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

Bob Drbul - Nomura Securities David Glick - Buckingham Research Group Michael Benetti - UBS Erinn Murphy - Piper Jaffray Omar Saad - ISI Group Matthew Boss - JPMorgan John Kernan - Cowen & Company Christian Buss - Credit Suisse Kate McShane - Citi Investment Howard Tubin - RBC Capital Markets Steven Marotta - CL King & Associates Evren Kopelman - Wells Fargo Securities Robert Ohmes - Bank of America Merrill Lynch.

Good morning, everyone, and welcome to the PVH Corp. Second 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 transcript or replay of this call. The information is being made available includes forward-looking statements that reflect PVH’s view as on September 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 am pleased to turn the conference over to Mr. Manny Chirico, Chairman and CEO of PVH..

Thank you, Kim. Good morning, everyone. Joining me on the call is Mike Shaffer, our Chief Financial Officer; Dana Perlman, our Treasurer and Senior Vice President of Investor Relations; and Ken Duane, the CEO of our Heritage businesses and our North American wholesale businesses. Business trends in the second quarter came in pretty much as we expected.

We have anticipated a highly promotional retail environment, particularly in North America. Given that macro retail environment, we are pleased with our second quarter results which exceeded our earnings guidance. This outperformance was driven by the results of our Tommy Hilfiger business which posted an 18% increase in earnings for the quarter.

The other positive news coming out of the quarter is in inventories. Our inventories as well as overall industry-wide inventories at retail are clean and backing balance as we enter September and the all-important back-to-school selling season.

Let me highlight some of the key trends that we’ve seen in each of our business units for the second quarter and early part of the third quarter. As I indicated, our Tommy Hilfiger business had a very strong second quarter.

Revenues increased 9% driven by strong wholesale growth, retail square footage expansion and our comps store sales growth increased in North America about 2% and 3% in Europe. As we begin the third quarter, sales trends have improved in August with comp sales in Europe up and North America up mid-single digits.

At wholesale, in Europe, we continue to plan for holiday sales up about 5% based on our current order book. Our sales of the spring selling season is well underway and based on our current order book, we are projecting continued momentum with wholesale growth of about 5% for the spring season.

Moving to Calvin Klein, revenues for our Calvin Klein business increased 1% in the quarter which was slightly ahead of our forecast. Second quarter sales continued to be negatively impacted by planned declines in the wholesale jeans business as we continue to restructure the sales distribution mix by reducing off-price sales.

Our Calvin Klein underwear business continued its strong performance posting mid-single-digit wholesale sales growth in the quarter. At retail, our North American business posted a 2% comp store increase while comp store sales in our international business declined 4% driven by the ongoing transition of our European business and softness in Asia.

Calvin Klein sales trends in the third quarter have also improved with comp store sales up mid-single digits in North America and up low-single digits internationally. Our earlier reaction to our new product deliveries have been positive but it is still early.

Men’s and women’s underwear are posting double-digit increases in average unit retails and we are exceeding our retail sales plan with our major department store customers. In the jeans area, new product is just beginning to hit the retailers’ floor. We have significantly upgraded our denim offering.

Commensurate with the Calvin Klein brand position, we have increased our U.S. opening price point jeans to 69.50 in men’s and women’s from its previous position of 49.50. Overall, we expect to rollout the bulk of our new Calvin Klein jean shops in North America and Europe in September and October before the all-important holiday selling season.

We will open about 150 shops in Calvin Klein jeans men’s and over 50 shops in Calvin Klein women’s across North America, and we will open about 80 new shops across Europe in the third quarter. We have opened about 20 men’s jean shops in August and we have seen a significant uplift in initial sales post-installation with healthy sell-throughs.

As we have mentioned before, we believe our Calvin Klein jeans men’s product is further ahead relative to our women’s product, but we believe we are seeing nice improvements with the new fall product deliveries.

Europe and Asia have also seen an improvement at retail and wholesale and we believe we are seeing some early signs of positive consumer reception over the past few weeks. New products are just beginning to hit the floor, but once again I remind everyone that it’s still early in the selling process.

Moving to our Heritage business, our Heritage business sales were relatively flat but experienced significant margin pressure as our North American moderate brands were most severely impacted by the promotional retail environment in the second quarter.

As we begin the third quarter, our Heritage wholesale businesses are well positioned to deliver strong growth driven by our Van Heusen and IZOD businesses, which are planned for growth with our key retail partners. In particular, our IZOD brand is launching at Kohl's.

This launch is being supported by a major marketing campaign which will begin in early September and very strong retail presentations at all major Kohl's doors. We are very excited about this new business and believe it will help drive our second half Heritage business turnaround.

