PVH Corp (PVH) — Q4 2016 Earnings Call Transcript

Thank you, Karina. Good morning everyone. Joining me on the call is Mike Shaffer, our Chief Financial Officer and Chief Operating Officer; Dana Perlman, our Head of Treasuries and Investor Relations; and Ken Duane, who runs our North American Wholesale Businesses. Overall, our strong performance in the fourth quarter exceeded our expectations and our full year 2016 performance demonstrated our ability to overdeliver against our initial 2016 plans. Despite the ongoing challenging macro-environment and a highly promotional retail market in the United States, we grew 2016 earnings per share 20% on a constant currency basis above our long-term growth target. Throughout the year, our performance was driven by the momentum across our Calvin Klein and Tommy Hilfiger businesses, with our international businesses being the highlight. Our European and China businesses continue to be our healthiest markets. We have seen relatively strong performance in our North American wholesale businesses. Strength has been observed across all distribution channels: wholesale, retail, and our digital channels. Speaking of digital, outsized growth continues across our digital e-commerce business. For both the fourth quarter and the year, we continue to generate revenue growth in excess of 20%. This channel remains our fastest growing distribution channel. During the quarter, we began to see an improvement in trends in our U.S. outlet stores located in international tourist destination locations as traffic stabilizes. As important as the domestic business has been historically, our international business continues to outpace our domestic growth, diversifying our revenue and earnings streams. We believe this trend will only continue to accelerate in 2017. Before I delve into our individual brand performance, I would like to comment on our recently announced acquisition of True&Co. True is a direct-to-consumer intimate apparel e-commerce retailer. This acquisition enables us to further participate in this fast growing online channel and provides a platform to increase innovation, data-driven decisions, and speed in how we serve our consumers. We believe that over time we will also be able to leverage the mindset and expertise of this model across our other apparel businesses. Moving to our brands, let me begin with Tommy Hilfiger. The Hilfiger brand's health and relevance remained exceptionally strong globally during 2016. The brand has seen a positive reception from consumers with both brand awareness and interest to purchase up on a year-over-year basis. One of the brand's highest profile initiatives was a successful re-launch of its global women’s business in the second half of the year, featuring Gigi Hadid as our brand ambassador. The partnership has allowed the brand to reach a new women’s consumer, capitalizing on Gigi’s impressive social media following, which includes over 30 million Instagram followers. The response has been terrific. The Gigi partnership has created a halo effect across all women’s categories and has generated double-digit sales growth in our women’s business across all global regions. Moving into the financials, overall revenues for Tommy increased by 5% on a constant currency basis for both the fourth quarter and fiscal year ‘16. Earnings were up over 18% on a constant currency basis, both for the fourth quarter and the year. Our revenues were driven by the outstanding performance of our international business, which generated over 14% constant currency sales growth in the quarter and for the year. Our Tommy Europe performance continues to be a standout for us. Both the fourth quarter and the year highlighted the strength of the brand in our largest region. It is clear that the brand is performing very well across all of the European markets and channels, and we achieved nice market share gains throughout Europe. All major European markets are performing well, as demonstrated by a 7% comp store increase in the fourth quarter and a 9% increase for the year. As strong as our retail business has been, our wholesale performance in 2016 was impressive, and I am extremely pleased with our forward order book. As I mentioned last quarter, our Spring 2017 order book was up close to 8%, and our Fall 2017 order book has now come in at nearly a 10% increase versus the prior year. Let me move to Asia, our Tommy Asia business led by China continues to perform well. We believe the investments in marketing and the positive changes we are making to the business model through the integration with the Calvin Klein China business will support the long-term growth of the brand. Our strong performance in China continues into the first quarter of the year, and I believe given this momentum, we are well-positioned to outperform our 2017 financial plans. Tommy Hilfiger North America saw a strong men’s wholesale business both in the fourth quarter and throughout the year. We are pleased with our outperformance relative to our competitors in wholesale this year. As a reminder, we successfully transitioned the women’s wholesale business to G3, beginning in the fourth quarter, and we look forward to seeing that performance as we move into 2017. Shifting to retail, during the quarter we saw some stabilization in international tourist traffic in our outlet stores. However, it was not enough to materially change the pressure on that business, which we have been experiencing all year, including in the highly promotional U.S. market, as comparable store sales were down 7% for the quarter and 9% for the year. Moving to Calvin Klein, when we speak about the brand, creatively, Calvin Klein had a tremendous year as the brand captured compelling brand and cultural relevancy. With a focus on digital consumer engagement, the brand continues to drive strong digital advertising campaigns, which have created impactful interactions with consumers. Additionally, from a branding perspective, we continue to diversify our distribution through key specialty chains and stores for both our Halo collection product as well as our Calvin Klein jeans and underwear lines. Since we spoke last, I am pleased to say that Raf Simons' first runway show for men’s and women’s in February received overwhelmingly strong reviews, and we believe the brand continues to bring fashion credibility and a positive buzz around the collection. From a product perspective, 2016 Calvin Klein also delivered strong performance across its major product