PVH Corp (PVH) — Q3 2016 Earnings Call Transcript

Thank you, Matt. Good morning everyone. And thank you for joining us on the call. 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 our North America Wholesale Businesses. Overall, our performance year-to-date and through the third quarter continues to exceed our expectations, and demonstrates our ability to deliver against the 2016 plan despite the ongoing macro environment. Overall, we had a terrific quarter with revenues increasing 5% on a constant currency basis, while EPS grew approximately 15% on a constant currency basis. The momentum across our Calvin and Tommy Hilfiger International businesses continued during the quarter. Our Europe and China businesses continued to be our healthiest markets, along with our North America wholesale business. The strength has been seen across all channels of distribution: wholesale, retail, and our digital channels. Speaking of digital, for Q3, we continued to generate revenue growth in excess of 20%, and this channel continues to be our fastest growing distribution channel. The one challenging part of our business continues to be our U.S. retail businesses in the third quarter. We did not see improvement in comp store sales trends from first half trends. Specifically, international tourist traffic and spending continues to weigh on our U.S. retail business. However, as we moved into the last two weeks of November, we have seen a significant improvement in comp store sales across all of our U.S. retail businesses. Let me move onto our brands and speak about the Tommy Hilfiger brand. We have previously discussed with you, Gigi Hadid as our global ambassador for Tommy Hilfiger’s Women’s; representing apparel, footwear, accessories, and fragrance. The reaction in brand awareness that she has helped to bring to our brand over the last few months has been terrific. This initiative reflects the brand’s strategic commitment to expand our women's businesses globally. We believe that we have a significant growth opportunity in women and we're encouraged by the improvements and positive momentum we're seeing globally in this full holiday season. Financially speaking, overall revenues for Tommy increased 6% on a constant-currency basis, and EBIT was up about 12% on a constant-currency basis. Our revenues were driven by the outstanding performance of our international business, which generated 18% constant-currency sales growth in the quarter. The Tommy Europe business performance was incredible, and it continues to highlight the strength of the brand in our largest region and highlights the market share gains the brand continues to achieve. We continue to see very healthy performance in all major European markets in the third quarter, demonstrated by a 10% comp store sales increase in Europe for our retail business. This strong performance has continued into November along with very strong margins. Again, we are pleased with the strong wholesale performance that we're seeing as our full holiday season to date is up about 6%. Looking out to spring 2017 season, which starts to ship in the fourth quarter, our spring order book is running up 8% versus the prior year, which is ahead of our previous guidance of about 7%. Moving to Asia, our Tommy Asia business continues to perform well, led by our recently acquired China business, as that business will be on track to be accretive for this year's earnings despite the increased marketing dollars we have put into the China market to support the long-term growth of the brand going forward. Moving to our North America business, Tommy North America continues to see a really strong men's wholesale business, which has continued to outperform our competitors, not only in the third quarter but throughout the entire year. We have now handed off the women's business to G3 and expect to see strong growth going forward for men as our licensee. Shifting to retail, as I mentioned, in the third quarter we continued to see challenging sales trends with our comps down 11% in our U.S. stores. This trend continued into the first two weeks of November, however, we did see a significant improvement in comps in the last two weeks of November with overall fourth quarter comps to date down mid-single digits. This stronger selling is being driven by higher AURs, coupled with our healthy inventory position, and has the potential to generate higher than planned gross margins in the fourth quarter. Moving to Calvin Klein, overall, we continue to see great momentum within the Calvin Klein brand and our business more broadly. The brand continues to drive relevancy with strong digital advertising campaigns and by enhancing and diversifying our distribution of the brand to a number of key specialty stores in the U.S. and Europe. Over the last quarter, we continue to see our awareness levels, and willingness to purchase metrics continue to improve in all major markets. As an update on some product initiatives, generally speaking, our scope to jean launch has been well received across all markets where we have seen strong sell-throughs, higher AURs, and better overall margins. Our full launch in tailored bras featured seductive comfort with lace where we took our best-selling seductive comforts silhouette and added lace, and have seen a great reception to date around the globe. We have also expanded our size scale offering in the U.S. to include extended sizes of size 40DDD. These additional size bands of 36 to 40 have the potential to represent 25% to 30% of our total U.S. bra business. This represents a significant market share opportunity for us going forward. For men, we introduced our liquid stretch product, which provides the utmost comfort in a great new innovative stretch fabric and takes advantage of the active trend that is happening in the market. From a financial perspective, revenues for Calvin increased 10% on a constant currency basis, and EBIT was up 9% on a constant currency basis. Our revenues were driven by strong top line growth out of Europe, China, and North America Wholesale across all classifications with continued strong gross margin performance. Calvin Klein Europe's performance continues to show incredible improvement year-over-year, and we're quite pleased with the progress of the business and where we are headed. The wholesale business continued its strong performance with full holiday 2016 sales up high-teens. This momentum is accelerating as we move into 2017, as our spring order book now is running up over 20%. Our European retail business continues to gain momentum with third quarter comps running up mid-teens, and the sales trend has continued into the fourth quarter. The strength of the European business is coming from all major markets and across all product categories with an acceleration in both jeans and underwear categories. And we have also seen strong growth in some of our new product categories, particularly accessories. Our Calvin Klein Asia business also continues to perform well, with China outperforming all other markets. We continue to see strength across jeans, underwear, accessories, and our newer performance at leisure business within Asia. Moving to North America, our Calvin Klein North American business continues to see healthy growth across our wholesale channels in line with our plans which reflected lower open-to-buy dollars from retailers versus the previous year. I’m pleased to report that we’re continuing to see strength across all categories from our dress shirt business to sportswear, jeans, and certainly our underwear business, led by continued momentum in our women’s intimates business. Shifting to retail, as I commented on our Tommy Hilfiger North America retail results, we did not experience any improvement across our U.S. retail business at Calvin with overall comps down about 5% for the third quarter. This trend continued into the first two weeks of November, however, we have seen a significant improvement in comp store sales during the last two weeks of the month with fourth-quarter comps to date flat to last year. Finally, our Heritage business revenues were down 8%, driven by the ongoing impact of our rationalization initiatives announced in 2015, including the exit of the Izod retail business and the discontinuation of several licensed products within dress furnishings. Our Heritage business has continued to track positively against our full year 2016 financial plan with operating margins improving 90 basis points for the quarter, driven by improved wholesale performance and continued strength in our Van Heusen retail business with third quarter comps up 6%. Specifically, we continue to see solid performance across all of our Heritage businesses with the exception of our neckwear business, which has been soft for the entire year. Looking at our outlook for the year, we are increasing our earnings guidance for the year, while taking into account the impact that the strengthening U.S. dollar will have on our reported results. We are being prudent in planning the fourth quarter holiday season, which we expect will remain highly competitive. We also believe that geopolitical uncertainty has intensified post the U.S. elections, which will drive microeconomic volatility. Given this backdrop, we believe it is prudent to be conservative with our financial projections for the fourth quarter as we move out. And with that, I am going to turn it over to Mike to quantify our third quarter earnings and our outlook.

