Q2 2013 Earnings Call
September 10, 2013 8:30 am ET
Emanuel Chirico - Chairman and Chief Executive Officer
Michael A. Shaffer - Chief Operating & Financial Officer and Executive Vice President
Robert S. Drbul - Barclays Capital, Research Division
David J. Glick - The Buckingham Research Group Incorporated
Christian Buss - Crédit Suisse AG, Research Division
Erinn E. Murphy - Piper Jaffray Companies, Research Division
Omar Saad - ISI Group Inc., Research Division
John D. Kernan - Cowen and Company, LLC, Research Division
Kate McShane - Citigroup Inc, Research Division
Evren Dogan Kopelman - Wells Fargo Securities, LLC, Research Division
Eric M. Beder - Brean Capital LLC, Research Division
Howard Tubin - RBC Capital Markets, LLC, Research Division
David Weiner - Deutsche Bank AG, Research Division
Robert F. Ohmes - BofA Merrill Lynch, Research Division
Previous Statements by PVH
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The information being made available includes forward-looking statements that reflect PVH's view as of September 9, 2013, 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 the subject of this webcast and call.
These risks and uncertainties include the company's right to change its strategies, objectives, expectations and intentions and its needs 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 statement, 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 second quarter 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, Kyle. Good morning, everyone. Joining me on the call this morning is Mike Shaffer, our Chief Financial Officer; and Dana Perlman, our Treasurer and Senior Vice President in charge of business development and investor relationship. Ken Duane is also on the call. Ken runs all of our Heritage businesses, as well as our North American wholesale businesses.
Looking at the business, we were pleased with the second quarter results. We beat our second quarter revenue and earnings guidance. We saw a strong outperformance against our projections in both Calvin Klein and the Tommy Hilfiger businesses, as well as in all of our Heritage wholesale businesses.
From a macro point of view, I would describe the environment from a consumer point of view as volatile. We saw the quarter -- we saw the second quarter get off to a strong start in May and early June, and then the business and the environment softened, particularly in North America and Europe where we saw attractive trends in June and July that were actually down year-over-year. Business strength began in August, particularly in our North America business. And as we turn into September, we've seen business soften and traffic trends soften in the North American environment. So overall, we're trying to follow the consumer and see where the trends are taking us.
Focusing in on each business and the performance in the quarter. On the Tommy Hilfiger business, it continued to be strong overall during the quarter. We posted 11% revenue increase. Revenues were up about 10% in North America, driven by a 7% retail comp store increase, growth in square footage in North America, in our retail business and strong growth in our wholesale business.
Internationally, revenues were up 11% for the quarter. Revenue growth in Europe was partially offset by continued weakness in our Japan business. Our retail comps in Europe posted a 6% increase in the second quarter.
Operating income for our Tommy Hilfiger business grew 3% to $100 million as 20% earnings growth in North America was partially offset by a 15% earnings decline in our International business.
Continued weak performance in Japan, coupled with gross margin pressure in our European business caused by higher promotional selling and a weaker U.S. dollar merchandise purchases negatively impacting our International results overall. As we look into -- out to the third quarter, third quarter sales strengths in North America are running on plan with our retail store comps running up about 3%.
Looking at the third quarter International sales trends, European comps were running ahead of plan, up mid-single digits. We are planning our wholesale fall and holiday sales up about 8% for the year. Geographically, we see continued strong growth in Central and Northern Europe, with particular strength in Germany, France and Russia, partially offset by weakness in Southern Europe, Spain and Italy in particular.
Looking out to spring 2014, which we begin shipping in January, last fiscal month of our year. We are seeing our spring order projections flat to last year as strong business trends in Northern Europe are being offset by a double-digit declines in Southern Europe, particularly the Italian market.
Moving to our Heritage business. Our wholesale Heritage businesses continued their strong performance. Sales came in ahead of our estimates. We also saw a strong performance in our newly acquired Speedo and court intimate business units. Overall, second quarter operating margins improved in our wholesale Heritage business to over 12%. This margin expansion resulted from a significant improvement in sportswear margins driven by strong sell-throughs at retail and higher average unit retail selling prices. Third quarter sales trends are running on plan and inventory levels are quite clean during the back-to-school season.