categories. Calvin Klein underwear continues to experience strong global momentum, particularly in women’s, and we believe that significant whitespace remains. Calvin Klein jeans continued its growth trajectory, as the brand remains very strong in Asia and Latin America, and we have made significant progress in Europe and North America. Notably, the launch of Calvin Klein jeans sculpted jeans resonates with consumers across all regions. These two categories achieved significant market share gains during 2016, demonstrating the power of the brand. From a financial perspective, revenues were flat for the quarter in large part due to the loss of approximately $25 million in sales from Mexico as we formed a Mexico joint venture. Revenues, however, were up 9% on a constant currency basis, reflecting strong global trends. Our revenues were driven by strong top-line growth out of Europe, China, and North America wholesale across all classifications, with all posting strong gross margin improvement. While EBIT on a constant currency was down for the quarter due to a $30 million planned marketing expense increase, as well as the creative leadership changes we have made that we have previously discussed with you, EBIT for the year was up 11% on a constant currency basis. Moving to Europe, Calvin Klein Europe's results continue to demonstrate the incredible performance that we've seen all year, both from a top-line and a bottom-line basis. I cannot be more pleased with the direction of the business. We experienced robust performance with fall holiday 2016 wholesale, and our fourth-quarter retail business saw strong comps up mid-to-high single digits across all regions and very healthy gross margins across both businesses, as we experienced lower-than-planned markdowns as a result of strong sell-throughs. As we have previously discussed with you, our Spring 2017 wholesale order book is up about 20%, and I'm very pleased to report that our Fall 2017 order book is up north of 25%. The strength of the business across all distribution channels is coming from all major markets across all product categories, with an acceleration in both jeans and underwear categories. We have also seen significant growth in our newer product categories of accessories and men's apparel. Moving to our Asia business, Calvin Klein Asia continues to perform well, with China outperforming other markets, and that performance is consistent across all product categories. During the quarter, we did see a continued improvement in our Hong Kong and Korea businesses relative to the first nine months of the year. Our international comp sales increased by 6% for the quarter. In North America, Calvin Klein 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 prior year. As a reminder, in the fourth quarter of 2015 we saw large fixed fill programs in particular in underwear that we were up against in the fourth quarter. Despite this and the highly promotional U.S. environment during the quarter, I am very pleased to report that we continue to see strength across all categories in our wholesale business, ranging from dress shirts to sportswear, jeans, and certainly our underwear business, led by the continued momentum in women's intimates. Shifting to retail, our Calvin Klein North America business saw a similar stabilization in international tourist traffic and spend, with an improvement relative to the first nine months, as overall comp store sales were down only 2% for the quarter versus 4% for the year. Finally, in our Heritage business, the Heritage revenue declined by 5% for the quarter and 10% for the year, driven by our ongoing program of rationalization of some of our brands and businesses, which began in 2015, including the exit of the Izod retail business and the discontinuation of several licensed brands within its dress furnishing group. Our Heritage business has trended positively against our full year 2016 financial plan with improving gross margins and operating margins. As a result of our performance through the first nine months of the year, we decided to invest approximately $5 million in additional marketing to help drive the business as we move into 2017. Specifically, we have seen generally steady consistent performance across all of our businesses, including Heritage Retail, which comped up 7% for the year. The only business that has experienced pressure has been neckwear, which has faced soft trends all year. Overall, I believe our consolidated 2016 results demonstrated our strong execution and continued commitment to execute against our growth strategies, which include; first, driving consumer engagement by investing in product, marketing, and in-store and online experiences; second, expanding Calvin Klein and Tommy Hilfiger’s worldwide reach by assuming more direct control over various license businesses around the world; and third, investing in our global operating platforms and digital platforms to support our growth initiatives while making a positive impact in the communities where we live and work. In 2017, we plan to build on the investments made in 2016 around talent, our global operating platforms and systems, our consumer experience, and most importantly, our brands. We continue to take a prudent approach to plan our 2017 business in light of the global macro environment and the geopolitical volatility around the world. The uncertain global retail landscape, as well as the strengthening U.S. dollar, have caused us to be very conservative in our estimates. We are looking for reported earnings growth of 7% to 9%, and on a constant currency earnings basis growth of 13% to 15%. When you look at the business regionally from a planning point of view, the North American environment continues to be difficult, with the recently announced department store closures and the challenging traffic trends, which continue and we plan on projecting those to continue throughout 2017. Our North American retail stores continue to see traffic pressure. However, I can confirm that the stabilizing international traffic trends we experienced in the fourth quarter continue into the first quarter. Comps for Calvin Klein North America and Tommy North America are both trending down mid-single digits quarter-to-date with the Easter shift affecting the comps in April. Our international businesses continue to see great momentum quarter-to-date, with Tommy and Calvin international comps running up mid to high single digits, with outperformance continuing to come out of Europe and China.