Thanks, Manny. The comments I'm about to make are based on non-GAAP results and are reconciled in our press release. Third quarter revenues were up 4% versus our guidance of up 3%. Our Calvin Klein and Tommy Hilfiger businesses had a strong quarter. Calvin Klein revenues were up 10% on a constant currency basis, ahead of guidance and driven by all regions. Calvin Klein International comps were particularly strong with the comp store increase of 7%. Tommy Hilfiger revenues were up 6% on a constant currency basis for the quarter, driven by strong performance in Europe, as our Europe comp sales were up 10% and the addition of our China business as well. Our Calvin Klein and Tommy Hilfiger U.S wholesale businesses performed well in the quarter and exceeded the plan. However, our U.S. retail businesses for these brands remained under pressure due to continued declines in our stores located in international tourist destinations. Heritage revenues were down 8%, primarily due to the exit of the Izod retail business and discontinuation of several licensed product lines in the dress furnishings business. EPS for the quarter was better than the top end of our guidance by $0.20. It was driven by our strong Calvin and Tommy performance, as well as favorable taxes and interest of approximately $0.15, and a timing shift in marketing spends into the fourth quarter from the third quarter of $0.05. Our inventories for the quarter were very clean at the end of the quarter, and were down 6% versus the prior year. We have increased the EPS guidance by $0.15 at the top end of our previous range and $0.20 at the low end of our previous range before a $0.05 negative impact from FX. For the full year 2016, we are increasing our non-GAAP earnings per share estimate to $6.70 to $6.75. If we exclude the negative impact of FX of $1.65, we have earnings per share growth of 18% to 19% over the prior year. As I mentioned, for the full year 2016, we’re anticipating, based on current exchange rates, that we will be impacted negatively by about $1.65 of earnings per share for foreign exchange, which is $0.05 worse than previous guidance. The $1.65 impact is approximately 80% driven by transaction and 20% driven by translation. Our guidance continues to reflect the prudent view of our business for the fourth quarter as a result of global consumer spending remaining volatile and the U.S. retail market continuing to be promotional. Overall, we are projecting full year revenue to grow approximately 3% on a constant-currency basis. Overall, operating margins are expected to increase approximately 75 basis points on a constant-currency; on a constant-currency basis, as it decreases approximately 80 basis points on as reported basis. Our Calvin Klein business is projecting revenues to increase 8% on a constant-currency basis with operating margins expected to increase about 50 basis points, excluding the negative impact of 160 basis points of FX. Tommy Hilfiger revenues are planned to increase 5% on a constant-currency basis with operating margins planned to increase about 110 basis points, excluding the negative impact of approximately 220 basis points of FX. Our Heritage business is planned to have a revenue decrease of 9% due mostly to our exit of the Izod retail business and several licensed product lines in our dress shirt business. Operating margins in our Heritage business are planned to decrease about 30 basis points. The fourth quarter non-GAAP earnings per share is planned at $1.13 to $1.18, and includes $0.23 of estimated negative impact of foreign exchange. The fourth quarter will include an increase of $25 million versus the prior year in brand marketing, as well as investments associated with the recent Calvin Klein leadership changes. The $25 million increase includes the shift of $5 million of marketing from the third quarter into the fourth quarter versus our previous guidance. Our full year marketing spend remains flat to the previous guidance. Revenue in the fourth quarter is projected to increase 1% on a constant-currency basis; negatively impacting revenue in the fourth quarter is a 2% reduction resulting from our transaction to form a joint venture in Mexico, which primarily impacts our Calvin Klein business; and licensing our Tommy Hilfiger North America’s wholesale business to G3. Calvin Klein revenues are planned at 3% constant currency decrease; Tommy Hilfiger revenues are planned at a 5% constant-currency increase; while Heritage revenues are planned to decrease 3%. And with that, we'll open it up for questions.

