to be between $100 million to $150 million over the next three to four years, three to five years; and I think that’s an opportunity given the strength of our Calvin Klein business in Brazil and as we look at that business developing overtime, again we have the option to bring that business in-house, four years from now, if it makes sense and we can make economics work.

And similar story, in Mexico as well, we have a very healthy Tommy Hilfiger business. It’s a $150 million in those markets. We have a Calvin business that we operate directly ourselves. Finding the right business model there, which might be a combination of both, could really work well for us as we go forward. So we’re looking at that as well.

When you look at product categories then on the Calvin side in North America, the tailored clothing area is an area that we think is a natural fit for us, given our strength in the dress furnishings business with neckwear and dress shirts, and then secondarily the whole women opportunity that G-III does just a fantastic job in operating and has grown the business so well, and now I'm really talking long-term.

Clearly that’s a license that’s 9 to 10 years today, but as that business comes forward, we are trying to work out a business model that maybe is more -- the we’re more directly involved and something we'll be looking to do. So those are broad strokes, some of the big opportunities that aren’t necessarily factored into our growth strategies..

Next we will hear from Dana Telsey from Telsey Advisory Group..

As you think about the CK transformation and what’s happening with the gross margin pressure in North America, looking out towards the fourth quarter and into 2015; can you parse together as you think of the gross margin pressure and the changes that you see will happen, does inventory come down, does product improve, and how do you see that with the CK business in Europe? Is it more promotional there, do you see pricing improving?.

Okay, so I guess, when you said fourth-quarter ’15, you meant 2014..

Exactly..

So, look I think just a couple of things. I think we are -- in North America, the Calvin Klein business with the exception of jeans, is very healthy. Our margins there are under the least amount of pressure overall than we’re seeing.

And I think as we move forward, the new product initiatives, what -- we were up again significant liquidation sales last year. I think there is a real margin opportunity for us in the fourth quarter of 2014 as we go forward in North America.

I think in general I think last year’s fourth quarter, once we got past Thanksgiving last year, it got significantly promotional. The tighter calendar, we talked about less days last year. I don’t want to go back and rehash all that.

The very challenging January that really occurred I think -- I don’t anticipate that repeating itself and that’s not built into our numbers, that that type of pressure would repeat itself.

So I think relatively speaking from a comparative point of view first half, second half; the second half comparisons are much easier as we start to cycle those going forward, particularly in North America. In Europe again, the Tommy business we’ve not seen any significant margin pressure there at all.

That business is very healthy, continues to perform very well and I would expect that only to continue into the second half of the year. Talking specifically about Calvin Klein, we’re looking for some significant margin improvement in the third and fourth quarter, principally because we were in liquidation mode all of last year.

So sales were under pressure last year throughout. We were liquidating goods. We weren’t happy with the product quality. We do have the right presentation. So I think there on a specific basis for us, we clearly think that there is margin opportunity as we go forward.

I think that they will be naturally some level of promotion in the market but I think for us it’s about first getting some regular price selling that we didn’t almost have at all when it came to the jean side of the business. So there's a big margin opportunity for us in the third and fourth quarters that we need to capitalize on..

Our next question is from Joan Payson from Barclays..

In terms of the Calvin Klein distribution rationalizations and I think you started touching on this in terms of Europe.

But with regard to the off price versus full price mix in North America, what do you think that could be at the end of this year? And then in terms of the European business, which has always been more heavily focused on the southern regions, what do you think the northern versus southern side could be pro forma?.

Just a -- could you repeat that? You broke up on this side. Could you just repeat the last part of the question about northern - southern? I didn’t hear it..

Just in terms of pro forma for the distribution closures, what do you think the northern versus southern mix could be in Europe?.

Okay, sure. Let me start with North America. I think in North American there's always a healthy mix of off price to regular price selling. You need to clean goods. The T.J. Maxx channel is a natural channel to do that. You could do it in an appropriate way and limit the distribution.

It could both be profitable selling and then it could be -- it’s not brand denigrating in any way. And we feel by the end of this fiscal year we’ll have that balance from a dollars’ point of view in the off price channel where we wanted to be both in jeans and underwear.

And as we’re growing the regular price business in North America, that percentage should come in line over the next year or two as we go forward.