Thanks, Manny. The comments I am 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 2016 and then move on to 2017. Our reported revenues for the fourth quarter were flat relative to the prior year and exceeded our guidance. On a constant currency basis, fourth quarter revenues increased by 1%. Tommy Hilfiger revenues were on plan and up 5% on a constant currency basis, inclusive of the move women’s North America wholesale business to G3 in the fourth quarter. The Tommy Hilfiger revenue increase was driven by strong international performance, including a 7% comp store increase in Europe. Our Calvin Klein revenues were flat relative to the prior year on a constant currency basis and exceeded guidance. Negatively impacting revenues versus the prior year was the deconsolidation of our Mexico business, which was worth approximately $25 million, as well as a significant one-time fixture fill in the prior year due to the expansion of the wholesale North America underwear business. Calvin Klein international revenues increased 14% on a constant currency basis, with a 6% comp store increase, as well as strong wholesale performance. Heritage revenues were down 5%, slightly below plan due primarily to the discontinuation of several license product lines in the dress furnishings business. Our non-GAAP earnings per share was $0.05 better than the top end of our previous guidance; the EPS beat was driven by overall revenue outperformance of approximately $0.03 and favorable interest and taxes of approximately $0.02. Our inventories ended the year very clean and flat relative to the prior year. Moving on to 2017, we are currently anticipating that we’ll be negatively impacted by $0.40 per share due to foreign currency. The $0.40 impact is approximately 60% driven by translation and 40% driven by transaction. For the full year 2017, we’re projecting non-GAAP earnings per share to be $7.30 to $7.40. If you exclude the negative impact of foreign exchange, we have constant currency earnings per share growth of 13% to 15% over the prior year. Overall, we are projecting constant currency revenues to grow approximately 4% excluding the negative impact of 2% related to foreign currency. 2017 revenues will be negatively impacted by approximately $70 million related to deconsolidating our Mexico operations and approximately $80 million related to the transfer of the Tommy Hilfiger North America wholesale business to G3. 2017 revenues will be positively impacted by a net amount of approximately $30 million related to 2017 being a 53-week year, partially offset by the negative impact of the timing of Chinese New Year. Overall operating margins are expected to increase approximately 30 to 40 basis points on a constant currency basis and increase approximately 10 to 20 basis points on an as-reported basis. We project Calvin Klein revenues to grow by 7% on a constant currency basis, excluding the impact of a negative 2% related to foreign currency and including the negative impact of the Mexico deconsolidation. We are planning Calvin Klein operating margins to be relatively flat on a constant currency basis and to decrease 30 to 40 basis points on an as-reported basis. Our Calvin Klein earnings will be negatively impacted in 2017, mostly in the first half of the year, by the continuation of investments made in the later part of 2016 related to brand investments in advertising and creative leadership. Tommy Hilfiger revenues are planned to increase by 4% on a constant currency basis, excluding a negative impact of 3% related to foreign currency and including the negative impact of the transfer of the North American wholesale women’s business. Tommy Hilfiger operating margins are planned to increase by about 100 basis points on a constant currency basis and to increase by about 75 basis points on an as-reported basis. Our Heritage business is planned to have a revenue decrease of 1%. Operating margins in our Heritage business are planned to increase by about 20 to 30 basis points. The impact of foreign currency on our Heritage business is relatively immaterial. Our corporate segment expenses are planned to increase by about 15%. The increase reflects low single-digit growth in our overhead, as well as startup losses associated with new businesses. Interest expense for the year is planned to be about $120 million compared to the prior year amount of $115 million; the increase is primarily the result of the EUR350 million bonds issued in June of 2016. In 2017, we are planning to pay down at least $250 million of our debt, and stock repurchases are planned to be between $200 million and $215 million. Our tax rate for the year is planned at about 18%. First quarter non-GAAP earnings per share is planned at $1.58 to $1.60 and includes $0.10 of estimated negative impact for foreign currency. Excluding the negative impact, we are expecting earnings per share to increase by 12% to 13% for the first quarter. Revenue in the first quarter is projected to increase by 4% on a constant currency basis, excluding the negative impact of 2% related to foreign currency. Negatively impacting revenue in the first quarter of 2017 is the Mexico deconsolidation and transfer of the Tommy Hilfiger North America wholesale women’s business, partially offset by a full quarter of revenue for the Tommy Hilfiger China business, which we acquired in the first quarter of 2016. Calvin Klein revenues are planned at a 5% constant currency increase, excluding the negative impact of 2% related to foreign currency, while Tommy Hilfiger revenues are planned at an 8% constant currency increase, excluding the negative impact of 4% related to foreign currency. Lastly, Heritage brand revenues are projected to decrease by 3%. Interest expense is projected to be about $29 million, and taxes to be about 20% in the first quarter. Now, we will open it up for questions.