I guess the first question I have, Manny, is on the expectations for Calvin Klein North America. When you look at the expectations for the fourth quarter, comparisons that you're facing in. And can you elaborate on that a bit, as well as we look to 2017, the expectations for the sustainability of the strong performance you're seeing so far this year?

Yes, look, I think it's, from the beginning of the year, we’ve really focused on, in the U.S., that the fourth quarter in 2015 had a significant amount of fixture sales associated with the, particularly the expansion of our underwear and our jeans business, and our women’s intimates business. As we really, in that fourth quarter, we were getting such substantial growth throughout ’15, we really were in position now to fill the fixtures in as we came out of the holiday season into that January period. So there was, from a regular price point of view, there was a significant amount of department store sales, and there was also in the off-price channel a significant amount of fixture still going on there to service that channel, as well as the demand for the product continue to improve. That happened once, and now, unfortunately, we’re up against that as we move forward. That’s the biggest issue we’re dealing with, that’s been factored in, from the beginning of the year, I guess, now as we move into the fourth quarter gets more highlighted. And also get in any way it puts any limit on those as we go forward into 2017. I think our growth internationally will continue to be very strong. And I think there’ll be some carry-over of that into the first quarter of 2017. But I don’t believe it will have any significant impact on our overall annual results for Calvin. There’s just too much momentum going on with the brand and too much push forward of goods that I just feel we’ll just overcome that.