From an integration point of view from the Warnaco acquisition, we are on track while all our systems conversions have taken place as planned and we will be substantially complete by the beginning of the spring 2015 season. Overall, we are cautiously optimistic about the second half of 2014.

We believe we are well positioned to achieve our targeted earnings growth, which is expected to be in excess of 15% in the second half of the year. This confidence is based on four key factors.

Inventories at retail are in good shape and although we believe it will be a normally promotional back-to-school and holiday season, we do not see the clearance markdowns that were required in the second quarter of this year or the fourth quarter of last year to bring season-ending inventories back into line.

By the end of third quarter, we will have anniversaried the entire investment spending on the Calvin Klein jeans and underwear business and we will not be up against this headwind in the fourth quarter.

We believe our new fall and holiday product initiatives for jeans and underwear along with our new retail shop presentations will continue to improve sales trends throughout the fourth quarter. And finally, August sales trends at both Calvin Klein and the Tommy Hilfiger business have begun to accelerate and we are currently ahead of our sales plan.

With that, I’d like to turn it over to Mike who will quantify some of the second quarter results..

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 second quarter were 1.98 billion, a 4% increase over the prior year when excluding the Bass business we sold to G-III last year.

Driving our revenue increase over the prior year was a 9% increase in our Tommy Hilfiger revenues, Calvin Klein revenues were up 1% and our Heritage revenues were flat excluding Bass. Our earnings per share for the second quarter was $1.51, a $0.06 beat to the top end of our previous guidance of $1.40 to $1.45.

The beat was primarily driven by overall better than expected gross margins and expense savings.

By business unit, we were disappointed with the performance of our North American Heritage business which was negatively impacted by heavy promotional environment and fell short on revenues and gross margin for the quarter but was more than offset by strong performance at Tommy Hilfiger. Calvin Klein earnings were on plan for the quarter.

For the third quarter, we are projecting earnings per share of $2.45 to $2.50 or an increase of 7% to 9% over the prior year. Revenues will be about 2.25 billion or an increase of 3% over the prior year, excluding Bass.

Our earnings per share for 2014 continued to be planned at $7.30 to $7.40 as the second quarter EPS beat is being offset primarily by a takedown in revenue and earnings in the second half of the year due to a decrease in FX largely driven by a weaker euro.

In addition, our 2014 earnings continued to be negatively impacted by the incremental spending in the acquired Calvin Klein businesses. We have not reduced these investment plans from our initial budget and we’ll continue to make all necessary investments to continue to grow these businesses for the future.

Our second half EPS estimate currently reflects growth in excess of 15% over the prior year, which is heavily weighted to the fourth quarter. Our revenues for 2014 are projected at about 8.4 billion or 4% increase over the prior year excluding Bass. Tommy Hilfiger and Calvin Klein are planned to have revenue increases of 7% and 3%, respectively.

Our Heritage business revenues are planned to increase 2%, excluding Bass. Our downward revision to revenue guidance reflects negative impacted FX due to a weaker euro as well as the impact of weaker than planned sales on Heritage retail and dress shirt divisions.

The lower estimate for dress shirt sales is due to softness in the basic replenishment area. Our full year operating margins continue to be planned on 60 basis points 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 a large part to the Calvin Klein investments.

For the year, we’re projecting our Tommy Hilfiger operating margins to increase 10 to 20 basis points, our Heritage brand operating margins to decrease 30 to 50 basis points and our Calvin Klein operating margins to decrease 160 to 180 basis points. Finally, we continue to project debt pay down on track at 400 million for the year.

With that, operator, we’ll open it up for questions..

Thank you. (Operator Instructions). We’ll take our first question from Bob Drbul of Nomura Securities..

Hi. Good morning..

Good morning, Bob..

Good morning, Bob..

Manny, I was wondering if you could sort of provide a little bit more detail on what you’ve seen maybe, I don’t know if you want to comment by retailer, but on some of the initial Calvin jeans shops in the U.S.

or in Europe, if you could just give us a little bit more flavor, color, any sort of sell-through numbers or anything from that standpoint? I know it’s early..

Okay. With all those caveats that you put in, I guess we are encouraged by what we’re seeing both in North America and what we’re seeing in Europe and Asia as well. The initial reactions of the product has been positive, average unit retail out the door are all double digits.

As I indicated, in our own stores comp store trends have improved and I believe that the product is much more in line where the brands position is in other product categories, so I believe we’ve lifted the product. The challenge now will be to bring the consumer along with us.

We feel positive about what we’ve seen particularly on the men’s side and I think we still have some more work to do on the women’s side of the floor as we go forward. So that’s a challenge in jeans. I think the other challenge in jeans just to say, and particularly on the women’s side, is the category itself.

The category itself is under extreme pressure particularly from – what I would describe as active wear or performance wear. Our Calvin Klein active wear business is very strong.