Hi, good morning guys.

Good morning.

I guess Manny the first question is around e-commerce with this acquisition that you recently completed. Can you just talk a little bit about how your relationship with Amazon has developed and how this would change or alter that? Sort of how big is e-commerce for you today?

Well, we don’t disclose the e-commerce overall from a reported point of view. But on a retail sales basis overall we do about $1 billion in sales with all of our brands. The True acquisition is a relatively small business today. What it provides us is a platform and expertise particularly from a data mining point of view with the consumer. We’re really going to use it as a laboratory to understand that business better. We believe we can grow the True brand globally given our intimate expertise both from a logistics and sourcing point of view. I think they were lacking in those capabilities but clearly had great capabilities from a digital point of view. We’ll have to see how it all plays out; it’s a relatively small acquisition for us, but it could be a very exciting acquisition as we go forward.

Got it. Since I sort of got you on that one Manny, I'm going to ask Mike a question. On the marketing expenses, can you talk a little bit about the plans for '17 Mike, given the increases in '16, how you're thinking about that as an expense for 2017 and how you approach it?

Yes, Bob. The marketing expense, as we look forward for 2017, we’re pretty much flat as a percent of sales, with the dollars growing obviously because the revenues are growing. The timing is pretty much going to be less; it was heavily weighted to the fourth quarter, it would be a little bit spread out definitely, but for the most part flat as a percent of sales.

Great, thank you very much.

Thank you, good morning. Manny, there is a perception out there that maybe holding back the valuation of your stock is that you have high exposure to the U.S. department store sector. With growth in your international business and even within the U.S. in specialty retail, your department store exposure has come down over the years. Can you walk us through kind of where it's been, where it is, and where you see it going, just so we can get some clarity just given the challenges that that sector is seeing? Thank you.

Sure, I guess I'd say a couple of things, David. The department store sector in North America, in the United States in particular, is very important to us, and it's a highly profitable channel. Those retailers are great strategic partners as we work together. But I think it's clear that over the last seven years we've done a lot to significantly diversify our business model. Today, 50% of our revenues are outside the United States, which I think is larger than just about every other major U.S. apparel maker. It’s critical as we go forward to continue to fuel that growth, and we’re seeing that in Europe and Asia really accelerating. As we’ve made investments over the last two years to grow that business, those businesses are by far our highest operating margin businesses. So from that point of view, it’s critical. We've done a lot over the last few years to grow our digital sales base as well in North America and also around the world. So I think when I look at us competitively against the major players in the U.S. market, we are significantly more diversified both from a sales and an earnings point of view geographically, with 50% of our sales occurring outside the U.S. and more than 50%, probably close to 60%, of our profits outside the U.S. So I would just say that I’ve heard this sentiment as well that I think because we have such strong partnerships with the retailers here in the United States that there is a sense that we’re overly dependent on that channel. It’s critical and it’s important to us. But I firmly believe that we have done a tremendous amount to diversify our business model with our own retail, a digital platform, and the international investments that we have been making as we move forward. There is no single retailer that represents close to 10% of our sales from that perspective, and I think overall when I look at the valuations as the CEO, I do get frustrated when I consider where we are trading as a price-to-earnings ratio against some of the competitors, and I tend to agree with you that I believe it’s just a misalignment at this point.

Is it fair to say the department store penetration is at or below 20%? When you factor in off price and your own retail and Amazon in the U.S., is that a fair characterization?

Okay. But we don’t get into all of that, but you are pretty close. I don’t think it’s far off. So I think that’s a reasonable perspective when you look at it.

Thanks. I just had one additional follow-up. The Tommy and Calvin brands have been very strong the last couple of years; there is a lot of fashion momentum, brand momentum. The other pushback we get at times is, well, how can this continue given the department store conversation we just had? And that you’ve really developed a lot of the category and geographic opportunities. Can you quickly walk us through the biggest, most significant Tommy and Calvin geographic and category opportunities still in front of you that could drive say high single digit constant currency growth going forward? Thanks.

Sure, I guess I’d just take a step back more from a more micro and maybe more focused on the short-term. As you would expect, we’re looking out at the U.S. retail landscape; the U.S. market continues to be quite challenged. Because of that, we are planning that business conservatively based on current trends we’re seeing in the market today. We are not looking for huge improvements in the second half of the year; we would hope for stabilization. But from a planning and projecting point of view to the street, we have really taken into account the trends we are seeing right now, which will likely continue as we work through some of the malaise we see in North America. Growth for us, as I’ve tried to cover in my opening comments, is happening internationally. The big opportunity for us, and I have mentioned it in Europe, is the Calvin Klein brand. Given that it’s about 30% the size of the Tommy Hilfiger business in Europe, it presents the opportunity in Europe to really go after that business. We are seeing it materialize both in our retail comps and in our order books that I have laid out for you. There is a significant amount of whitespace in Europe, especially with our sportswear businesses, where we haven’t launched women’s yet in a meaningful way. Men’s is in the early stages from a growth point of view, and the three categories driving growth today from just the size perspective are jeans, underwear, and accessories. Clearly, men’s sportswear and men’s tailored, along with the women’s opportunity, are ahead of us there. When you move to Asia, that has been a significant area of growth for us, and I believe that will continue. China doesn’t show any slowdown in performance for both the Tommy and Calvin brands. I think there will be an expansion of our retail footprint and our offerings by product category that will continue to drive strong top-line and bottom-line growth throughout Asia. The last point I’d make about our international business is it would be disingenuous to say that I’m not pleasantly surprised with the strength of the Tommy Hilfiger business. When your business is as large as that, clearly in sportswear it is the market leader throughout Europe. To be posting high single-digit, low double-digit growth on the wholesale side of the business in the first and second halves of the year speaks volumes about the momentum that the brand has, the strength of the brand in that market and the opportunities for it to continue as we move forward.