Can you also talk about how you’re planning for the business in Russia?

In Russia, things have actually improved compared to the previous 12 months. We are seeing business stabilize and grow in the spring 2017 order book, likely in the mid to high single digits. It's a very profitable business for us, and it appears to be on track. There are currency issues and market bottlenecks, but the first half of 2016 was much more challenging than the current situation.

And I guess one last question. Manny, can you talk about what you’ve learned with your Amazon relationship on a global basis with the businesses that you’re partnering with them?

What we’ve learned, I guess, two things that we’ve learned; one is that Amazon does a great job of selling core products. So replenishment in core products, which we have a fair amount of in our product categories, has been exceedingly well for us and continues to be a big growth opportunity for us with them. The second piece is that in North America there is a whole learning process that’s going on with their business and how we marketed, how fashion gets to be sold. They’re learning and we are learning what works well with their customers. It’s a nicely profitable channel of distribution for us. And I don’t like to speak about Amazon in specific, but our dotcom business, be it a direct dotcom business or our brick-and-mortar.com business is by far our fastest growing business.

If I could just kind of build on Bob’s question about the revenue growth. There are a lot of puts and takes this year in the Heritage business. You’ve got the Mexico joint venture, et cetera. Do you see that the Tommy and Calvin business growing in that mid to high single-digit range in constant currency? And do you feel like you’ve rationalized Heritage business to the point where you could see overall mid single-digit overall revenue growth going forward?

I believe that on a constant currency basis, when we look past the fluctuations in licensing for next year, we have the licensing of the Tommy Hilfiger North America women's business to G3. We see this as a significant opportunity for us, both in terms of retail presence and profitability, especially given the confidence expressed by G3 and our retail partners. We view this as a major opportunity for 2017 and importantly for 2018. As a result, I believe that there’s no reason we shouldn’t expect Calvin and Tommy to grow in that mid single-digit range overall, potentially reaching high single digits on a constant currency basis. Our Heritage businesses, as always, will be managed with a focus on profitability and cash flow, and we anticipate they will experience flat to low single-digit growth in line with North American retail. We've indicated that we expect 4% to 6% mid-single digit growth overall for PVH on a constant currency basis, and we see no reason for that outlook to change.

And that leads to my next question, you mentioned constant currency, obviously, you talked about the volatility you’re seeing in a lot of different aspects of the markets, including currency. Given where our rates are today, what sort of headwinds do you see to your revenue and earnings growth, given where rates are at the momentum going forward? Thanks.

I am not providing guidance for 2017 today. However, you can refer to a basket of currencies, with the U.S. dollar showing a year-over-year increase of about 6% to 7% after the election. The volatility we've seen in the last month and a half will affect that. Our international business accounts for 55% of our overall profit, so we are monitoring this closely as we progress. When we examine the fundamentals and profitability, as well as our two major brands, our international growth has never been better than it is currently, and I am optimistic about the future. Yet, we must navigate the direction things are headed. This situation is highly volatile and uncertain, not just due to the U.S. elections but also with several European elections occurring in the next six months that could impact us. We have been managing this for the past three years, and we will continue to do so.

Could you talk about how the non-tourist versus the tourist stores performed in North America during the third quarter? And then I guess as you have seen the North American trends improve over the last couple of weeks, what has been driving that improvement? And then have you seen a gap between non-tourist and tourist stores narrow?