I think you saw that in G-III’s results yesterday and I think that’s taking some of the action off of the denim floor as well, so I think it’s that balance, but early signs are positive.

The 20 shops that we opened in men’s which are basically in North America we’ve seen really good sell-throughs there, double-digit increases against plan and significant increases against last year as we’ve also increased square footage there..

Great.

And then the second question that I have is in terms of the risks that remain around the Heritage business impacting your results similarly to how they did in the first half of the year, like how confident are you today that the new estimates, the updated guidance fully reflects less risk around that piece of the business as we look to the full year numbers?.

Look, I think there is a lot of uncertainty in general not just in our Heritage business, but just look at retail in general and what’s going on. I feel confident that inventories are clear now and it seems like sales trends are in line.

We’re not dealing with the kind of difficult situation we saw in the first quarter last year when we were impacted by weather. So I believe that will position us well.

I guess the only other thing I’d mention is that last year’s third and particularly fourth quarter from a margin point of view and a sales point of view at retail was just weak, and I think the comparisons second half of the year are much easier than they were in the first half of this year.

So that balance including inventories, it gives me confidence as we go forward. But clearly if there is more pressure toward that retail, I think the business that would see it first would be our opening price point Heritage business.

I think there could be some risk there, but I feel given the strength in Calvin and Tommy that we can more than offset it..

Great. Thank you very much, Manny. Good luck..

We’ll take our next question from David Glick of Buckingham Research Group..

Thank you. Manny, just a question on the second half and the trends that you’re projecting in excess of 15% earnings growth.

Are there any other investments that you anticipate in 2015 that you have previously talked about that would preclude or prevent you from kind of continuing that momentum into next year as you – obviously you anniversaried all the big investments in the Warnaco business?.

I think the issue will not be in the investment spending in our business above where we think it will be. If there is risk to 2015, it will be the geopolitical environment, what’s going on around the world and the macro environment.

As I sit here right now looking at the world, it is not the most stable situation and that gives me the greatest concern..

Got it. And then a follow up on Calvin Klein. I mean your momentum in the Tommy Hilfiger business continues to be very strong, kind of in line with our long-term high-single-digit growth that you’ve been calling for from Tommy Hilfiger.

Given your Calvin order book, are you at a point where you’ve cut the distribution and closed doors enough where you think you can really start to accelerate the Calvin business? Obviously your fourth quarter revenue projection applies a nice acceleration but do you think we can finally get back to kind of in line with your long-term outlook on Calvin Klein’s revenue growth?.

I believe so. I think between the product initiatives, the investments we have made, eliminating the headwinds that we’re dealing with particularly with getting the off-price channel to a much more rational level, those headwinds will be behind us. So I feel that yes, the growth is there, the opportunities are there to grow.

And then it somewhat depends upon the environment, but I think we’re well positioned as we go forward..

Great. Thanks, Manny. Good luck in the second half..

Okay..

Our next question comes from Michael Benetti of UBS..

Hi. Good morning, guys. Congrats on a great quarter in a very tough environment..

Thanks, Michael..

Manny, I know you love getting picked apart on details, so just a couple of questions here. If I missed it, I apologize.

Calvin Klein order book for the spring, could you give us an idea of how that looks?.

Yes. Well, I don’t think I did. It’s up double digits, 10%, 11% and that feels pretty good right now from where we’re going. When we’ve talked about retail customers, they continue to be enthusiastic about the initiatives we’re putting in place.

But to be fair to them, they haven’t seen any real selling of product expect in our underwear business which has been healthy throughout.

So we’re really looking for the third quarter and the fourth quarter to be our stamp that we can really point to progression as we go forward from a selling point of view as new shops get in both in Europe and in North America and as you start to really flash positive sales increases with the retailers, I think that’s how you start to get more space, better presentations and I think that’s what we need to see over the next 60 to 90 days and I think that could set us up well for second half of 2015..

Okay, great.

And could you help us understand the components of the gross margin improvement that we saw in the second quarter to help us think ahead a little bit as we move through the year?.

I’m going to turn it over to Mike. He’ll give some details and then I’ll throw in some color..

I guess from a mathematical perspective what you saw was the Heritage margin declined and we had a little bit of pickup on the Calvin and Tommy side, so you really had a mix impact. We’re up a bit on margin to our plan. It was really a mix-driven – for us was mix-driven over the guidance..

Yes, and I would say the Tommy business, the performance was just great in the quarter, I don’t think there’s any other word, both North America and in Europe. And when you think about it, I think in Europe we were significantly less promotional than a lot of our peers.

So we didn’t try to steal business and drive it and I think that worked its way through the business as we’ve seen in the results..

Okay. And then one last little question here. If we look through the guidance a little bit and look at how Calvin should flow through third quarter and fourth quarter, you’re expecting a nice acceleration in the top line there in the fourth quarter obviously.