Great. Thank you very much for the color and good luck.

Thanks.

Great, thanks, good morning. I wanted to focus Manny a little bit on just the North American landscape at wholesale. You guys have done a really nice job of keeping your inventories clean. Can you just talk a little bit about how inventory in the channel looks right now in North America? And then I guess secondly on this channel, how are retailers approaching open-to-buy dollars in '17? And given the strength of both Calvin and Tommy, kind of where do you fit on the packing order relative to your peers?

Sure. There are always pockets, but right now I would say that retailers have done a very good job in the department store sector in particular about keeping inventories clear. We came out of the fourth quarter; I think they reacted strongly to some of the softer sales trends, tightening open-to-buy dollars and moving inventory out. The fact that Easter is later this year, three weeks, is a big timing shift, which I believe will position us well. So inventories and carryover have really been cleaned up as we move forward. The other pressure that's been coming from that sector is significant pressure on inventory turn. So inventory open-to-buy dollars have been constructed. Whether they’re planning flat sales or slightly negative comp sales, the buy plan is even lower than that. So I think that bodes well for gross margin as we go through the first quarter and into the second quarter. Competitively, you've heard a number of our key partners talk about the strength of our business in their stores, particularly the Tommy Hilfiger business across the board. We've had numerous conversations with our key accounts, such as Macy's, about the strength of the Tommy Hilfiger business. So we’re clearly gaining square footage and market share in numerous categories as we move forward. The momentum behind the Calvin Klein brand just continues. That brand has been an unbelievably strong performer with the buzz and excitement around Raf Simons and our recent collections. I think the momentum we’ve seen in the Calvin Klein brand could accelerate as we move into the second half of the year. We’re really excited about it. And as Mike mentioned, we're not cutting back on investments; we're continuing to spend our marketing dollars. We're not under the same pressure that some of our competitors are that are talking about pulling back their expenses. We’ve maintained our marketing dollars as a percentage of sales at least as high as we did last year. Our voice in the marketing area, given that most key brands have cut back, will become even more powerful as we move forward.

Perfect, that's encouraging. Then just maybe philosophically, could you just talk about how you're thinking about acquisitions going forward? I mean, should we anticipate the priorities to be more about tuck-in acquisitions like you did with True&Co., whether it’s adding expertise, or are you still thinking kind of over the next 18 to 24 months about rolling up some of the global licenses? Or could there be a transformational acquisition thought process that’s still in your mindset? Would love to just hear how you're thinking about that?

I guess, as a backdrop given the strength in both Calvin and Tommy, that’s where the focus will continue to be. I think there will continue to be some licensing buybacks that we'd be excited about. It always depends on timing and the timing of our licensees, but I think that you’ll likely see more of that from us in the short-term over the next six to nine months. The True acquisition brings us opportunities in product categories where we have market leadership. For instance, in intimate apparel, men's underwear, and the dress furnishings area, these are areas from a classification standpoint that are very profitable businesses. If there are opportunities from a digital perspective where we can make investments and gain expertise, it’s very expensive and challenging to recruit talent, so sometimes it’s easier and more efficient to acquire that talent, as we did with True. I think in those areas, you will see us continue to make investments moving forward that will be strategic for the businesses, the brands, and our overall operations as we go forward. So, that will be the focal point. Finally, the backdrop on the tax situation, with the deductibility of interest and a number of things, gives us pause. We have a very strong balance sheet, but planning for any major acquisition is challenging right now given the uncertainty around capital structure and tax positions. We hope that the situation will become clearer over the next three to six months and will allow us to make more informed decisions.

Got it. Thank you guys and congratulations.

Thank you.

Hey guys, good morning. Congrats on a great quarter. Two topics I wanted to touch on, first would be the gross margin. Can I just get a little clarity? It sounds like if I add all your comments together, you’re guiding grosses this year to look roughly similar to the same level of year-over-year expansion that you saw last year; is that a fair assumption?

On a reported basis, that would be correct, Michael.

Okay. As I look at that, in the fourth quarter it looks like you had about 320 basis points and then about 400 excluding currency, though that's obviously a huge number. I think most of that would come from the mix shift on the underlying business. If I just look at the path you have laid out for the year, it sounds like you’re planning North America very conservatively. The international order books are accelerating, and then I’d assume on our currency model that FX headwinds would diminish through the year. I'm trying to figure out if there is an opportunity for gross margins to start to accelerate as we move through the year just based on some of the moving parts there.