Yes, we've observed the gap narrowing. There are several factors to consider, and I don't want to dive into the specifics of demand from late September into early October. Overall, the situation was milder compared to the previous year, which affected our business to some extent. This was part of why we decided to hold back some of our marketing budget in the third quarter and deploy it when we anticipated consumer shopping would pick up. We moved $5 million into November and December, which positively influenced trends in North America. The major improvements this year have come from our domestic stores, and we've also seen better performance in our international tourist stores. Looking at trends for the first two weeks of November, Calvin's sales were flat, and we had a strong business leading into and following Black Friday for both Calvin and Tommy compared to previous trends. I believe we've been effective in managing inventories, which is reflected in our gross margin and sales figures. Overall, I'm optimistic about our position going into the fourth quarter.

And then just in Europe, it seems that the momentum in Calvin Klein is really broad based across denim underwear accessories. I guess, at what point can you start to push the envelope with new category opportunities such as sportswear? And then how big do you see that opportunity over time?

I believe that Calvin is currently operating as a business in Europe worth approximately $550 million to nearly $600 million. In contrast, Tommy has around $1.7 billion in sales. I see a long-term opportunity for Calvin to approach Tommy's sales figures, especially since Tommy is currently larger than Calvin in Europe. Over the next three years, I am confident that we can reach $1 billion in sales within the European market. The men's sportswear segment presents a significant opportunity for us, which I anticipate will yield healthy margins as we move forward. Additionally, the women's market, influenced by Calvin's brand essence, represents an even larger potential in Europe. With Raf Simons joining us, it's still early days, but he has proven to be an exceptional designer for women's fashion. I believe he will greatly impact Calvin as a whole, which is promising for our women's division going forward. Our company traditionally has stronger expertise in men's clothing, and I think the addition of Kim and his team will greatly enhance our opportunities for Calvin.

And then just last one from a macro perspective. You've already referenced some of the uncertainty with some of the European elections coming forward into next year. There's been a lot of chatter with Italy recently, just with the upcoming referendum vote on December 4th. Can you just level-set the conversation and remind us how much exposure you have to Italy? Thanks.

Italy accounts for approximately 2.5% of our consolidated sales. It is a strong market for us, especially for Calvin, which has a rich history there. Our business performance in Italy is currently strong, and we are monitoring the upcoming election closely to see how it may impact us. While the market in Italy is smaller than the UK, which is just over 3% of our sales, we remain attentive to developments in that region.

Let me ask two quick modeling questions, and then I have a follow-up. We get a lot of great color on the parts of the business to look forward to a bit here, but the one blind spot we have right now is North America wholesale out over the next few quarters. I know North America order books are probably to change. But any color you can give us on the forward look you have there, and what really helps with the model over the, I guess, the near-term. And then the second modeling question is just as we look at the gross margin into 2017, it seems like that should exit the year with pretty strong momentum, given what amounts have taken out product margin basis to get to what you delivered in third quarter and what you’re guiding to in fourth quarter, knowing that FX rolls off here, or should get stronger. I mean that should really enter '17 from a fairly strong position as well. Am I right there?

Mike, I guess, I would agree with you, just in concept. I’m not going to go into that specifically. But if you think about whatever you just saw at the group to project next year sales growth. I think second half sales growth will be stronger than first half sales growth, mainly in the Calvin Klein North America business. Because a lot of the fixture sales and fall brands that went into effect this year are our anniversary, but that big top-in, particularly on those Ezi core base programs we’re significant for us as we go forward. I think in the first half of the year, the opportunity is greater, from a gross margin point of view for the reasons you pointed out, is that, not only us but I think everyone, will come out of fourth quarter in a much cleaner inventory position, just given the fact that we went into the third quarter with 6% less inventories, and projected overall sales growth for the business. So, I think that will bode well for margins as we go forward. And some of the costing benefits that we’re seeing in the first half of the year, I think, margins continue to improve. I think that will be more of the first half story, where I think sales will be more of a little bit more of the second half story next year when you’re thinking about modeling.