There's a lot of dynamics going on there, but I wanted to see if you could help us understand how much of the acceleration into fourth quarter is coming from things like finalizing the off-price destocking that you talked about in Europe versus how much is coming from things like the AUR improvements that you talked about and the comp improvements in the business? Thanks a lot..

Look, I think it’s hard to break it down in details specificity, but I would think as far as to give you some color on – how I would see it playing itself out, I think cleaning up the distribution, closing some of the unprofitable stores and whatever as we get into the fourth quarter that’s about half the improvement to get the baseline, not having to – again on an expense leverage basis not having the headwind of the investment spending as well will be a big benefit.

But I think about half of the benefit is also coming out of the new product initiatives and the anticipated increased sales that we’re expecting in jeans and underwear. So I really think it’s give or take 50% each of where the improvement is coming in the fourth quarter..

All right, that’s really helpful. Have a great morning. Thanks..

Thank you..

We’ll take our next question from Christian Buss of Credit Suisse. Mr. Buss, you’re line is open..

I think we lost him. Why don’t we go to the next question..

All right. We’ll go to our next question, Erinn Murphy of Piper Jaffray..

Hello..

Yes, hi.

Can you hear me?.

Yes, we can. Hi, Erinn..

Great. Hi, good morning. Just wanted to follow up on the strength in Calvin Klein Europe on the order book, Manny, that you alluded to for spring.

Are there any regions that are coming on stronger and then just what are you seeing generally right now in southern Europe?.

Okay. I think Germany in particular is coming on strong in the UK. Those are the two markets where we’ve seen strong improvement. The Italian market both for Calvin and Tommy continues to be a drain, potentially not as severe as it had been but continues to be a drain.

The business in Spain for both businesses is actually starting to grow, again off of a base that over the last three years is down anywhere from 30% to 40% but it’s no longer becoming – particularly for the Tommy business, it’s no longer becoming a negative impact to the business as we go forward.

I guess just – you didn’t ask specifically, but in Europe the biggest concern we have right now is what we describe as our Russia business and that whole Middle East business which combined our Russia business is about $100 million business and our Turkey-Middle East business is about $75 million business with high operating margins meaning 14% to 15%.

That business has softened as you’d expect given what’s going on from a geopolitical point of view and how it plays out could put some real pressure on the business in the first half of next year. So we’re really watching that very carefully. We’re trying not to get stuck with inventory.

The Russia business is a distributor franchise operation to a great extent and there we don’t want to put our strategic partner in a difficult inventory position, so really working hand-in-hand with them as we go through that business. So that’s been a market that’s been double-digit growth for us consistently last three years.

So that is one area of concern that we have, that and the Italian market..

Okay, that’s helpful. And then I think sticking on the European theme, you did talk about being less promotional I think both in Calvin and Tommy.

What is your expectation for just the overall environment in the back half in Europe? Do you think it will remain in this less promotional cadence or do you expect the environment to pick up as we get into the holiday season in Europe?.

I’m in no way indicating that I think that this will not be a promotional environment. But I think there’s a difference between what I would call normal promotional and having then to deal with sales shortfalls and clear inventory.

That’s the most expensive markdown, that’s the markdown that you deal with in the second quarter and the fourth quarter as you transition season.

So, as in the first quarter last year when we really fell behind – the whole industry fell behind in selling trends, we really had to get inventories and balances in the second quarter when it just cost a lot more to clear those goods.

Last year in the fourth quarter, we really saw softening in general at retail starting in December which really caused the bulge of inventory that had to be dealt with upfront. So I don’t foresee that given the initial selling that we’re seeing given the overall inventory position that we see at retail with our key partners.

So I think they have done a good job of getting themselves positioned for the holiday selling season. So I think we’re in a reasonably good place as we go forward.

And like anything else not to play weatherman or weatherperson, I think the weather trends particularly here in North America have been positive for business for selling of fall product and we had the complete opposite in the first quarter of this year.

So I think we’ve transitioned well from a seasonality point of view here, cleared goods and are seeing some initial good selling of fall product across the board..

That’s great to hear and best of luck this fall..

Thank you..

We’ll take our next question from Omar Saad of ISI Group..

Thanks. Good morning, guys. Nice quarter..

Thank you..

Just a couple of questions. First of all on the outlet channel, Manny, it’s a big channel for you guys. It’s been a great channel for the industry in the last decade. Went through a period, seems like a period of softness, seems to be coming out of that a little bit.

What are your thoughts on what’s kind of happened and happening there and how are you thinking about that channel from a traffic and consumer standpoint going forward?.

Sure. Look, I think the outlet channel for us particularly at the premium brand level and we put Calvin and Tommy and some of the other competitors there out there, I think even through a difficult first half of the year, we saw real positive selling in stores low-single to mid-single-digit kind of comp.