So, Michael, look from our perspective, you’re absolutely right that the mix is a piece of it. Our international businesses have higher gross margins, also higher operating expenses, but they are growing at a faster rate; so you are absolutely right. However, when you outperform your models and outperform your business, you do see higher gross margins because you don’t take the markdowns you plan and you also move out higher AURs. At this point, the models and margin guidance reflect our models. Outperformance would definitely lead to some upside opportunity.

Okay. I guess the second topic would be some of the comments on the new Li & Fung deal in the press release. Do you mind just giving us a little color on that? What it is, how different it is, and what do you see as the benefits for you?

I think Li & Fung has been a great partner for us. Strategically, we’re changing the relationship from a buying commission basis to a strategic partnership and combining our business together. We believe they can bring us some real value-added services from a speed and efficiency model; they are looking at their business model as it changes. This does a couple of things for us long-term, not in the short-term: long-term it gives us the opportunity to reduce some of our buying commissions as we take more direct control of the business together. Secondarily, it enhances our speed-to-market capabilities and allows us to react more quickly. Thus, it’s all very positive. I think changing this relationship will be beneficial for both companies.

Got it. If I could sneak one more in there, I just wanted to see if there are any other opportunities as you look across your owned businesses today where you’re at maybe the crossroads of low profitability on something that you operate today, but an obvious operator might be out there, like G3 on the women’s business side, that could potentially be another licensing opportunity for you as you look through 2017?

Michael, I just want to make sure I understand the question. Are you asking about taking businesses that are operating in-house and potentially licensing them out?

Yes.

I think that the women’s issue there was the big one. Particularly with Tommy, G3 is a great partner with amazing operating expertise in the women’s side of the business. That opportunity is significant for them to really take the Tommy business and grow it in a similar way that they have grown our Calvin Klein business. So, as I look at the other categories, no, I don’t see big opportunities to take businesses out and outsource them at this point in time, and that was the big opportunity.

Good morning everyone, congrats.

Good morning.

Manny, you talked a lot about China. Can you help us size the Tommy Hilfiger and Calvin China businesses right now? In terms of where they are from a sales standpoint and where they are from a profitability standpoint relative to your other international businesses?

Well, I guess look, I don’t want to break it down that much. We provide a lot of breakouts of the businesses and brands, and I don’t want to detail it at micro-level. I guess to give you a sense of scale, the Calvin business is three times the size of the Tommy business in China. And as we look at those two businesses, we believe we can double the size of both businesses in China over the next five years. The China business model for us is our highest operating income business as a percentage of sales. Therefore, the more growth we see there, net of some investments we have to make to scale up, the profitability in that business is set to continue to grow.

Okay. Shifting gears a bit, Mike, I think you talked about Tommy Hilfiger operating margin being up 75 basis points for the year, while Calvin down 30 to 40. Can you talk about what’s pushing Tommy’s margins higher for the year? And then I think it’s mostly investments that are bringing Calvin down, but can you just give us a little bit more detail on those two line items?

Yes, look, I think it’s two-fold. One is the revenue increase on the Tommy side as a driver. The gross margins are clearly the biggest component that we are seeing improvement and expansion in gross margin for both businesses, but Tommy particularly healthy. And as you said, the investments in Calvin Klein for the first three quarters are going to be a little bit of a drag.

Yes, I think, Michael, when we look at the business and where we see opportunities, there is always some sales opportunity. However, we do see in the business models we laid out that the opportunity really lies in gross margin expansion and then leveraging SG&A on top of that. That’s how we are thinking about it, particularly in North America, where I think chasing sales by buying more inventory upfront is inappropriate right now. There is a great opportunity; if we outperform at retail, it will reflect positively on the gross margin line.

Okay. I guess the second topic would be some of the comments on the new Li & Fung deal in the press release. Do you mind just give us a little color on that? What it is, how different it is and what do you see as the benefits for you?

I think Li & Fung has been a great partner for us. Strategically we’re changing the relationship from a buying commission basis to a strategic partnership putting the business together. We believe they can bring to us some real value-added services from a speed, efficiency modal. I think they are looking at their business models and as it changes. It does a couple of things for us long-term not in the short-term, long-term it gives us the opportunity to reduce some of our buying commissions going forward as we take more direct control of the business jointly. Secondarily from a speed point of view, the initiatives and the ability for us to really take advantage of speed to market and quicker reaction times from that perspective is all very positive. So again I think that changing relationship will be both good for both companies.

Got it. If I could sneak one more in there, I just wanted to see if there, do you see any other opportunity as you look across your owned businesses today where you're at maybe the crossroads of low profitability on something that you operate today that could potentially be another licensing opportunity for you, as you look through 2017. Thanks.

I think there is still some opportunities, particularly with the women’s business given the size of the G3 partnership. That said, we have no significant announcements or plans at this time.

Good morning everyone, congrats.

Good morning.

