PVH Corp (PVH) — Q2 2017 Earnings Call Transcript

Thank you, Glenn. Good morning, everyone. Thank you for joining us on the call. Joining me on the call is as usual Mike Shaffer, our Chief Financial Officer and Dana Perlman, our Treasurer and Head of Investor Relations. Also, I have two guests that hopefully can answer some specific questions you may have. Daniel Grieder who runs our Tommy Hilfiger business globally as well as oversees all the operations of our European business is here, and Ken Duane, our CEO of PVH Heritage Businesses and our North America wholesale business is also here. So going to the results, I am pleased to report that our strong second quarter performance exceeded our expectations and demonstrated our continued ability to deliver against our strategic and financial plan despite the challenging global macro environment. Tremendous strength continued across all of our businesses with our international businesses demonstrating outsized performance, particularly China, Europe and Japan which are our healthiest markets. Meanwhile, our North America business performed in line with our plan but the US market continues to be highly competitive and promotional. Overall, in the second quarter we grew revenue 7% and our EPS came in at plus 15%. Importantly, in our second quarter results we had a planned $25 million increase in brand marketing investment versus last year related to both Calvin Klein and Tommy Hilfiger, which we believe will continue to drive market share gains and allow us to capitalize on each brand's growth opportunities into the second half of this year and over the next few years. When we look at our performance across channels, we generally saw strength across all channels be it wholesale, retail or our digital channels. We continue to focus on diversifying our distribution through our focused efforts around digital and full-price specialty partners. Digital continues to be by far our fastest growing distribution channel, and we are continuing to invest there both digitally and we also are focusing on initiatives to drive both our owned e-commerce site as well as our third-party partners' businesses. Moving to our brand let me start with Tommy Hilfiger. The brand just continues to experience significant demand and we are seeing broad-based strength across all businesses. I am excited to report that the Tommy Hilfiger brand relevance continues to improve. From Gigi Hadid, as our women's brand ambassador to our newly announced ambassadors, the Chainsmokers who will appear as the global brand ambassadors for all Tommy Hilfiger men's categories beginning in fall 2017. The partnership reflects our strategic commitment to continuing the strong global growth of all of our men's business and attempting to bring newer, younger fans to the brand. We believe that these brand ambassadors will help us drive performance in our global growth categories, with specific emphasis on women's apparel, accessories and men's tailored. Moving to the business, we continue to be extremely pleased with the response from consumers and are benefiting from market share gains in each of our major markets. Overall, revenues for Tommy increased 4% in the quarter and earnings were up over 8% in the quarter. This growth was driven by outstanding performance in our international businesses. International revenues increased 9% fueled by the continued strong performance in Europe and Asia. International retail comp sales increased 6% in the quarter with very strong retail performance in China and Japan. Our Tommy Europe results were outstanding and continued to be a standout for us. All major European markets continue to demonstrate outstanding performance. Based on the strength of our spring-summer season sell-throughs, we also saw healthy gross margin improvement during the quarter. As I mentioned last quarter, our fall 2017 order book finalized at a 10% increase versus the prior year. We are pleased to report that our spring 2018 season is projected to increase over 10% as well. The spring order book results continue to exceed our expectations and we are quite pleased with the broad-based strength across all product divisions and across just about all retail European markets. Tommy Hilfiger Asia led by China continues to perform well as we continue to execute to the strategic priorities we set in place when we fully acquired this business last year. We see significant long-term growth opportunities for the Tommy brand in this critically important market. Additionally, our Japan business continues to see positive momentum and excellent results as the brand repositioning in this market is paying huge dividends for us. Moving to North America. Tommy saw another solid quarter with strong results with our men and women's department store business in a challenging retail environment. We are pleased that our outperformance relative to our competitors continues through the second quarter and into the third. Shifting to North America retail, we saw flat comparable store sales for the quarter in North America as we saw an improvement in traffic trends including stabilization in international tourist traffic during the quarter. Moving to Calvin Klein. Speaking about the brand Calvin Klein continues to capture compelling brand and cultural relevancy through its focus on digital consumer engagement, elevated brand imagery and strong advertising campaigns. From a brand and marketing perspective we announced the launch of our fall 2017 Calvin Klein 205 West 39th Street global advertising campaign and have recently reopened our Madison Avenue flagship store featuring our floor-to-ceiling installation by the world-renowned artist, Sterling Ruby. The reopening marks the arrival of Chief Creative Officer Raf Simons debut of the fall 2017 Calvin Klein 205 West 39th collection in the store. This new collection product is also being delivered to key retail partners in over 30 points of sales around the world. As a reminder, some accounts include Bonnie, Saks, Galeries Lafayette, Dolby Street, Isetan and Lane Profit. Early initial sell-throughs have been positive and we have more results to discuss with you here as we go forward in the future. In the fragrance area we have two new launches. Obsess just recently launched and it leverages archived photos and films of Kate Moss and Mario Sorrenti from the original Obsession campaign which aired over 15 years ago. Additionally, in