That doesn’t strike me as a channel that’s under a lot of pressure. And I know there’s been some competitors that’s had their own issues that had to deal with it, but I think on balance the channel has been healthier than a specialty store or more based retailers. So I felt good about that.

I think when you get into a highly promotional environment like the end of the first quarter and the second quarter, I think it does put more pressure on the outlet channel because it is a value channel of distribution.

So I think it has experienced that and the healthiest environment for the outlet channel is when regular retail is doing well, because there’s not a compelling message going on at regular retail from a promotional point of view.

This year’s second quarter when you went to the middle of the mall, particularly at specialty stores, I mean you saw prices that were dropped 70%, 80%, so the consumer didn’t have to get in her car to drive to the outlet store. So I think that always plays a role as well. So I think as we’re going into fall, it feels much more balanced..

Thanks. That’s super helpful. And then a follow up on the gross margin questions. Gross margin is up two quarters in a row after being down last year. You’re talking about taking the opening price point from 49 to 69.

How long tailed can some of these gross margin opportunities be, and where do you see that evolving and what’s the opportunity not just the next quarter or two but over time?.

Look, to put it into perspective, our Calvin Klein European jeans business and our Calvin Klein North America jeans business when you put it together they are marginally profitable businesses. There’s no reason why those businesses over a period of time shouldn’t be operating at, let’s just take 10% operating margin.

Our other in-house Calvin wholesale businesses really track much higher than that, but let’s get the 10% first. So we think over the next three years, there’s opportunity to take operating margins that today were 2% and really drive it.

The key is going to be – as I’ve talked about in the past is we’ve got to increase the average unit retails on these goods, the out-the-door retails on these goods. There’s been much too much promotional selling, discounting of product, taking down the quality of the product.

So we’re going through a transformation here and a major transition as we raise retail price points, training the consumer that this is the appropriate place for Calvin Klein jeans to be positioned at.

Does that put some pressure on retail selling? I’m not sure or the other products that bear the name Calvin Klein clearly transact at comparable price points be it on men’s sportswear business or women’s sportswear and classification business across all retail.

These are large businesses at Macy’s and other department stores that are in the top quartiles as far as out-the-door retail prices. So we consistently demonstrated that. I don’t know why jeans needs to be at a place that is being going out the door at $25 on balance. It’s just not appropriate.

We should be much closer in North America to an out-the-door retail price all-in clearance markdown selling T-shirts, everything about $40. So that’s the opportunity. The way we have it planned out is we will get there and we will get there over a two to four-year period. We’re not assuming it’s going to happen overnight.

We hope that the initiative, the presentation will drive it faster but the financial plan is driven over that happening over a period of time..

Thanks, guys, really helpful..

We’ll take our next question from Matthew Boss of JPMorgan..

Hi. Good morning.

So can you elaborate a little bit more into August, what you saw driving the acceleration at both Tommy and Calvin and how sustainable you think some of the acceleration is?.

Yes. I don’t know how much more explicit I could be. I mean I’ve given comps. I think with our inventory position being in a very good place with early selling of fall product happening, we’ve seen an acceleration of sales in North America in our retail stores and internationally in our retail stores.

I think just to put it into perspective is as we were coming out of second quarter, mid-July on we started to see an improvement in business and that trend is continuing now for the four weeks of August.

So the last six weeks we’ve seen healthy retail store comps particularly here in North America and in Europe and it gives us confidence as we go forward. But as you know, there’s still a lot to go, big holiday seasons, a lot is going to depend what’s coming on from a competitive environment. I think we were well positioned.

So the initial reaction to the new product that’s gone in, I think that’s been the biggest sign that we’ve seen so far. So from that perspective, we’re taking a lot – we’re feeling good about it but again we’ve got multiple deliveries for the coming month after month. We have new product launches in underwear that’s coming.

We feel really good about those launches but now they have to deliver with the consumer..

Great. And then from an inventory perspective, I mean clearly the channel seems in a better place today than three months ago. It was a great call on your part in terms of the way this was going to progress.

So what’s the best way to think about potentially more conservative ordering trends out there so that people can maintain this with the potential margin opportunity? It sounds like clearly a net positive but I just kind of wanted to get your thoughts on the puts and takes out there?.

Matthew, when we made the call in May, it didn’t feel so good, obviously, and I think that’s what we saw and it seemed pretty clear to us that that was the way it was going to play out. The inventories were too high.

The consumer, even though she was coming back into the store, average unit retails because we needed to be more promotional were just lower and we were selling more goods later in the season than the prior year. So that – you just do the math, you don’t need to be a genius to see this is going to be a problem.