Manny, you talked a lot about China. Can you help us size the Tommy Hilfiger and Calvin China businesses right now? In terms of where they are from a sales standpoint and where they are from a profitability standpoint relative to your other international businesses?

Well, I guess look, I don’t want to break it down that much. We provide a lot of breakouts of the businesses and bands, and I don’t want to detail it at a micro-level. I guess to give you a sense of scale, the Calvin business is three times the size of the Tommy business in China. And as we look at those two businesses, we believe we can double the size of both businesses in China over the next five years. The China business model for us is our highest operating income business as a percentage of sales. Therefore, the more growth we see there, net of some investments we have to make to scale up, the profitability in that business is set to continue to grow.

Okay. Shifting gears a bit, Mike, I think you talked about Tommy Hilfiger operating margin being up 75 basis points for the year, while Calvin down 30 to 40. Can you talk about what’s pushing Tommy’s margins higher for the year? And then I think it’s mostly investments that are bringing Calvin down, but can you just give us a little bit more detail on those two line items?

Yes, look, I think it’s two-fold. One is the revenue increase on the Tommy side as a driver. The gross margins are clearly the biggest component that we are seeing improvement and expansion in gross margin for both businesses, but Tommy particularly healthy. And as you said, the investments in Calvin Klein for the first three quarters are going to be a little bit of a drag.

Yes, I think, Michael, when we look at the business and where we see opportunities, there is always some sales opportunity. However, we do see in the business models we laid out that the opportunity really lies in gross margin expansion and then leveraging SG&A on top of that. That’s how we are thinking about it, particularly in North America, where I think chasing sales by buying more inventory upfront is inappropriate right now. There is a great opportunity; if we outperform at retail, it will reflect positively on the gross margin line.

Okay. I guess the second topic would be some of the comments on the new Li & Fung deal in the press release. Do you mind just give us a little color on that? What it is, how different it is and what do you see as the benefits for you?

I think Li & Fung has been a great partner for us. Strategically, we’re changing the relationship from a buying commission basis to a strategic partnership, putting the business together. We believe they can bring to us some real value-added services from a speed and efficiency model. I think they are looking at their business models and as it changes. It does a couple of things for us long-term, not in the short-term; long-term it gives us the opportunity to reduce some of our buying commissions as we take more direct control of the business jointly. Secondarily, from a speed point of view, the initiatives and the ability for us to take advantage of speed to market and quicker reaction time from that perspective is all very positive. So, I think that changing relationship will be both beneficial for both companies.

Got it. If I could sneak one more in there, I just wanted to see if there, do you see any other opportunity as you look across your owned businesses today where you're at maybe the crossroads of low profitability on something that you operate today but could potentially be another licensing opportunity for you, as you look through 2017? Thanks.

I think there is still some opportunities, particularly with the women’s business given the size of the G3 partnership. That said, we have no significant announcements or plans at this time.

Good morning everyone, congrats.

Good morning.

Manny, you talked a lot about China. Can you help us size the Tommy Hilfiger and Calvin China businesses right now? In terms of where they are from a sales standpoint and where they are from a profitability standpoint relative to your other international businesses?

Well, I guess look, I don’t want to break it down that much. We provide a lot of breakouts of the businesses and bands, and I don’t want to detail it at a micro-level. I guess to give you a sense of scale, the Calvin business is three times the size of the Tommy business in China. And as we look at those two businesses, we believe we can double the size of both businesses in China over the next five years. The China business model for us is our highest operating income business as a percentage of sales. Therefore, the more growth we see there, net of some investments we have to make to scale up, the profitability in that business is set to continue to grow.

Okay. Shifting gears a bit, Mike, I think you talked about Tommy Hilfiger operating margin being up 75 basis points for the year, while Calvin down 30 to 40. Can you talk about what’s pushing Tommy’s margins higher for the year? And then I think it’s mostly investments that are bringing Calvin down, but can you just give us a little bit more detail on those two line items?

Yes, look, I think it’s two-fold. One is the revenue increase on the Tommy side as a driver. The gross margins are clearly the biggest component that we are seeing improvement and expansion in gross margin for both businesses, but Tommy is particularly healthy. And as you said, the investments in Calvin Klein for the first three quarters are going to be a little bit of a drag.

Yes, I think, Michael, when we look at the business and where we see opportunities, there is always some sales opportunity. However, we do see in the business models we laid out that the opportunity really lies in gross margin expansion and then leveraging SG&A on top of that. That’s how we are thinking about it, particularly in North America, where I think chasing sales by buying more inventory upfront is inappropriate right now. There is a great opportunity; if we outperform at retail, it will reflect positively on the gross margin line.

Okay. I guess the second topic would be some of the comments on the new Li & Fung deal in the press release. Do you mind just give us a little color on that? What it is, how different it is and what do you see as the benefits for you?