Let me get to the follow-up, so we have, I guess, two different stories going on as we look through the model here on the top line, and I’m trying to reconcile. It's a significant momentum under the business as you guys are focusing on with Calvin and Tommy, but then you have this, the reported revenues that are lower than you would think on that momentum in those instances. You guys have done a great job staying on the ball at your feet with the portfolio with the transaction this year. But are there some areas that come under the microscope as you guys start doing your mid-range planning here, specifically like how do you look at the U.S. store fleet? It’s been a while now that they’ve been under pressure. It looks like the drivers that caused that pressure a few years ago are starting to flare up again. I know you guys de-risked the inventory position there to protect P&L this year. But do those stores still have a long-term economic return opportunity versus hurdle rates that you guys target for your business today?

With the two major brands, Calvin and Tommy, none of our stores are losing money, except for those that serve as marketing platforms, like our flagship stores in New York or Miami. Without considering those stores, which are essential for brand perception, our retail business remains one of our most profitable segments. The challenge we are encountering is that the business, which was very strong in 2013 and 2014, has faced some pressure, yet this pressure has still resulted in double-digit EBIT margins on a fully allocated basis for our two major brands as we move ahead, which is encouraging from a profitability perspective. Additionally, we are beginning to see a reduction in the pressures caused by the strengthening U.S. dollar, particularly with the euro, Brazilian real, and Canadian dollar declining between 15% to 30%. We anticipate this trend to ease as we approach the fourth quarter, contributing to some of the improvements noted in late November and early December. I would appreciate some more time to observe this and gauge our direction. The dollar pressure we've experienced so far hasn't reached the intensity we witnessed previously, suggesting that things will stabilize. To be frank, some of these developments are quite recent. When I spoke during the fourth quarter call, the euro was at $1.13, and today it's at $1.06, marking a 6% to 7% decrease. This information is just a month or a month and a half old. We need to delve deeper and comprehend the potential impact of these changes as we progress.

I guess just on the gross margin line, so very strong Q3 and sounds like that should continue into Q4. First, just wondering if you could maybe give us what the negative impact to gross margin was in Q3 due to FX? And then just more broadly, just curious how we should think about the gross margin improvement you’re seeing in regards to geographic mix versus maybe sell-through improvement in pricing?

So in the third quarter, we were about 370 basis points of impact due to FX. And as you think about the fourth quarter, what's going to happen to the year, the fourth quarter is going to be the strongest quarter. All our businesses will have gross margin improvement in the fourth quarter, and it will be the strongest quarter year-over-year growth in terms of gross margin.

And I guess the second part was…

Sell-through improvement versus pricing…

Yes, geographic sell-through has been exceptional, especially in Europe. The sell-through rates there have been outstanding, particularly for Calvin and Tommy brands. While there are global factors at play, Europe has shown resilience in the market despite concerns surrounding Brexit. Our UK operations have thrived post-Brexit, likely due to the strengthening of the euro against the British pound and the dollar as well. Shoppers are recognizing Europe as a great place to shop for value. Overall, while we see a decline in our U.S. retail business, our European stores have performed remarkably well.

And I will just say that when you think about the growth, as Manny just described, that faster growing internationally comes with higher gross margins. It does have higher expense but also higher operating margin. But the gross margin is really feeling it both performance-wise and benefiting from mix as well.

And then there's a really quick follow-up, Manny, it's good to hear about the quarter-to-date improvement in the retail business as you've seen. I am not sure if I missed this. But can you comment on what's baked into your Q4 guidance on the domestic comp performance. Are you assuming that it was a continuation of first-half trends weaker, or are you assuming that it does improve and hold that improvement?

We had initially projected Calvin Klein to experience low single-digit negative comps, but they are now flat. For Tommy, we expected high mid single-digit negative comps, and they have improved to mid single-digit comps. Overall, the trends in both businesses have shown improvement.

Can you discuss the expectations for SG&A spending? The third quarter saw a significant increase in marketing investment, and SG&A expenses rose by double digits year-over-year. You are expecting a considerable increase for the fourth quarter. Do you anticipate this trend continuing into next year? Will this be the area where you aim to expand your operating margin next year, as many analysts believe will be the case?

