PVH Corp (PVH) — Q4 2015 Earnings Call Transcript

Good morning everyone and welcome to the PVH Corp. Full Year and Fourth Quarter 2015 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 of March 23, 2016 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 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 in 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, Dana. Good morning. Joining me on the call is Mike Shaffer, our Chief Financial Officer; Dana Perlman, our Treasurer and Head of Investor Relations; and Ken Duane, who runs all of our wholesale businesses in the United States. Just some general comments. We’re very pleased with our fourth quarter and full year 2015 results, which exceeded our expectations despite the difficult macroeconomic environment and the highly promotional retail market in the U.S. We grew 2015 annual earnings per share 15% on a constant currency basis, consistent with our long-term growth targets. Our Calvin Klein business was the highlight as the investments we’ve made over the last two years continue to generate solid results, and we saw strength across all regions where we operate. Our Tommy Hilfiger business also saw positive momentum in all of its international markets, highlighting the global power of the brand. Lastly, our heritage brands produced a notable improvement in overall profitability. I’m going to get into the Tommy Hilfiger business a little bit. Revenue in the Tommy Hilfiger business for the quarter increased 5% on a constant currency basis. The performance was driven by our business in Europe, the brand’s largest market, with European comp sales up 10% for the quarter and 8% for the year. We continued to gain market share from our peers in almost all markets throughout Europe. Our wholesale performance in Europe was also very strong in the fourth quarter and we expect that to continue in 2016. Our European spring/summer 2016 wholesale order book is up 4% and we are planning our fall/holiday 2016 wholesale sales also up about 4%. In the U.S. market, we were challenged with unseasonably warm weather and the further deterioration of traffic and consumer spending trends in our U.S. stores that are highly penetrated in international tourist locations. North America retail comps declined 7% in the fourth quarter. The strong U.S. dollar continues to negatively impact international tourist spending throughout the United States. Some marketing highlights for the brand. Rafael Nadal was signed as the brand ambassador for Tommy Hilfiger Underwear, Tommy Hilfiger Tailored, and the Tommy Hilfiger Bold fragrance. Beginning with the fall 2015 marketing campaign focusing on these categories that we see significant growth in, the launch of the Nadal partnership was accompanied by a global multimedia advertising campaign in over 40 countries, a campaign video that went viral and was one of the top 10 videos on Google for the launch period. The campaign had over 500 million impressions during the second half of ’15 and helped full-price sales of underwear nearly double in Europe and in the U.S. during the second half as well. We also took strategic steps to strengthen the Tommy Hilfiger women’s business globally during the quarter. We signed supermodel and millennial icon Gigi Hadid as the global brand ambassador for Tommy Hilfiger women’s collection beginning in the fall of 2016. Gigi will also be collaborating with Tommy on a capsule collection which will be distributed globally with key retail partners and on our own ecommerce site. In February, we announced our new licensing agreement with G3 apparel to design, produce, and distribute the brand’s women’s wear collection in the U.S. and Canada, beginning with the holiday 2016 season. We believe that G3’s expertise in the women’s wear business can significantly enhance our women’s presence in the U.S., and I feel that over the next five years they can build a Tommy Hilfiger women’s business in the U.S. to well over a billion dollars, which is what they have done with our Calvin Klein women’s wear business over the last five years. We also announced in February that we will be buying back the remaining 55% interest in our joint venture in China that we did not already own. The business has experienced strong momentum over the last several years with brand awareness doubling and our retail footprint more than tripling over the last five years. Since 2012, the first full year of operations after the joint venture was acquired, the Tommy Hilfiger China business has more than doubled from approximately $70 million in revenue to a little bit more than $140 million in revenues for 2015. We have over 350 stores, of which 65 are directly operated by the JV. Moving to Calvin Klein, overall we continue to see great momentum with the Calvin Klein brand and our business more broadly. Revenue in the Calvin Klein business for the quarter increased 21% on a constant currency basis, with international comps up 6% while North America posted a 4% increase. Earnings on a constant currency basis increased 31%, reflecting the strong top line growth with continued gross margin improvement in both Europe and Asia. North America posted a 20% revenue growth on a constant currency basis for the fourth quarter and 8% for the year despite the challenging market conditions in the U.S. At wholesale, we saw healthy top line performance driven by the continued outperformance of our underwear category. As we look at our U.S. jeans turnaround, we saw solid performance in the first half of the year as we had previously discussed with you, but as we moved into the fall/holiday season, as a result of the overall U.S. retail landscape, we experienced a softness in business at our department store customers, but we did see strong performance through our new retail partners, Urban Outfitters and Amazon in the U.S. Additionally, our U.S. retail business posted healthy performance despite the market headwinds that were experienced with comp stores up for the full year about 2%. As we move into the first quarter, the strong wholesale sales trends have continued. Our Calvin Klein international business also posted strong performance with sales growing 21% for the quarter and 11% for the year on a constant currency basis. Calvin Klein Europe saw a significant turnaround in the overall business with operating profits moving to mid-single digits for the year. We saw an improvement across all categories, including jeans, accessories, as well as underwear, and we continue to see Europe as a major growth opportunity for the brand. We’ve seen an acceleration in the Europe business as our improved product, marketing, and retail execution is paying off. We are seeing outperformance against our plan across both genders, with women’s outperforming men’s. Our best-performing markets in Europe are Spain, the U.K., Germany, and Italy. Overall for Calvin Klein Europe, our summer/spring order book for CK is up mid-teens, and fall/holiday is also planned up about mid-teens. We continue to see increasing consumer acceptance and strong retail performance at our wholesale accounts in