the fourth quarter we will be launching a new campaign for our Eternity fragrance which will be showcasing new celebrity talent. I am pleased to note that we are starting to see our fragrance business begin to rebound around the world. We are also excited to report that we have two international Calvin Klein flagship stores opening in the third quarter. One in Shanghai and one in Dusseldorf. These stores will be offering a wide assortment of products including jeans, sportswear, underwear, tailored clothing and performance products. As we move further into fall into the holiday season, we will continue to roll out our jeans and underwear marketing initiatives with an enhanced direct-to-consumer focus to drive our business as we enter the all-important holiday selling season. From a business perspective, revenues at Calvin increased 8% in the second quarter reflecting strong global trends with 20% increases coming from our international business. In particular, we continue to see strong top-line growth out of Europe and China with North America performing in line with our plans. International retail comp store sales increased 6% in the quarter. EBIT declined about $10 million for the quarter as a result of a planned $20 million increase in marketing and creative leadership expenses as we've discussed with you in the past. As a reminder, we should be lapping these expenses as we move through the second half of the year, particularly in the fourth quarter. Our international business has been strong, Calvin Klein Europe has outperformed. I could not be more pleased with the direction of the business as results continue to demonstrate outstanding performance both from a top-line and bottom-line perspective. We saw strong sales through wholesale and retail and continue to experience healthy comparable store sales growth on top of multiple years of double-digit comp sales increases. As we discussed on last quarter's call, our fall 2017 order book was finalized at north of 25%. I am pleased to report that the momentum continues with our spring 2018 order book which is projected to be up again over 25%. The strength in the business continues to be seen across all distribution channels from all major markets and across all product categories, jeans, underwear and accessories for both men's and women's. Moving to Asia, Calvin Klein Asia continues to perform well with China outperforming other markets across all product categories. We continue to invest in the business here and see continued momentum in our Calvin Klein jeans business as new and improved products are driving strong sale increases. We've also seen performance from our underwear, performance in accessory business continue to improve across all markets. Overall, that region continues to see strong growth. The one region of underperformance is Korea, which clearly has been pressured by the negative geopolitical news out of North Korea, which has had a negative impact on the overall Korean business. Calvin in North America continues to see healthy growth across our wholesale business in line with our plan despite significant reduced overall department store open-to-buy plan. Our Calvin Klein North America business experienced a 2% negative comp store sales which are in line with our planned and slightly ahead of our first quarter sales performance. Finally, in our Heritage business, we had a strong quarter. Let me remind you that while Heritage's revenue increased 13%, it was principally a result of a planned shift in the timing of shipments from the first quarter to the second quarter, as well as some sales moving from the third quarter into the second quarter compared to last year's sales trends. So for the year we expect flat overall revenues from our Heritage business which is in line with our initial plan. Comparable store sales were up 1% in the Heritage business in the second quarter. EBIT increased significantly in the quarter due to the planned shift in shipments and from general improvements in gross margin experienced both at the retail and wholesale businesses. We feel our Heritage business is very well positioned as we move into the second half of the year. Speaking about the full-year guidance, we've raised the full-year earnings guidance outlook and believe that our brands will continue to drive our second half performance despite the ongoing volatility in the macroeconomic and geopolitical environment. Specifically as a result of the momentum in the business, we continue to make investments in our Calvin Klein and Tommy Hilfiger businesses and we've added $10 million of marketing into the second half of the year relative to the previous guidance to help fuel the opportunities we see ahead of us in these businesses. I'd like to just touch on a little bit on third-quarter trends. Our international business continues to see nice momentum quarter-to-date with Tommy and Calvin international comps running up mid-single digits, with strong performance continuing to be seen out of China, Japan and Europe. The environment in North America continues to be challenging with traffic trends and department store landscape under pressure which we believe will continue throughout 2017. As such, we are planning the North America business prudently based on the landscape. Clearly, it seems to us based on recent earnings reports that a number of our major competitors are experiencing significant sales declines, particularly with North America department stores. Contrary to that trend both Tommy Hilfiger and Calvin Klein are growing with these accounts. As we move into the second half of the year, we will be expanding our square footage and growing our sales with this very important channel of distribution, which we believe will help the momentum of the business into the second half. In our own retail businesses, we are seeing some improvement in sales trends as we headed into late July and into August of 2017. Comps accounted by North America are trending now flattish and Tommy Hilfiger North America is trending positively up mid-single digits quarter-to-date. We feel quite strongly that we are well positioned for the balance of the year and believe that given the underlying brand momentum and the strength we are seeing in our international businesses that we can continue to over-deliver against our financial plans. And with that I'd like to turn it over to Mike Shaffer, who will quantify some of the results.