I think Li & Fung has been a great partner for us. Strategically, we’re changing the relationship from a buying commission basis to a strategic partnership putting the business together. We believe they can bring to us some real value-added services from a speed, efficiency modal. I think they are looking at their business models and as it changes. This does a couple of things for us long-term, not in the short-term; long-term it gives us the opportunity to reduce some of our buying commissions as we take more direct control of the business jointly. Secondarily, from a speed point of view, the initiatives and the ability for us to take advantage of speed to market and quicker reaction times from that perspective is all very positive. So, I think that changing relationship will be both beneficial for both companies.

Got it. If I could sneak one more in there, I just wanted to see if there, do you see any other opportunity as you look across your owned businesses today where you're at maybe the crossroads of low profitability on something that you operate today that could potentially be another licensing opportunity for you as you look through 2017. Thanks.

I think there is still some opportunities, particularly with the women’s business given the size of the G3 partnership. That said, we have no significant announcements or plans at this time.

Hi good morning everyone and congrats on a really nice quarter. I guess just to go back to David's question on Calvin International. Manny, is it possible to update us just on the current size and maybe profitability of Calvin Klein Europe today and maybe where you think the opportunity is from here?

Yes, I think everybody has got a sense that the Tommy business is a $2 billion business, and I called out that Calvin was about 30% of that, which gives you a pretty good idea of how big the Calvin business is and the opportunity for growth that we see there.

And on the margins relative to Tommy in Europe?

The margins are healthy; they're close to 10% and they're probably 300 to 400 basis points lower than Tommy, given the scale of the business. We would expect them to equate to the Tommy business over time.

Great, thanks. And then just a follow-up, in the U.S. I think you have about 200 to 250 retail stores in North America for both Calvin and Tommy. Has anything you've seen over the past 12 or 18 months led you to think about your store strategy? Just curious if there are certain locations that maybe are no longer hitting your hurdle rates or maybe don't make sense as leases come up over the next year or so?

Sure, look. I guess the nice thing about our retail portfolio, with the exceptions of a few flagship stores, is it's what I would describe as a very liquid portfolio, meaning that renewals come up every two to three years. In the A centers, we have much longer leases, and those you wouldn’t want to get out of. So I guess a couple of things that we are looking at is we've had some real megastores in some key centers that continue to be highly profitable. However, the general square footage and footprint we are opening in general across the globe, not just in North America, is using digital technology, which allows for smaller and more efficient stores. We’re reviewing the footprints; we’re looking at new openings and analyzing leases that come due to determine whether it makes financial sense. Aside from a few flagship stores that are essentially marketing drivers more than business-driven, we don't have a portfolio burden with four wall losses on Calvin and Tommy. Our retail stores and contributions have remained strong; they’ve been challenged given the strength of the dollar and shifts in international tourism, but they're still highly profitable for us. So we constantly monitor our portfolio, maintain flexibility, and it's essential as we look for trends, but I think modeling that business moving forward, I wouldn’t plan for significant growth over the next two years.

Thank you.

Hi, thank you for taking my question. Just curious, with the strength in Europe, I know a lot is being driven by your initiative behind both brands. But I wondered if you could maybe walk us through just the wholesale environment in Europe, particularly in some of the bigger countries that you’re in? Just what you are seeing from a traffic standpoint at those locations and what you see going forward?

I think you know brick and mortar in general is under pressure, but I think one of the benefits that exist in Europe and in Asia even more so is the level of retail square footage per capita is significantly lower, about 50% lower than it is in the United States. So I think some of the challenges with brick and mortar in the United States has to do with there being too many stores. I don’t believe that same issue exists in Europe and Asia to that degree. Therefore, traffic trends are healthier there. The currency situation, particularly in the UK, works in our favor; they benefit significantly from European tourism in both the UK and Asia. I can say from credit card data that shows spending growth, particularly from Chinese tourists, for instance, as they shop in the UK and Europe due to the euro being favorable for them. I can confidently say we are outperforming our peer set; we are gaining market share and square footage growth. Many competitors have stated their European businesses are healthy, but I don’t think many are seeing the same wholesale order book increases that Calvin and Tommy are.

Great, thanks so much. Just want to follow-up on the last point you were talking about. Obviously, consumers are migrating online, and it’s causing a shift in where people buy, but is there some aspect of the channel shift that’s causing overall industry growth rates to slow? In other words, has it changed consumer behavior in some way?

That is a really broad question, and I don’t think it’s fully answered yet. Just trying to understand this, and one thing you’re concerned about as a retail or wholesale entity is there has always been a significant amount of impulse shopping that consumers do in-store and in key zones where they are more inclined to purchase. If traffic is down, I am not sure that the impulse nature of online shopping translates as well as it does in brick-and-mortar stores where we can romance the consumer. So I think that’s a challenge; I think some players do it well, while others do not. It’s as simple as buying bar soap.

Got it. And then if I can ask one more on CapEx, is there a piece of the CapEx number for this year that’s carved out for stores? Is it possible to give us the detail on that?

No, but there is no general change. I’d say that the usual remodeling and rehab, nothing out of the ordinary at all this year.

Well, thank you everyone. Thank you for joining us for the call. We appreciate your support and we will speak to you in May. Take care, bye-bye.