But I think it’s important to keep in mind that the Calvin business, relatively speaking is so clean -- it's distribution in other product categories, sportswear, if you move into the women’s side of the house, our accessory -- that distribution is so clean, when you look on the balance, we're not overly distributed from a brand point of view in the off price channel with this.

There's just too much jeans and underwear in that channel that needed to be cleaned up. So I think what once we get through this fiscal year, we feel perfectly positioned as we go forward.

Moving to Europe, I think what you have to keep in mind is the jeans business was principally focused on Southern European distribution, at least on a regular price point of view. It was very difficult to find prior to 2014 quality jeans distribution in Germany, Central Europe, France, the UK. That’s where the major cleanup is going and where it is.

We’ve always had good jeans penetration in Spain and we had a big business in Italy but it was -- the Italian business was much too much in the off price channel and significantly discounted and that is the channel that is going to be the biggest challenge for us.

That market will be the biggest challenge because one it’s obvious market and two it’s the market that’s feeling the most pressure economically and that continues and that consumer is under the more pressure. So we’re very focused on that. We're focused much more in the Italian market on opening price point jeans there.

We will be more promotional in our own stores in the Italian market just because we had to be, given our size and where we are.

So again, we’re trying to manage that upgrading, but it will be less promotional than it has been, it will be cleaner than it has been but we’re not going to be able to just to turn the spigot it off completely in the Italian market..

Okay, great, and then just in terms of your gross margin expectations for the year, if you could provide some additional color just in terms of I guess what the contribution could be from the retail and international expansion, compared to the negative impact from promotional activity?.

Okay just two things I want to clear. Again, we’ll talk about gross margins. We are going to see gross margin, gross margin improvement going forward and that’s excellent. But I guess I just want to reiterate a couple of things.

The off-price sales, because they were done under the Calvin Klein label, which is of the quality that is, selling internet channel distribution with planned sales was a very profitable transaction for Warnaco. It wasn’t brand enhancing but it was very profitable.

So making 30% margins which were lower than what the overall brand does, but with almost no incremental expenses was a very [indiscernible].

On a gross margin basis, eliminating these sales will be enhancing to our gross margin, but will not be enhancing from a profitability point of view since there were so few expenses that along with that sales transaction. So Mike will give you some of the guidance specifically for gross margin..

Joan, we’ve talked about the gross margin expansion, about 70 bps of improvement for the year. We’ve talked about a couple of things. One, as I mentioned before, we are doing less promotion which helping our margin.

The mix of businesses is a big factor, selling VAS is a factor, growth on the international markets where we operate with higher gross is a factor. So all that comes together and for the year we’re still not finding about 70 bps improvement..

And our next question will come from Eric Beder from Brean Capital..

Could you tell us a little bit about J.C. Penny and what you’re seeing at the J.C. Penny stores? And in terms of -- let’s do J. C. Penny first..

Okay, I guess on the Penny side, it feels pretty good. Again, sales trends have been positive. You see, I'll let them speak for their own comps, but our business there has been very solid, both the dress furnishings business and our Van Heusen and IZOD sportswear businesses have been very strong as has our Warner bra business as well.

So we’re very happy with how J.C. Penny is performing in the mid-channel for us. And we haven’t -- those trends have continued into the second quarter for us. So we’re feeling good about that.

And how are you feeling about the Kohl's expansion with IZOD and how does that look for you?.

We’re very excited about that. That’s going to be a big launch for us. We really start to shift that very late second quarter, but mostly third and fourth quarter. It is a major growth initiative for us. There will be a significant marketing spend that will go along with that that Kohl's is making a significant contribution for.

We also have a significant shop presentation spend there. So the brand will be presented in an excellent way going forward. You should start to really see that, I would think in probably September 1st to September 15th, you’ll really start to see the IZOD presence in men's', in kids, in Calvin clothing and dress furnishings in that store.

So I think we’re very much excited about that. They are excited about getting some of the national brands that they are launching in the second half of the year and IZOD is clearly on the men's' side the big launch for that. Operator, we’re going to take two more questions and then call it. It’s about 10 o’clock right now..

Okay, great. We will take our next question from Howard Tubin from RBC Capital Markets..

Assuming 3-Q works out the way you expect it to, how should we think about kind of total inventory growth going into 3Q and ending the year?.