Thanks Manny. The comments I am about to make are based on non-GAAP results and are reconciled in our press release. Our revenues for the second quarter were up 7% to the prior year and exceeded our guidance. Tommy Hilfiger revenues were ahead of guidance and up 4%. The Tommy Hilfiger revenue increase was driven by strong international performance, including a 6% comp store increase, partially offset by a decrease of approximately $20 million due to the transfer of the North America women's wholesale business to G-III in the fourth quarter of last year. Our Calvin Klein revenues were ahead of guidance and up 8% to the prior year and included the negative impact of deconsolidation of our Mexico business which was worth approximately $15 million. Calvin Klein international revenues increased 20% with strong performance in Europe and China. Heritage revenues for the second quarter were up 13% driven by its shift in the timing of shipments from the first and third quarters to the second quarter. Our non-GAAP earnings per share of $1.69 represents growth of 15% over the prior year and included a planned increase of approximately $25 million of marketing compared to the prior year related to Calvin Klein and Tommy Hilfiger. The $1.69 was $0.06 better than the top end of our previous guidance and the beat was driven by a $0.07 business beat and favorable FX of $0.02. Partially offsetting that was a timing of tax expenses which was unfavorable for $0.03 in the quarter. For the full year, we are currently anticipating that we will be negatively impacted by $0.20 per share due to foreign exchange, an improvement of $0.15 when compared to our previous guidance. For the full year, we are projecting non-GAAP earnings per share to be $7.60 to $7.70 which is 12% to 13% over the prior year which is $0.20 higher than our previous guidance and reflects a $0.15 increase due to favorable FX, and a $0.15 increase due to stronger business, partially offset by an increase in marketing for Tommy and Calvin Klein of approximately $10 million. Overall, we are projecting revenue to grow approximately 6%. 2017 revenues would be negatively impacted by approximately $70 million related to our Mexico deconsolidation and approximately $80 million related to the transfer of the Tommy Hilfiger North America wholesale women's business. 2017 revenues will also be positively impacted by a net amount of approximately $50 million related to the 2017 being a 53-week year, offset in part by the negative impact of the timing of the Chinese New Year. Overall, operating margins are expected to increase approximately 10 to 20 basis points on an as-reported basis and to increase approximately 30 to 40 basis points on a constant currency basis. We project Calvin Klein revenues to grow 8% with operating margins down about 50 to 60 basis points on an as-reported basis and to decrease about 10 to 20 basis points on a constant currency basis. Our Calvin Klein earnings are negatively impacted in 2017 by the continuation of the investments made in the latter part of 2016 related to brand investments in advertising and the creative leadership changes. Tommy Hilfiger revenues are planned to increase 6% with operating margins planned to increase about 90 basis points on an as-reported basis and about 110 basis points on a constant currency basis. Our Heritage business is planned to have relatively flat revenues versus the prior year with operations margins planned to increase about 10 to 20 basis points. Our corporate segment expenses are planned to increase about 15%. This increase reflects low single-digit growth in our overheads as well as startup losses associated with new businesses. Interest expense for the year is planned to be at about $120 million compared to the prior year amount of $115 million. This increase is primarily the result €350 million bonds issued in June 2016. In 2017, we are planning to pay down at least $250 million of our debt and have stock repurchases of about $250 million. Our tax rate for the year is planned at about 17% to 17.5%. Third quarter non-GAAP earnings per share are planned at the $2.88 to $2.92, or 11% to 12% over the prior year and includes $0.06 of estimated negative impact for foreign currency. Revenue in the third quarter is projected to increase 4% and will be negatively impacted by the deconsolidation and transfer of the Tommy Hilfiger North America wholesale women's business. Calvin Klein revenues are planned at 5% increase. Tommy Hilfiger revenues at 8% and Heritage brand revenues projected to decrease 8%. As a reminder, this was due to the timing of shipments, which moved from third quarter to the second quarter. Interest expense is planned to be about $31 million and taxes about 12% in the quarter. And with that, we will open it up for questions.