The big benefit that we see right now is as we’ve gone from one month of selling of fall, we’re not seeing the kind of trends. And as we came out of the third quarter, we saw an acceleration, so looking at six weeks of business it’s a trend.

How sustaining it is, is going to depend on how’s the environment, what goes on with the consumer, the geopolitical factors that go on. So I think we’re really sitting there looking at it, feeling positive but there’s still a lot to go in the second half of the year..

Great. Best of luck..

Thank you..

We’ll take our next question from John Kernan of Cowen & Company..

Hi, guys. Thanks for taking my questions and congrats on a nice quarter. Can you give any color on where you see sourcing costs going next year? Obviously, cotton had a nice move down here and we’re starting to hear from some other of your competitors that are saying they do expect to see somewhat of a benefit.

So where do you see sourcing costs going next year and how much of a benefit do you think it can be to gross margin?.

Well, I think there’s a lot of dynamics going on from a sourcing point of view. One is you’re absolutely right. Raw material costs, particularly cotton, we’re seeing softness in and that’s giving us an opportunity.

The offset to that is we’re seeing significant increase in labor costs and also social compliance costs as you deal with the issues in Bangladesh and some of the other developing countries around the world. So right now we’re planning overall cost mix to be relatively flat. Depending on product categories, it moves around.

Some will have benefits that are very much cotton-rich products will have some benefits, but where we have more blended synthetic products, we’re actually not seeing a bit benefit at all on the raw material costs. So that balance I think is still being worked through and overall I think we’re planning for flattish kind of product costs..

Okay, that’s helpful. And then just to revisit the AUR story at Calvin Klein. It seems like there is just a huge opportunity. Are there any parallels to what you saw with the Tommy Hilfiger brand after you bought that? I think there was a multiyear acceleration in AUR and margins kind of coming out of that acquisition.

And where do you think a normalized operating margin for the entire Calvin Klein business sits as you look several years out?.

Yes. Well, I guess it’s a great callout. I think what you’d like to see is you’d like to see the business accelerate like we did see the Tommy business when we made the acquisition. We saw AURs increase.

We were also able in North America to really bring some logistical power to the business and scale and really we’re able to help a great merchandizing team logistically deliver product even quicker and we’ve gotten all those benefits and we were able to lay average unit retails both at wholesale and at retail.

And you see the benefit of that, the Tommy Hilfiger North America business operates at about 15% operating margin. When we look at the Calvin Klein business, today it’s somewhere just – we’re projecting this year it’s just below 14% operating margin. So we believe both operating margin should be north of 15% on an ongoing basis.

Some of that will play itself out potentially as we bring back in-house potentially more businesses and convert from a licensing model to an operating model some of the businesses. As that occurs, we actually expect some depression on the operating margin but some real acceleration on the top line overall very accretive to earnings.

But again the licensing model is a 65%, 70% operating margin business. So that balances as we go forward. So the short answer is I think there’s 150 basis points of improvement in the Calvin Klein overall operating margins going forward that we should be able to retain.

If we get there, I think that will be a point that we’ll take another look to see where this business should really move going forward. That would be our goal over the next three years..

All right, that’s very helpful. Thanks, guys, and good luck..

We’ll take our next question from Christian Buss of Credit Suisse..

Just wondering if you could talk a little bit about your expectations for the European market going forward.

How have your stores performed and what are your expectations for the back half of the year in your own stores, particularly for Calvin?.

Okay. In the Calvin businesses for the first half of the year, comps were a negative high-single digits, close to 9%, 10%. A lot of that was the transitioning out of cheap product and not discounting and promoting as dramatically as it has been.

We’ve seen a significant turnaround in that business in Europe starting in the second half of July through August.

We have overall comping probably mid-single digits as we go forward in Europe, overall internationally low-single digits, so we’ve seen an acceleration overall in our international comps driven principally by what we’re seeing in Europe based on positioning in-store of the product, some of the new presentations and the new product we’re seeing hit the stores.

So it’s given us some optimism but again as I said seven times so far, it’s still very early..

That’s very helpful. Thank you very much and best of luck..

Thank you..

Our next question comes from Kate McShane of Citi..

Hi. Thanks. Good morning..

Good morning..

Mike, I just wanted to go back to your comment about the detail on softness in dress shirts.

I know that’s been occurring for a little bit, but can you remind us what is driving some of that softness when we lap it and what’s being done to improve the business?.

The industry and the trend has been moving towards a fashion product. It took us time to get back into that fashion product, so we’ve been – we didn’t plan that trend to change as quickly as it did.

We’ve moved towards fashion as we get into the latter part of the third quarter and fourth quarter, so we should be able to catch that back up and really recover in the – at least make our plans as we move into the third and fourth quarters. It’s really been a basic and replenishment issue for us..

It’s Manny. I’d just add to that.