almost European markets. Moving to Asia, Calvin Klein continued to expand its presence in Asia, which is the most significant opportunity for long-term expansion. Strong performance in China with comps up high single digits for the quarter building on strong performance for the entire year. We also launched directly operated ecommerce platforms in China, Hong Kong, and Macau. We experienced strong performance in Southeast Asia and are aggressively opening travel retail stores, which are an important brand-building and profit growth opportunity for the business. Hong Kong and Korea continue to be our softest markets in Asia, but we have strategies in place in order to move that business forward and drive the brand in 2016 and beyond. From a market perspective, we drove brand relevance with strong campaigns and strong digital advertising campaigns as well. Our marketing focus has been on lifestyle advertising in order to encourage cross-category shopping leveraging through the hashtag, My Calvins, to connect with consumers. The brand has had over 20 million consumer engagements across its own social media channels during 2015. We have significantly increased our distribution to youth-minded shoppers through our expanded global distribution at Urban Outfitters, Opening Ceremony, Mytheresa, Amazon, Zalando, and TMall. From a product category perspective, Calvin Klein underwear has had a great quarter and year driven by our investments in marketing, product, and in technology. We focused on faster replenishment and better in-stock levels in order to meet the strong consumer demand. Our men’s division grew its market share and continued to hold the number one market position across U.S. department stores. Women’s also posted stellar results with a 20% year-over-year increase driven by new specialty store and ecommerce distribution, growth in panties and our focus on better bra fits, as well as the exceptional response to our modern cotton assortment, which is a casual alternative to our core lingerie business. Importantly, our modern product line is increasing our engagement with a younger consumer, which we believe will create loyalty over the long term as the younger consumer graduates in the future to our more elevated product categories and our more elevated product offerings. We have also seen strong improvement in our Calvin Klein jeans business with a continued investment in product, which has been evidenced across all of our international markets through their strong growth. We are increasingly focused on key initiatives to drive this business forward, including investing in supply chain across all of our denim efforts globally. We’re also investing in capsule collections and the ability to respond faster to consumer demands. Moving to our heritage business, revenue in the heritage business for the quarter decreased 10% from $447 million in the prior quarter. We saw a double-digit increase in earnings as we discontinued our Izod retail business during the year as well as a number of underperforming product lines in our dress furnishing business that did not meet our profit goals. In dress shirts, we launched the Van Heusen flex collar featuring an expandable collar, and given its initial success we are taking this technology and moving it across a number of our other brands in 2016. Our Izod shops at Kohl’s continue to post very strong performance following their 2014 fall/holiday launch last year. Warner’s and Olga improved market share positions for bras in the U.S., both in the chain and department store channels with both brands significantly increasing their market share. During 2015, the Warner’s No Side Effects bra drove significant performance improvement as its television commercial effectively communicated its key features and led to significant conversion at point of sale. Our Speedo division continued to post healthy performance during 2015 and we see a significant opportunity for the Speedo brand in 2016 with the Summer Olympics, which we believe we can commercialize with our key retail partners as we move forward. Van Heusen also had a solid year with comparable store sales growing 8% in the quarter and 10% for the year, and also exceeded all of our profit expectations. As we look forward into the first quarter and we look at the environment today by region, let me give you a little bit of a backdrop to what we’re seeing. In Europe, our business continues to persevere through the volatility that is plaguing the region, especially the recent terror attacks in Belgium, Turkey, and Paris. We continue to see strong comp store sales growth out of both Calvin Klein and Tommy Hilfiger, with no signs of slow down. Comps for Tommy continue to perform in the high single-digit range, and the Calvin Klein Europe business continues to comp low double digits. Moving to the U.S., as we’ve come out of the highly promotional fourth quarter, industry-wide inventory levels are elevated across channels. We aggressively cleared inventory in the fourth quarter and are not aggressively promoting in the first quarter as we are managing gross margin rates against lower unit inventory levels at retail. As such, we are currently seeing comps down in the Calvin Klein business low single digits and down low double digits for the Tommy Hilfiger North America business. Our Van Heusen retail business is posting high single-digit comp store growth. At the same time, we are seeing higher gross margins across the board in the U.S. We continue to see the strong dollar’s negative impact on our international tourist stores; however, we are seeing solid sales performance continue in our Canadian business. Moving to Asia, China continues to demonstrate strong results similar to what we’ve experienced in 2015; however, we were up against a shift in the Chinese New Year relative to our first quarter last year. We are expecting the weakness to continue in Korea and Hong Kong driven more by the broader macro environment in large part due to the lack of mainland Chinese tourist spending in those markets. Overall, Asia comps here are trending down in the high single-digit range due to the year-over-year compare against Chinese New Year. China continues to outperform the region and continues to outperform the rest of the world. I guess as an overall backdrop, the global retail landscape continues to be uncertain with major foreign currencies largely weakening against the U.S. dollar. Global consumer spending patterns are volatile. The consumer is dealing with a tremendous amount of uncertainty and also dealing with geopolitical risk. Given this backdrop, we believe that we can successfully manage this challenging environment and have taken a prudent approach to our 2016 plan. We believe that our best-in-class brands and management teams will continue to manage through the volatility by leveraging our powerful brands and our operating platforms while not losing sight of our long-term vision and our ability to deliver double-digit constant currency earnings per share growth. With that, I’ll turn it over to Mike to quantify some of the results.