Great, thanks, good morning. I guess Manny for you I was hoping you could address a little bit more about the improving trends that you've seen in back-to-school. I guess your tone was still fairly cautious on the environment overall in North America. So what are the drivers that have really led to that quarter-to-date improvement in both Calvin and Tommy here in North America?

Good morning, Erinn. We are observing notable positivity in our retail stores, particularly in the Tommy Hilfiger business, which has shifted from flat sales in the second quarter to a mid-single-digit increase. We are seeing an increase in foot traffic, indicating that consumers are engaging more. Additionally, the Calvin brand is showing favorable store trends. Conversations with our department store partners reveal that both Macy's and Kohl's highlighted a strong start to the back-to-school season. Given our performance in that distribution channel, I am feeling more optimistic. However, it's still early, being August 24, and we need to see how things unfold over Labor Day and into September, which is a crucial period. From an inventory perspective and the growth in department store space, particularly at Herald Square with the expansion for both Calvin and Tommy, especially the new Calvin Klein jeans shop which has nearly doubled its space, you can sense the positive momentum in our owned business, despite the challenges presented by the broader environment.

That's helpful. Clearly, you are seeing momentum across the board, including internationally.

I didn't mean to interrupt, but the trends we're observing internationally are continuing. They've been quite impressive throughout the second quarter for both Calvin and Tommy, and there's no indication of a slowdown. Additionally, as I mentioned regarding the order book, we are actually experiencing an acceleration as we prepare for spring.

Got it. So, yes I guess as you sit here now, I mean there is clearly a momentum so if the trends were just to continue whether it's organic or even strengthened from here even you are going to be benefiting from currency now. You've spent a lot of time talking about the reinvestments you've made in the business both in the second quarter you obviously planned more in the third or the back half as well. I guess from here if the business strengthened how do you think about that incremental investment? Do you plan to further invest or would you allow any potential upside to flow through? Just trying to understand how are you thinking about what still need for ongoing …

Sure. I think we will do what we've consistently done in the past and we've done through the first half of the year is as the business continues to outperform, we will continue to invest in the brand but also at the same time we will be looking to raise our financial projections and our goals in balance. We want to continue to fuel the growth particularly as we look out to 2018 and beyond and I think where other people are dealing with this tough environment of pulling back and taking their foot off the gas from a marketing perspective we think this is a time now to have a louder voice, gain a greater share of voice in the market. So I think we'll balance it as we’ve always done with the real goal to drive momentum.

Hi. Good morning. On the Calvin Klein on the 25% order book as you look at it, like what's really happening there? Like it was like by market, is it just taking massive amounts of share in various markets? Can you sort of peel that back a little bit more for us?

I can do a reasonably good job but since Daniel is here I’m going to just ask Daniel to speak about some specificity but don't get too specific Daniel.

There are several issues we are addressing. Firstly, it starts with the product we have redesigned over the past few years. We have made improvements across all divisions, incorporating a lot of consumer insights. The second aspect is the distribution; we have streamlined it and repositioned our brands in department stores. We have gained significant retail space in these stores, and when you combine these factors, we are outperforming our competitors and capturing more market share.

And some of the key markets if you just can touch on them, really seeing big growth.