Well, I think there's two things going on, John, that you really think about. One is, we are stepping up our marketing spending overall. And in the second half of the year, we reached $40 million, so that's the number. We'll anniversary that again next year, and then in the first half there'll be some additional spend on top of that as we anniversary this spend. We also have a full year impact of the creative direction that is going on and the change in creative direction that is going on in Calvin Klein. But I really think a bigger part of the SG&A movement is the mix of business. Our European and our China, and all of our international businesses come with higher overall SG&A expenses, probably in the tune of 1,000 basis points but also come with higher gross margins for those businesses. And then overall, we bundle together probably 100 basis points higher operating margins put together. Our international businesses of Calvin Tommy are growing substantially faster than our North American domestic business. That mix of business and SG&A growth is going to continue. And I think you just have to keep your eye on a constant currency basis on operating margins overall. So, that's a significant piece of what's happening.

And then just if we go back to the North American wholesale channel, one more time, can you just help us understand what a sustainable growth rate for the Tommy and Calvin looks like over the next two to three years? It's obviously some high-profile department store door closures over the next year, and there’ll be more in the future. So just wondering if I…

John, we don’t delve into detailed breakdowns or specifics regarding department store growth. We provide substantial information about our performance in North America, the EU, and internationally. It's important to consider the changes happening in brick-and-mortar stores as they continue to decline. The real opportunity lies in gaining market share. Simultaneously, the digital sector is growing, and it's essential to find a balance between the two. Our perspective is rooted in an omni-channel approach. When looking at North America, it's clear that growth might not be as rapid as what we see in our international markets, so this should be incorporated into your analysis.

My question was on, with some of the dynamics shifts we’re seeing in department stores, whether it's an evolution of how they’re thinking about their inventory buys, or maybe their own footprints. I was curious is the way that you were doing business with that, or they are trying to do business with you is also changing?

I believe everyone recognizes that speed is increasingly important, and our capacity to support the department store sector and respond more quickly is essential. This applies not just to department stores but also to our own retail locations. Our size and scale provide us with the necessary flexibility. We have been making substantial investments in our supply chain and logistics systems, which highlights where the challenges lie. Companies that fail to address these issues will face difficulties. Therefore, adjusting timelines, making decisions later in the process, and increasing flexibility are all vital as we move ahead. This is a continuous process that requires investment, but the return on that investment is significant.

And then on Calvin, you discussed some potential opportunities for Raf. I know it's early, but could you share more about how your assortment might evolve? Specifically, how do you see the relationship between your women’s business and G3 developing?

Okay. I think Raf Simons' involvement at Calvin Klein is transformative. It has opened new opportunities and expanded the brand's presence in premier distribution channels, which is beneficial for the overall business moving forward. His credibility and the expertise he has brought to the team, particularly in enhancing the women’s segment, present a significant opportunity. He has been with us for about three months now, and his first show is on February 10th. We’re all very excited about it, and the buzz is going to be tremendous. Retailers like Barneys and Stack and Lehman’s have shown strong commitments to the line, and their ability to carry it has been impressive. I believe this will create a significant halo effect. Additionally, as we develop more innovative products, the potential to expand that line into our bridge segment is promising. The inspiration from Raf will positively influence our bridge and white table businesses in North America and Europe, representing a substantial opportunity. However, we need to ensure we deliver on these expectations. Right now, it's all about potential. The momentum feels fantastic, but we also recognize that Raf hasn’t presented anything to the market yet. As he has mentioned, there can be too much talk before actual delivery. We prefer to focus on execution first before discussing implications. We are enthusiastic, optimistic, and dedicated to this business, and we believe it will yield positive results if we meet our commitments.

So, I just had two quick questions, the first, I was wondering if you could give a little color about what you’re seeing in your accessories business. I think you mentioned a little bit but maybe just a little bit about how that is trending and maybe where you see that business going, especially on the Calvin side? And then also on China, if you could just maybe give a little bit of an update on what you’re seeing there with some mix trends depending on what type of company has reported. But it would be interesting just to get a little more color about what are you seeing in China. Appreciate it.