Thanks Manny. The comments I’m about to make are based on non-GAAP results and are reconciled in our press release. I’m going to briefly touch on the fourth quarter of 2015 and then move on to 2016. On a constant currency basis, revenues for the fourth quarter were up 7% versus the prior year and exceeded our guidance. Driving our revenue increase was our Calvin Klein business, which delivered a 21% constant currency increase over the prior year. Both our Calvin Klein North America and international businesses had revenue growth of over 20% in constant currency. The North America growth was driven by our wholesale underwear business and square footage expansion in our retail business, which included the conversion of the Izod retail stores to Calvin Klein accessory and underwear stores. Calvin Klein International growth was mostly driven by Europe and China. Tommy Hilfiger revenues were up 5% in constant currency, also exceeding our guidance, with strong revenue growth in our international business which had revenue up 8% in constant currency and Europe comps up 10%, with most markets showing increases. Our U.S. Tommy Hilfiger retail stores located in international tourist destinations continue to be under significant pressure from a lack of traffic and spending. Our heritage business revenues were down 10% due to the continued rationalization of the heritage business, which included exiting the Izod retail business and several licensed product lines in our textile business. Our heritage revenues were below our guidance due to shipments that were planned to go out at the end of ’15 shifting into the first quarter of 2016. Our overall strong revenues drove an earnings per share beat for the company of $0.05 for the quarter versus our guidance, with favorable taxes and interest of about $0.03 being offset by further foreign exchange pressure of $0.03. Moving to 2016, our 2016 earnings will be significantly impacted by foreign exchange in 2016 we are anticipating, based on current exchange rates that will be impacted negatively by about $1.60 of earnings per share for foreign exchange. The $1.60 impact is approximately 85% driven by transaction and 15% driven by translation. As a reminder, our exposure at a transactional level is mostly due to our international divisions purchasing their inventory in U.S. dollars. To partially protect against this, we buy foreign exchange hedge contracts about 12 months out for about 80% of our projected inventory purchases made by our international divisions in U.S. dollars. Therefore, the hedges we entered into during 2014 at more favorable exchange rates impacted our operations in 2015, while the hedges we entered into in 2015 during the strengthening U.S. dollar will negatively impact our operations in 2016. Our exposure at a translation level is simply due to converting the revenue and earnings of our international divisions into U.S. dollars. For the full year 2016, we are projecting earnings per share of $6.30 to $6.50. If we exclude the negative impact of FX of $1.60, we have earnings per share growth of 12 to 15% over the prior year. Overall, we are projecting constant currency revenue to grow approximately 2% excluding the negative impact of 1% related to foreign currency. Overall operating margins are expected to increase approximately 75 basis points on a constant currency basis and to decrease approximately 100 basis points on a reported basis. We project Calvin Klein revenues to grow 6% on a constant currency basis, excluding a negative impact of 2% related to foreign currency. We are also planning Calvin Klein operating margins to increase about 50 basis points on a constant currency basis and to decrease approximately 100 basis points on a reported basis. Tommy Hilfiger revenues are planned to increase 3% on a constant currency basis excluding a negative impact of 1% related to foreign currency with operating margins planned to increase about 50 basis points on a constant currency basis and to decrease approximately 175 basis points on a reported basis. Our heritage business is planned to have a revenue decrease of 7% due mostly to the exiting of the Izod retail business and several licensed product lines in our dress shirt business. Operating margins in our heritage business are planned to increase about 50 basis points. The impact of currency on our heritage business is relatively immaterial. Interest for the year is planned to be between $100 million and $125 million compared to the prior year amount of $113 million. As a reminder, an interest rate swap converting variable to fixed interest began in February of 2016 and is the reason for the increase. We currently expect to generate approximately $500 million of free cash flow in 2016, which we will use with existing cash on hand to fund the acquisition of the remaining 55% stake in our Tommy Hilfiger joint venture and to make similar debt pay downs and stock repurchases as we did in 2015. Our tax rate for the year is planned at about 20% and in line with the prior year. First quarter earnings per share is planned at $1.40 to $1.45 and includes $0.50 of estimated negative impact for foreign exchange. Excluding this negative impact, we are expecting earnings per share to increase 27% to 30% for the first quarter. Revenue in the first quarter is projected to increase 3% on a constant currency basis excluding the negative impact of 2% for foreign exchange. Calvin Klein revenues are planned at a 12% constant currency increase, excluding the negative impact of 4% for foreign currency. Tommy Hilfiger revenues are planned at a 2% constant currency increase, excluding the negative impact of 1% for foreign currency, with North America planned down mid-single digits due to continued weakness in our retail stores located in international tourist locations, while our international business is planned up high single digits due to its continued strength in Europe. Heritage brand revenues are projected to decrease 9% due mostly to our exiting of the Izod retail business and several licensed product lines in dress shirts. Interest expense is projected to be about $28 million to $30 million and taxes to be 23% to 24% in the first quarter. With that, we’ll open it up for questions.