Yes. I have to say that all the markets are growing even those which we did expect less if you talk about the Russia and even Turkey, even these markets are growing, but I would say the main markets in the growth are Germany, the UK, France, and Holland. And I think again all the markets are strong and not one market is down.

Yes. The only thing I would add is I think if we would have been talking about this business momentum the last couple of years, in Calvin in Europe in particular to a great extent has been driven by apparel but really our underwear business has been off the charts in those markets and that business continues to be very healthy and grow but what's really satisfying to us is we are really seeing the influence of Raf Simons and Pieter Mulier in the jeans business as we are going to spring and the reception in the market. So the growth in jeans is just really started to outstrip the growth in underwear. And I think that is just great for the brand and that opens up broader categories of product and should help us our sportswear business as we move forward as well. Thanks, Bobby.

Good morning, everyone. Thanks for taking my questions. Manny can you talk to just the structural differences right now between the apparel markets in North America and Europe? Just big differences obviously in sale-through, sell-in and margin profile so just can you help us understand how much healthier these markets are for your brands in North America where you are obviously outperforming your peers in North America but it's the growth in Europe that's obviously very impressive.

Sure. Asia is largely an untouched market, with the exception of the Korean market, but overall, it primarily focuses on retail direct-to-consumer. Even when major department stores exist in Asia, they operate mainly on a concession model, making it a retail play within that environment. There's significant growth happening across the board, particularly in China, which has excellent growth potential for the future. When we look at Europe, there are two main differences to note compared to North America. First, the United States is clearly oversaturated at every level. You all know the statistics; on a per capita basis, square footage in the U.S. can be anywhere from 3 to 7 times greater than what we see in Europe, depending on the category. Second, the department store market in Europe is much more fragmented. In the U.S., a few major players dominate the market, whereas Europe offers opportunities for varied strategies with different retailers. From a financial perspective, the key structural difference is that due to consolidation in the U.S., the model is more efficient in terms of expenses. Conversely, the European market presents a higher gross margin with a higher expense structure—about 1,000 basis points higher in gross margin, and similarly, 1,000 basis points higher in expenses. On the other hand, the U.S. market boasts a lower margin but greater efficiency in selling, general, and administrative expenses. Regarding profitability, Europe is slightly more profitable than North America, perhaps by around 100 basis points, which highlights some of these dynamics. I hope this answers your question. There is pressure from the digital channel in both regions, but it's being managed effectively in each. However, the European market remains more fragmented compared to the U.S.

Okay. I have a quick follow-up question. Mike, you've mentioned a substantial amount of cash flow and discussed capital allocation between share buybacks and debt repayment. I'm curious about your perspective on the international licenses that you have not yet brought back in-house. Which ones are you currently focusing on?

We believe the international licenses are currently profitable and present an opportunity for growth. We are actively exploring markets in Asia and Brazil, along with our existing joint ventures, and considering potential investments there as well. We are generating cash and always evaluating these opportunities. As Manny often reminds us, a deal materializes when the timing is right, so it's something we monitor closely with our licensees.

Yes. The only thing I'd add I think we've over the last year I think we've clearly demonstrated an ability to bring those businesses in house and integrate them very profitably. Gets the benefit out of it both from the top line point of view by having greater control and at the same time getting the synergies that come with the acquisitions from an expense point of view?

Hey, guys. Good morning. Thanks for taking my question. Just two items in the model that help us out maybe if I look at the revenue guidance for Tommy Hilfiger and the third quarter looks like it's a pretty big acceleration than I think you are implying a slowdown in the fourth quarter. I know in general or at a high level you got order books in Europe that have accelerated so that I can kind of understand a bit of an acceleration, I don't understand why would slow I guess in the fourth quarter especially with the extra week? And then I think we see the opposite for Calvin Klein where you guided accelerated a little bit in the third quarter and slow in the fourth quarter. Anything you could help us just understand directionally what's going on there?

So, look I'll give you a couple of facts. We have one, on the Calvin Klein side of the business, the Mexico deconsolidation lapsed itself predominantly for most of the fourth quarter so we are not up against as we were in the first, second, third. The 53rd week is definitely an add-on so that's a good guide for us. And that's partially offset by the trends in the currency last year, the strongest quarter for the US dollar, or to say definitely the weakest quarter for the euro and our other currencies was the fourth quarter. So that's a benefit for us on a reported basis. And lastly for Tommy in the fourth quarter we did experience some sell-off as we handed the business to G-III on the women's side. So we actually are up against some of the sell-off.