I think Mike said it perfectly from that perspective, but I would add that basic margins tend to be higher than fashion margins overall, so the mix of business also moving from 30% fashion to 45% fashion has also depressed the mix of business and it puts some pressure on margin, as well as we try to balance our inventories we’ve had to deal with some liquidation of inventories to get back into those right levels as we’ve gone forward.

So it’s also been a top line issue at retail as the category which has enjoyed three years of really strong growth has really entered a period now as we moved in fashion, dress shirts is trending low-single-digit negative comp at most of our retailers and we’re seeing pick up in woven sports shirts which are much more fashion-driven at the same time and I think that’s – we’re in a bit of a fashion transition as we go forward..

Okay, that’s helpful. And I’m just going to throw this question out there.

I think it might be a little bit of a stretch, but do you think there’s any read-through to the health of the consumer, how the consumer is responding to promotions from the better than expected gross margins you saw in the second quarter?.

No. If you’re talking about the overall – I don’t think you can take all our particular situations and drive that through to the ultimate consumer. I think that would be dangerous. Look, the consumer is very small.

As we came in through the first quarter, there was no need – I mean I don’t want to make it overly simplistic but business was as tough as it was. There was no need to go out and buy bright colored spring merchandize in March and April when the snow was still on the ground and didn’t need to replenish this.

As the weather has started to turn, she came back to the stores and it was piled high with inventory and needed to be promoted in order to drive. She shopped and reacted. The problem was we were selling probably on balance at retail more units but at 10% to 12% lower AURs to clear it.

So when you do the math, that just put the pressure both on margins and you didn’t get necessarily the kind of comp sales performance that you would have liked to see going forward and the comparison that you ARPU the prior year. So I don’t want to overly simplify but I think that’s a lot of what happened is well in the first half of the year.

I think as we trend back, I think she also understood that first quarter was a bit of an anomaly and it was a moment in time. She clearly understands what value is at retail and when she goes into the store, she’s looking for that value but she also understands that the inventories aren’t piled high and goods are backed out.

So she is making that judgment as she goes forward..

Okay, thank you very much..

We’ll take our next question from Howard Tubin of RBC Capital Markets..

Thanks. Hi, guys.

Manny, can you share with us any updated thinking you might have on big picture acquisitions or divestitures?.

No. Look, I think directionally we’ve been pretty clear. I think we’re on pause as we integrate Warnaco, get this behind us, get the investment spend behind us.

As we turn into 2015 we’ll start to think about bringing some businesses in-house but I think the kind of acquisition you’ll see us doing in the next couple of years will be bringing more Calvin and Tommy businesses in-house as opposed to looking at a third global brand opportunity at this point.

I think there is plenty of growth opportunity and the ability to really take advantage of the infrastructure that we’re building internationally and that we’ve really invested in Europe and in Asia to really take advantage of that infrastructure as we go forward.

So I would say I don’t see a lot of acquisition activity at all next 12 months and I think it’s really 2016 and beyond kind of plot process..

That’s great. Thanks..

Our next question comes from Steve Marotta of CL King & Associates..

Good morning, everybody. Manny, you gave the number of shop-in-shops expected at the end of the third quarter globally. Can you talk about what they will ultimately be and when that may occur? And the follow-up question pertains to the CK Jeans spring '15 line.

How does it differ from the fall '14 line? Are there more SKUs? Is there a continued upward drift to AURs, if you could talk around that a little bit? Thanks..

Okay. In North America and in Europe from as far as a retail presentation and shop development, I would say we’re just really breaking – touching the tip of the iceberg here. We are not in all fall top doors even with this rollout. Clearly on the women’s side there’s only 50 doors. There’s a huge opportunity in North America.

There’s an opportunity for at least another 300 doors on the men’s side and 400 doors on the women’s side in North America. So I think that’s really where we’re focused on. In Europe, the Calvin Klein jeans business wholesale is probably a $100 million to $150 million in total.

We have our own retail business as well, but if you put that into comparison to the Tommy business which is over $1 billion, it just gives you a sense of the opportunity and how underdeveloped the business is in Europe. So, expansion is there and the opportunity to grow is there.

What’s critical is we have to do it in the right way and it’s going to take a level of time and like anything else with our retail partners, we’re going to have to demonstrate performance at retail in order to get greater square footage in order to get more doors. And it all comes down to product. They’ve been efficient on the jeans side.

I guess if I was – I don’t know any other way to do it but if I was waiting the men’s line, I’d say it was 7 from a 3 on a scale to 1 to 10, I think over time it would get to a 9 or a 10. It’s just natural as you develop the line, I think the bottoms are very strong and the tops aren’t where they should be and I think that will continue.

In the women’s product, I think although it’s been an improvement particularly on the bottom side, we have a long way to go on the women’s product initiatives in the jeans area.