Hi, good morning.

Good morning, Bob.

Manny, just a couple of questions for you on some of your comments. I think the first one is in the first quarter now, and you’re talking about lower inventory levels, less promotional environment, are you seeing your competitors act that way, and are the wholesale customers also sort of warming up to that type of approach as we look to this full year?

In the first quarter, we’re not seeing that in the market environment because they're still working through significant inventory levels from the fourth quarter. As we move into the second and third quarters, you’ll see a notable reduction in inventory levels since retailers are actively trying to cut back on their purchasing budgets for fall and holiday. They are being very proactive in focusing on inventory turnover, and everyone is really working to manage gross margin rates and limit markdown risks going forward. So, you should start to see that develop. My point was that we’re somewhat ahead of the market. We had a strong quarter in the fourth quarter and took advantage of clearing out goods to reach the appropriate inventory levels, enabling us to see gross margin improvements possibly sooner than is evident in the overall market.

Manny, as you think about the Tommy Hilfiger business and you look at U.S. trends, the announced relationship now with Tommy and G3, how do you separate sort of brand positioning in the U.S. versus tourism pressure on the Tommy Hilfiger business?

I think, as you know, we’ve seen strong growth in what we characterize as our domestic store base, which is really 95% driven by the U.S. consumer - middle America, some of the large urban centers. We’ve seen that business very strong. Where we’ve seen a difficult business environment has been in the tourist destination stores - you know, the Orlandos, the Las Vegas, some of the California markets, New York, which had enjoyed a significant level of tourist spending from key markets like Brazil and South America, as well as the European markets. With currencies going the opposite way and the U.S. dollar continuing to strengthen, this has not been an attractive place to travel to and we’ve seen that really impact our business, more directly on the Tommy business that has such a premium position globally - Europe, Asia, and Latin America - that we’ve really taken it on the chin on the Tommy business from a comp store performance. On the positive side, we’ve also seen tremendous growth in our international business. European comps are double digits increases, and our Asian business, particularly in China, just continues to do exceedingly well. So I think we’re trying to balance that out, manage inventories, and we understand the impact that’s going on.

Just one last question, Manny, from me. On your relationship with Amazon, what have you learned so far? How are you approaching the business as we look forward?

We see this as a significant growth opportunity, but we are proceeding with caution. Our focus is on key product lines and categories to expand the business. The underwear category, in particular, is well-suited for online sales, and we are seeing growth not just with Amazon but also across our department store accounts, which continue to thrive. We will carefully monitor this segment, managing inventory levels effectively. Our aim is to control the promotional strategies both in department stores and online as they are interconnected. We are taking an omni-channel approach across all our brands, focusing on expanding our online presence while prioritizing key department store partners like Macy’s, Kohl’s, and Nordstrom’s, where we have made significant inventory and technology investments to enhance our response to market demands. We view this as a vital growth avenue moving forward, managing it carefully regarding promotions. While I primarily addressed the U.S. market, we are witnessing similar positive trends in Europe, where online sales are rapidly increasing, and in Asia, particularly China, where we are experiencing notable growth on a smaller scale, all achieved in a profitable manner.