Let me start with China. In my view, the situation varies depending on your position in the market. Luxury brands are experiencing pressure in this region. The markets in China and Hong Kong, along with surrounding areas, have faced additional challenges. For Calvin and Tommy, we are seeing success in the net premium segment, which benefits us. While Tommy is still developing, Calvin has had a presence in China for a longer time. We see a substantial opportunity for Tommy, which currently has a stronger men's sportswear focus but also potential in women's and denim categories in China. We expect continued growth in our existing businesses there. Calvin is one of the leading brands in China with excellent consumer recognition and potential. We are expanding the brand into areas where it has previously had little presence, moving beyond jeans and underwear to accessories, which are becoming increasingly significant, and sportswear, which will grow in importance over time. The women's segment also presents a major opportunity for us. Additionally, we've noticed strong momentum in our leisure business, particularly in Asia and China. While the market in the U.S. is relatively mature, China is about three or four years behind and is just starting to see growth in this category. We believe we are well-positioned to capture a considerable share of this emerging market as a fashion brand. Regarding accessories, Calvin is positioned as a lifestyle brand, encompassing more than just specific items; it's fundamentally an accessories-driven business. Although our accessory business is still small compared to our overall operations, it is expanding rapidly. The accessory segment typically offers higher gross margins and operating margins when executed well. We see a strong growth potential for the Calvin Klein brand, although we do not plan to target it as a major global accessory effort. Nevertheless, it can serve as a significant growth driver for us since it remains a relatively small business.

I just have a quick follow-up about China regarding margins. Yesterday on Cramer you mentioned higher operating margins or higher margins in China. Were you referring to gross margins or operating margins or both, and by how much are those margins significantly higher?

I was talking about both, and just specifically on operating margins, it's at least 100 basis points higher.

So, on the margin side, excluding FX, your guidance this year implies almost 12% EBIT margins. So, Manny, what's the best way to think about a long-term target? Is it still 13%? And just if you ranked the brands, where do you see the biggest opportunity from here?

At these currency levels, I believe 13% is a reasonable target to consider as we move forward incrementally. The pressure on gross margins has been significant due to the fact that apparel products worldwide are more priced in U.S. dollars. While we have managed to mitigate some of that impact, we haven't been able to offset all of it. That’s the main distinction. If we reflect on two years ago, I mentioned that the overall target for the Company was closer to 15%. Therefore, I feel that 13% is a solid position. Clearly, both Calvin and Tommy present substantial opportunities, with Calvin likely performing a bit better than Tommy due to the composition of their businesses and their sources. I hope this provides some clarity.

And then just a follow-up on the Tommy side, can you talk about any underlying improvement, potentially in North America, maybe beneath the surface? Just how to think about maybe any potential halo impact that you're seeing from the new marketing campaign?

Well, look, I think we're clearly seeing it. Now it's a question of how sustained, is it sustainable, where we are, the overall market, all of those good things. But as I said on Cramer last night, I guess, on comfortable quoting and because he said it on public TV is Terry London said the Tommy Hilfiger business that mace is on fire. It's our biggest customer and it's an exclusive relationship in a number of product categories. So I think that just a piece to it, so the kind of momentum we're seeing and it's momentum that's really being driven by more units selling but also higher AURs across the board. And then just if you just think about, from a pure profitability point of view, the opportunity for G3, which they've called out as a long-term $1 billion women's business, but let's just say it's a $500 million opportunity over the next three years or so. They're taking over a business that did a little bit over $100 million, so that's a huge opportunity at 100% gross margin rates as a royalty business, healthy royalty rate. And we're planning that business at sales minimums. So if they outperform, which they expect to, that's applied for us in the second half of '17 moving into '18. Okay, with that, we're going to call it a call. I appreciate everybody's time. I'd like to wish everybody a happy, healthy, Merry Christmas, happy New Year, and a really healthy prosperous New Year. We look forward to speaking to you in the first quarter of 2017. Thank you very much. Have a great day.