Look, I think as we get through the third quarter, we’ll see our inventories get more towards flat and then we’ll see normal growth as we get into the fourth. As we end the year we’ll start to see more normal growth reflected with sales. At the end of the second quarter, our inventories are up about 3.5% to 4%. Our sales are planned up 1%.

As Manny said earlier, inventories are a point or so high. I guess I would say that the inventory composition is heavily basic weighted, the piece that’s a bit of a -- the overage piece is heavily in basics and we really don’t see much exposure.

And it’s going to take some time to work that down throughout the year, but it’s really not a financial exposure for us at this point..

Also we’re -- we are building our inventories to begin the shipping of IZOD, which was shipped early third quarter. So that’s hitting our warehouses in June and July. That’s set up as we go forward. So I think that build up and that fixture fill that goes on is also reflected in there.

So the quality of our inventory will down -- will be pretty strong by the end of the third quarter and then by year-end I think you’ll see it back to normal levels..

And our last question will come from David Weiner from Deutsche Bank..

Dave Weiner from Deutsche Bank. So I just had two questions to end things here. The first, Manny, you were talking about AUR increases in the jeans, in the CK Jeans business earlier in the call.

Can you just remind us in North America and Europe where those are and where you'd like them to go? And then my second question would be and I don’t know if I missed this earlier but can you give some kind of quantification of the early interest you are seeing in Europe and North America on your redesigned CK jeans product? Thanks..

Sure, okay. So on AURs, I don’t think I mentioned on this call before but we've talked it, is the jeans in North America going for seasonal basis all in t-shirts, jeans going out at $25. The right number for the positioning of the Calvin Klein brand with markdowns and clear should be closer to $40. Our men’s sportswear is $45 to $47.

To put it in perspective, jeans by its nature with the big t-shirt business is going to be lower than sportswear and that includes all the markdowns and clearance that’s appropriate for the business. So for us it’s moving at $25 to that $40 mark and our financial plan calls for that to happen over a three year period.

Starting in the fall season we should see a 10% to 12% improvement in AURs. We're hoping that closer to $30 as we go forward and then moving that up over the next two years, going to $35 and then $40.

So I think we're doing it in the smart way and we'd like it to happen quicker but I think you also have to recognize that the consumer has been trained at this and you can’t go overnight and take out the needle, particularly here in North America with some of the promotions that have gone on. Hopefully we could outperform that.

But it clearly gives you a sense of how underperforming the jeans business was from a margin point of view. Since the bottoms are ticketed 59%, 69%, 79% or 80% of the bottoms businesses are at that point and 20% or little bit higher than that. So it just gives you a sense of the kind of pressure that the jeans business has been on.

I think a lot of that just has to do with product and presentation. In Europe, directionally it’s a very similar story. The price positioning in Calvin Klein Jeans should be closer to EUR80 in Europe and we have been going out closer to EUR45 in Europe when you factor in t-shirts and everything that goes with it. So it’s a similar opportunity.

We think in some of the markets that the brand hasn’t had significant distribution in Northern Europe, Germany, France, the UK and so basically Central Europe, that there's an opportunity to move the out the door retails quicker and that will be more challenging to do in Southern Europe in the Italian market and the Spanish market.

So, those two markets will be more of a challenge for us to move it. So we factored all that into our business plans we've gone forward to really work that through. But again over a three year period, we want to move those out the door retails to where we believe it’s appropriately targeted.

We have a Tommy Hilfiger denim product is executing now at the door is a good benchmark for us as we go forward. So, it’s clearly where the brand should be positioned and how we should go forward.

As far as some of the doors, I really spoke about that in detail and where we're seeing some of these increases but I think the biggest endorsement here in North America is the new doors and our key retail partners opening up new shops in top 100 doors in the U.S. over the next few years. And they believe in the brand.

The brand performs in every other product category, men’s sportswear, women’s sportswear, accessories, tailored clothing, dress shirts, across the board and clearly believe that jeans should be a significant opportunity for the brand, since it's its heritage.

So, that’s probably the biggest endorsement we have from a distribution point of view and what we've been able to secure for ourselves in the third and fourth quarter of this year. Okay. Listen, I’d like to thank everyone for joining us on the call and we look forward to updating you again in September on our second quarter results.

Everyone have a good day and speak to you soon. Thank you..

And that concludes today’s call. Thank you for your participation..