Thank you.

Thank you. A couple of questions. Mike, starting with the margins for 2016 embedded in your guidance, you said down 100 basis points on a reported basis. Can you walk us through sort of the reported gross margin and SG&A, and how you get to that down 100? That would be the first question, thanks.

Okay, so on a constant currency basis, operating margins are up 75 basis points. When you flip to a reported basis, we’re down 100 basis points in operating margin. A couple of things, one, FX, transactional FX headwinds are significant. We talked about $1.60 of pressure there, and that’s a big piece of that take down, obviously. In addition when you look at the components, gross margins are up on a reported basis and on a constant currency basis. As we layer in the higher growth businesses for us in 2016, which is the China business for Tommy as well as the faster-growing international businesses that have higher gross margins, our gross margins are up, operated and reported. With those higher gross margin businesses - China and the other international business come a higher expense rate as well, so when you layer that in, our SG&A is up more than the gross margin on a reported basis, and that’s what’s taking the operating margins down on a reported basis.

Okay, so the dollar growth in SG&A, up mid-singles, is that a fair?

That’s absolutely correct.

Okay, all right. Secondly, I think there’s some confusion about the FX. In early December, late November when you reported, you gave an estimate of $1.50 to $1.60. Since then, the euro is up about $0.065. Some of the other currencies which you have a lot of exposure to got worse, then they got better, so I’m just wondering if you can kind of foot to the little bit higher FX pressure when I think investors were expecting somewhat lower.

Okay, so I think you’re going back to the last call, and I think we’re in that range; but just to pull it apart a little, when we talk about FX impact for ’16, it’s predominantly transaction. Where FX rates are today impacts translation. Where the FX rate was when we bought our inventories impacts transaction. So when you look at where we were at the end of the third quarter and where rates were throughout the balance of the year when we placed our purchases, the Canadian dollar was down significantly and the Mexican peso was down significantly, so the euro might have been in the range but the peso and the Canadian dollar took us to the high end of that range.

And those currencies only recently improved over the last two and a half weeks, so as you’d say, David, it’s just a very volatile situation when you look at those currencies, and making estimates in $1.50 to $1.60, and now we’re saying $1.60, there’s a lot of movement going on and a lot depends on when you place the orders for the goods and you place your hedges.

So, what you're saying is that the timing of your purchases after your call had a slight negative impact on the transactional foreign exchange?

Exactly.

Okay, great. Just one or two more, if I could. In terms of your free cash flow, $500 million, how are you going to prioritize that in debt pay down versus potentially additional accretive acquisitions, and how do we think about the potential interest savings after 2016 if you do elect to use all that free cash flow to pay down debt?

Our main focus is on strategic acquisitions. Our projections are based on the assumption that we will achieve a similar debt repayment and stock buyback as we did this year. Additionally, we plan to use our excess cash to fund the acquisition in China, along with the cash available from the China joint venture. For your modeling, that's the perspective to consider. We are aiming for a leverage ratio around 2.5 times, and we are making progress toward that goal.

Okay. Last, if I could, any different view on the U.S. outlet business? It seems like we’re probably at the peak of the toughest tourist compares. Would you expect those, based on the timing of the currency, the strengthening of the dollar in late ’14 and the lag for when people buy their plane tickets, make their travel plans, et cetera, do you think that this summer we should see an inflection point, and given a normalization in terms of clearance levels versus the competition and promotional activity, do you anticipate an improvement in your outlet trends after we get past the first quarter?

Short answer is yes. We are planning the business as we project it out to be challenged, more challenged in the first and second quarters of this year. We see the inflection point as sometime in July as we look at the business and how we trended last year versus how it’s trending right now. You can imagine we’ve got analyses, reams of analyses as we look at sales and what’s going on with the consumer. So short answer is yes, more pressure on the first half of the year, and we expect that to subside in the second half.

Right, thank you. Good luck.

Thank you.

Great, thanks. Good morning. First, with the momentum that you’re seeing the Calvin Klein brand right now and the order book trends that you alluded to for the second half of the year, and I look at your guidance on a constant currency basis with Q1 being up 27% to 30% full year, just being 12 to 15, it does seem that there’s a disconnect based on the strength of what you’re seeing right now with how you’ve implied the second half of the year. So could you just maybe walk through some of your key assumptions as we go throughout the year? It just seems that there’s a pretty considerable level of conservatism.