So that’s no reflection on our people and what’s going on, but it’s a natural progression that you go through as you try to raise the level of the brand, it’s positioning, what the consumer wants with the brand, understanding what works, what doesn’t.

I think we are learning and moving just as we did with some of the other businesses that we developed with Calvin and Tommy over the years. So I think we’re feeling good about it that we still have a way to go..

Thank you..

Next question..

Your next question comes from Evren Kopelman of Wells Fargo..

Hi. Thank you. Good morning. My question is on Calvin Klein.

Can you give us a little bit more color on the comp internationally by region; Latin America, China, Korea and also where the improvement in the August trends came from also on the international side?.

Yes. The biggest improvement came out of Europe overall. We saw some improvement in Asia, principally China. The two businesses internationally that has been soft for us has been Korea and China. You’ve heard a lot of discussion about it.

The Korea business actually in the last four or five weeks we’ve seen high-single-digit comps move kind of low-single to flattish kind of business. So that trend has started to improve. Our business in China also has improved somewhat, but again that market has been such a driver for the Calvin Klein brand over the last three years.

That has slowed down. Overall growth in China this year we’re only planning it 4% to 5% and a lot of that has to do with just the environment that’s going on with consumer there as things settle down. So that’s a market that we’re really watching closely, managing inventories there.

We have a very high premium position, high profitability in all of Asia. That’s a business we really want to protect and not really chase sales that are going to be unhealthy for the brand as we go forward. So we see great opportunity for the brand in that market, but right now the consumer is choppy at best as we go forward.

I guess, operator, we’re going to take one more question since we have another investor conference right after this. So we’ll take one more question and then call it a day..

All right. We’ll take our last question from Robbie Ohmes of Bank of America Merrill Lynch..

Good morning. Thanks for taking my question. Actually a couple of quick follow-ups.

Manny, the CK jeans increase to $69.50, what is the out-the-door for the season that you’re planning? I guess do you think – are you planning to end up with a higher out-the-door but actually coming from that much higher price point be on promo or higher percentage discount to the customer than you were initially planning last year? That was my first follow-up..

Robbie, when we talk about the line it’s not just the jeans component. That’s a component of the denim, it’s also a big T-shirt component, it’s a large sports shirt component balance. We are looking for AUR increases this year somewhere in the 12% to 13% range. But again that’s also the depressed base.

That’s how we’re planning the business and we’ll continue to monitor this. So we’re looking for AUR somewhere in the – approaching $30 out-the-door which we still don’t believe is where we need to be but is where we are planning the business. So there will be points in time where we will be promotional both in denim.

It is a classification category and it has that component to it in order to drive traffic and sales it may be necessary and we’ll watch that very closely with our retail partners, but the financial plan I think I mentioned it a number of times is for a gradual improvement from $25, $26 to $40 over the next three to four years..

Got it.

And could you just remind us the CK advertising plan for the back half of this year versus the back half of last year?.

It’s up dollar wise somewhat. CK has always spent a significant amount in marketing. We’re reallocating some funds from sportswear to jeans to underwear and doing what you would do naturally to drive some of the businesses. But I think overall our second half of the year of our Calvin Klein advertising will be up somewhat..

And then just quick last question.

The IZOD Kohl’s shipments, did those hit in the quarter you just reported or those begin in the third quarter? Could you remind us how they play out?.

We started shipping 725. They didn’t hit the retail floor until about 815. And when I say hit the floor that’s without any – almost without fixtures as was going through. So we were just starting to get a position. No marketing at all associated with it. Initial selling has been very strong. We have no marketing and no callouts for the business.

The marketing launch is planned for next week. I think it starts on September 7, so we are feeling good about how that’s going to shape up. We’ve seen the shops. In the last two weeks there were 1,200 doors. The shops were great. The presentation is A+.

We love how it’s been partnered with Kohl’s to really get it positioned and we think we’re in a real strong area. So we’re really hitting – it’s really on the men’s side, it’s sportswear, dress furnishings, suits and then also on the kid’s side as well. So the brand will really be visible on that side of the floor as we go forward.

So I think we’re off to a good start logistically and position-wise and initial selling again very modest, but very good in that full price..

And a couple of hundred million dollars business annualized?.

I think at retail dollars, I think the number I talked about was retail at Kohl’s on the men’s side about $150 million as we get into 2015, '16. So I think we’ve got to do the math off of that. So I think a lot like anything else is going to be how we’re performing sort of the fourth quarter..

Great. Thanks so much..

Thank you. Okay. I thank you all for your attention. Thank you for joining us on the call. Have a great back-to-school season. Go shopping and we’ll speak to you in December with our update of the year. Take care..

That does conclude today’s conference. Thank you for your participation..