Look, I think it’s a really good question and there is a lot of momentum in the Calvin Klein business. It’s also a very long year as we try to really lay out what I would describe as a prudent plan that we continue to invest in. When you think about the quarters, second half of 2015 really saw a substantial growth in the Calvin Klein business, so the comparisons get tougher in the second half of the year and we are assuming that we’re just not going to be able to have the kind of double-digit growth that we experienced in the first and maybe into the second quarter of this year to continue into the second half of this year. In addition, I’d just remind everyone, in the U.S. open to buy dollars at retail for the second half of the year, major department stores have really shrunk those open to buy dollars. The challenge there is that they went into that season expecting comp store growth. We all know it didn’t happen for a lot of reasons - the unseasonably warm weather, international tourism issues, but suffice to say that second half of the year was generally very tough. The assumption here is we’re dealing with these compressed open to buy dollars and we’re managing inventories tightly, so we’re planning that second half level of sales growth much more cautiously as we go forward. If the trends were to continue what they are now, we would chase that business and I think there’d be a sales upside opportunity we don’t have in our numbers, but I think it would be premature to call that out now.

Got it. That’s helpful, and fair enough. Just secondly, if we think about longer term on some of the margin opportunities with both Calvin Klein jeans as a category, as well as the underwear business, can you just kind of pencil out for us where those businesses are trending now from a margin perspective by category, and then where do you still see the longer-term opportunity?

Well, I think when we talk about margins, I’ll just give you some perspective. I’m not going to lay it all out. The Calvin Klein underwear business is, by its nature, one of the highest margin businesses we have from a profitability point of view. Our underwear business in general is one of our highest operating margin businesses, so I would not anticipate significant margin expansion in those businesses but I would expect continued top-line growth in those businesses which are margin-rich, so I think as they grow faster than the core, I think you’ll see margins improve. On the jeans side, domestically there’s significant opportunity to grow our operating margin. That business was the business that I’d argue when we made the Warnaco acquisition was the most damaged. It’s about a $300 million business, men’s and women’s, and I think we can continue to see margin expansion there. I think you should think about that we are in the low single-digit kind of margin rates in jeans in North America, and there’s no reason why that category, as it expands and as we get better sell-throughs from the better investments that we’re making in product and marketing, that that shouldn’t be a 10% operating margin business. The last piece I would say is our European business from a margin point of view is clearly the biggest opportunity we have. That business has been the most impacted on the Calvin side by currency, and it’s really transactional currencies; but despite that last year, we operated in the mid single digits. With the headwinds we’re seeing this year transaction-wise, I’d expect that business to continue into the mid single digits this year and then to start to expand to that 10% goal we talked about. So Europe, both from a top line basis for Calvin Klein and on an operating margin basis probably geographically holds the biggest opportunity for continued growth in profitability.

That's very helpful. If I could ask one more question, can you explain the mechanics of the Tommy Hilfiger women’s business as you transition it to G3 this year? Are you just winding down the product and the channel, and will they take over to start shipping the sportswear business in the fourth quarter of this year? Please help us understand that dynamic as we model it out, and I assume that in fiscal 2018 for 2017, you will start to see an increase in the royalty from that line. Any additional information would be appreciated.

Yes, you've got it right. This year is going to be a transitional year for us. Overall, the financial impact of the transaction in 2016 will likely be slightly negative, but as we move into 2017, we expect to see significant positive results. We will be replacing a business that was only marginally profitable with a higher-margin licensing business, which should lead to growth in licensing revenues for women's products, projected to be in the $18 million to $20 million range annually. Therefore, this change should yield a favorable outcome for us as we enter 2017.

Great, thank you guys, and congrats on a good quarter.

Thank you.

Hey, good morning guys. Let me add my congrats on a great quarter. I know it was tough out there. Just want to understand a couple of things here. I think we talked about the Calvin guidance through the year, but the cadence on the Tommy guidance, I guess I don’t understand what are the dynamics at Tommy to get to 3% growth, excluding currency, when the acquisition should add about two points, if my math is right, and the trends right now across the different businesses look pretty favorable. Would you mind helping me understand that a little bit?

Yes, I think the biggest impact is we are planning the North American business retail down and we’re also losing a quarter wholesale sales of the women’s business, which is about $25 million associated with the women’s business that moves out, and then planning the retail business to continue high single-digit negative comps for the first half of the year and then moderate in the second half of the year to low single-digit negative comps. So more pressure on the Tommy Hilfiger North American retail business, which is the biggest component of our North America business.

Do I have the pieces upside down, though, because you’re guiding it to plus-2 in the first quarter and then to accelerate to plus-3 for the year.

The China piece is the big driver there.

Okay. I guess on China then, it seems like a strategic owner, long-term brand owner would be more incentivized for growth. Can you talk about what some of the immediate needs are for Tommy China, maybe as far as the investments you look at and how fast you think you can scale that business?

We will increase our marketing spending, but let me clarify. Even in a partial year, the acquisition will provide marginal benefits and should offer significant advantages in 2017. Our strategy is to invest more in marketing for our brand in China because we see a substantial growth opportunity. This is a $140 million business that is highly profitable, and we believe it can grow to approximately $300 million to $400 million over the next five to six years. For context, the Calvin Klein business is nearing $300 million, so we see strong potential there. Additionally, Tommy Hilfiger in China is primarily driven by men’s sportswear, with women's representing only 20 to 25% of the business. This presents a considerable opportunity in men’s wear. We also see potential in other categories that are just underrepresented there, such as denim, accessories, and tailored options. Our aim is to develop the complete lifestyle for the Tommy Hilfiger brand in China, similar to our presence in Europe.

Okay. So if you wouldn’t mind, Manny, I know you’ve been getting a lot of near-term questions, so just as we think a little longer term, as you guys seem like you’re on steadier footing with control over the P&L after the Warnaco acquisition and then some really unexpected FX issues here the last few years, as you take a breath here and think about strategy, how do you think about the priority between going after a few of the licenses that we’ve talked about quarter-to-quarter that are low-hanging fruit for you guys to bring in versus something more strategic like exploring a third big brand at some point?

From a strategic standpoint, I believe gaining greater control of our brands, both Calvin and Tommy, is extremely important. I understand that a major impact would come from adding another global brand to our portfolio. Currently, our focus remains on the incremental acquisitions we've discussed, as we aim to maximize the opportunities available for Calvin and Tommy. As we transition from 2016 to 2017, we will look out for opportunities in the market. We generate a substantial amount of cash and maintain a strong balance sheet without significant leverage, which provides us with ample purchasing power. Historically, we have successfully acquired brands such as Calvin, Tommy, and Warnaco, and I don't foresee that changing. However, for the next 12 months, our priority will be on strategic licensing acquisitions.

Thanks a lot, and congrats again, guys.

Thank you.

Hey, good morning guys. Thanks for taking my question and congrats on a real nice quarter.

Thank you.

So Manny, thinking longer term, I think there’s a lot of investor concern about the apparel category in general. Clearly there were two disruptive factors over the past couple quarters, being FX and the warm weather, but as you look out at this category long term and when you look at the company’s long-term profitability profile, where do you think you can move the operating margin long term, and how sustainable is this 12 to 15% EPS growth at the current top line run rates?

Okay, let me start with the latter first. If you take a step back and consider the volatility, the market has been unpredictable, we've experienced warm weather, and we're facing several challenges due to the geopolitical situation. Despite all this, I understand it can be frustrating for investors, as it is for the management team, but we've increased our earnings on a constant currency basis by about 15% over the last two years. It's indeed frustrating over this two-year period to see nearly $3 of earnings per share adversely affected by currency fluctuations. We believe there’s nothing to prevent us from continuing to drive earnings per share growth at a double-digit rate over the next three years, based on our strategic planning, targeting growth in the range of 12 to 16% given the dynamics in the Calvin Klein and Tommy Hilfiger businesses. We also see a clear opportunity to recover the margin losses affecting our operating margin due to foreign currency impacts. Looking ahead, we believe there’s potential for an overall improvement of another 100 to 200 basis points in operating margin as we move forward. If we receive any support from currencies, meaning if the dollar weakens somewhat against other currencies over the long term and we return to a global equilibrium, that would significantly benefit our operating margins internationally. I hope that answers your question.

Yes, that’s really helpful for our long-term models. Just one more follow-up on China for Hilfiger. Where do you see the potential sizing of this business and the long-term economics of the business? Historically, China’s been a pretty high margin region for a lot of the western brands there, so I was just wondering what you think the economics of this Tommy Hilfiger China business looks like two to three years out.

Okay, so look - I think you kind of answered the question yourself. Just the size of the business, we are thinking about a $500 million business over the next five years growing to, so that would be substantial growth. Margins, I think there’s a combination of we will grow more balanced from a retail wholesale point of view. It’s important to take control of your brand. I would say the current model that has been built is too franchisee dependent, so we will be bringing that business in-house. That’s a lower margin business but still very healthy - very, very healthy than just a pure wholesale franchise model business, but I think it’s critical that you take ownership of your brand and how you present it, not only in Shanghai and Beijing but throughout the other Tier 1, Tier 2 cities throughout China. I think China should be our highest operating margin region in the world.

Okay, thanks. That’s really helpful. Best of luck.

Thank you.

Thanks, good morning. Nice quarter, guys, especially given everything going on.

Thank you.

I wanted to ask about the growth in SG&A dollars, as it's been a while since we've seen this, at least a few quarters. It seems like you're planning to increase SG&A spending again next year. What are the main areas and investment opportunities you are focusing on, and what gives you the confidence to do this? It’s definitely interesting. I have a follow-up question as well.

Well I think as Mike said, some of that is driven by the mix of business that we see, some of the international markets growing significantly faster. At the same time, we continue to make incremental investments in marketing, we continue to make the investments that are required in the digital space to drive ecommerce, both our own platforms as well as the pure play channels that we’re dealing with, with some of the key players around the globe. It’s a somewhat different model, so it really requires us to invest in those operating platforms and in people, but we think the returns long-term are very high there as we move it forward. So that’s where you’re seeing the spend - it’s a combination of mix and then really investing, both systemically and technologically, and continuing to invest in the brands and products.

Thanks, that’s helpful, Manny. You mentioned a couple times Urban Outfitters, Amazon’s come up a couple times. I know you’ve got a lot of digital and social media going on. I wanted to ask how you’re thinking about channels of distribution longer-term, bigger picture, especially North America, the two kind of traditional main channels for you guys - the wholesale and department stores and outlets have been very strong. I know they’re obviously still important, but maybe there’s some shifts going on in consumer behavior. Are you thinking differently about your points of distribution and the balance in the mix going forward?

The world is definitely changing, and it's happening faster than we expected. For the past two decades, we have been a multi-channel distributor, so this new channel is just another aspect that we need to manage directly. Currently, ecommerce profitability is lower than what we see with brick-and-mortar operations, both wholesale and retail. However, as this business grows, we anticipate profitability will even out, which means we can become agnostic about where we sell our products. Achieving this balance will require more investment in systems, technology, and personnel over the next few years, especially as we navigate a shrinking number of stores in North America. Major retailers are planning store closures, and we expect them to continue reducing their store base by about 5% per year over the next three to five years. This slow adjustment is essential as retailers align their physical stores with their expanding ecommerce platforms and the need to engage consumers with fewer locations.

One last quick one, Manny. The $3 EPS from currency the last couple years, last year and this year, can you give us an update on the opportunity, if any, to recapture any of that lost earnings from pricing or other factors?

Sure. I believe there are three key areas we are concentrating on. First, we are investing significantly in the supply chain, exploring various product sources, which presents a long-term opportunity to enhance our margins. Second, while we are considering price increases, it's important to approach this carefully. Simply raising prices to cover costs isn’t effective; we need to manage key price points in our core, highly profitable categories over time. This requires aligning consumer behavior with our promotional strategy to increase our average retail prices. Lastly, as we find balance in the currency markets, we faced significant challenges due to the rapid currency fluctuations that occurred over a short period. The euro, for instance, dropped from the mid-$1.30s to around $1.10 in just three months, making it difficult to adapt our hedging strategies quickly. Consequently, we couldn't increase prices in response to these impacts as the consumer was already feeling squeezed. However, I see a potential to regain ground over time, and I anticipate a 100 to 200 basis point opportunity in operating margins compared to the goals we set in 2016 as we progress.

Thanks, Manny. Good luck.

Okay. Last question, please?

Good morning everyone, and congratulations. Manny, as you’ve talked about brand acquisitions and license acquisitions, as you think about the landscape holistically, is there ever a time for brand dispositions or anything you’d want to dispose of as you think of the portfolio?

You know, Dana, we’re constantly looking at that. There are no plans, there are no discussions right now, so I don’t want to start any rumors. But we are constantly looking at the portfolio, and either in the past two or three years we’ve sold off divisions, we’ve sold off brands, we’ve closed divisions, we’ve shut down the Izod retail business. We’ve really consolidated a number of areas, and I think we’re going to continue to do that. I don’t see a dramatic move in the next 12, 18 months, something that would be a spinoff or whatever. Every time I look at those models, they sound good when you talk about them until you sit down and actually try and execute those. They just don’t make sense, especially when you have a healthy business like our heritage business that operating margins are improving, we’re growing off significant cash flow. I don’t know why we would walk away from that so quickly, so for me, I’m still wedded to that business. I like the cash flow, I like the usually consistent earnings trends that go on in that business that we can count on as a balance to some of the fashion that we have going on in Calvin and Tommy. So no major plans.

Thank you.

Okay. Thank you everyone. I really appreciate the time. We’ll see you in May for our first quarter earnings call, and have a great Easter holiday. Take care. Bye bye.