Yes, we sold the remaining product we had, but those sales were not particularly profitable. Overall, I believe the fourth quarter has the potential for increased sales opportunities as we move closer to it.

That clarification is very helpful. I’d like to rephrase Erinn's question. If we examine the SG&A from last year, it seems you started to make significant investments, making comparisons easier. Is there a timeframe when we might begin to see some SG&A leverage? We're consistently discussing strong top-line figures, and international order books are stable. This gives us confidence in that outlook. Could you please help us understand when we might expect to see SG&A leverage in the business?

I think we are starting to see progress in the fourth quarter and moving into 2018. We've discussed our acquisition in China, which involved significant investments in infrastructure, personnel, and auditing. While our revenues continue to grow, particularly in Asia with the Calvin business, we are not experiencing the same level of profitability flow-through as we have in the past. This is due to the sizable investment in infrastructure we needed to make following the acquisition. We expect that to improve starting in the fourth quarter of this year as we capitalize on the sales growth we are experiencing throughout the year, which will help with leveraging our SG&A costs. The only area where we won't achieve leverage is marketing, as we are dedicated to consistently spending a portion of our sales on marketing investments. We believe this is beneficial and want to maintain our momentum. Additionally, I want to be candid in saying that if we do face challenges, we know how to manage expenses effectively, but this environment does not reflect those challenges.

And if you add that up I guess just a final if you add all that up, that offset a pretty meaningful mix shift of the 1,000 basis points higher SG&A international. You’ve got enough there that rolls offset the natural mix shift in your business on the SG&A line.

Michael you are a smart guy. That's why you get paid for. You run the numbers, you figure out how it goes that way. We are reporting.

Thank you for taking my question. With regards to CK International and the momentum there. If you had to highlight one or two areas that might need more work what would that be? And how meaningful would it be to contributing to this existing business momentum?

I believe the largest opportunity in Europe that we're not fully leveraging is in men’s and women’s sportswear. This includes tailored clothing, and our footwear business is just beginning to develop. The accessory business is doing well but remains relatively small. When we made the acquisition, we aimed for the Calvin Klein Europe business to reach $1 billion, and there's no reason over time that it shouldn't grow to match the Tommy business, which is around $2 billion. We are discussing all reported sales. These opportunities, particularly in women's business, will involve some investment, but we do not anticipate any decline in the overall operating margins of that sector. We will continue to invest in infrastructure to capitalize on this growth. Moreover, we are enhancing our digital capabilities and supply chain across the board, not just for Calvin. We need to implement various strategies as competition intensifies, and we believe these efforts will positively impact our gross margin.

That's helpful, thank you. In the shorter term I just wondered if you could make any comment about impact to gross margins when it comes to holiday and what are you anticipating from the environment with regards to promotions?

Erinn, it's going to be promotional, and it's always promotional. I don't believe it will be worse than last year; in some respects, it should be better. Our inventory is in good shape, particularly our own inventory. If you look at our balance sheet, we are up about 6%, while our sales guidance for the third quarter is 4%. We believe we've made smart decisions regarding our additional inventory position to capture upcoming opportunities. Relatively speaking, especially in North America, we are planning for continued promotions and the need to be competitive in that market. However, I expect to see ongoing improvements in gross margins due to our initiatives and the momentum of the brands.

Yes. I was wondering if you could talk a little bit about the marketing strategy going forward for Calvin and for Tommy. And also wondering more detail how Raf Simons success on the collection side is being filtered through the rest of the collection?

I will discuss Calvin first, and then I'll hand it over to Daniel to talk about Tommy, as it’s important to hear from those leading the business. Regarding Calvin, it's clear that Raf Simons has made a significant impact on the brand, evident from the media coverage and the excitement surrounding it. His first collection is currently being delivered, and early reactions at the point of sale have been positive. The displays you will see, especially in stores like Bonnie and Saks, are expected to enhance our business in the second half of the year. The positive influence is just starting to be felt, and the excitement is growing across the retail community with our partners and department store accounts. However, we will have to monitor how well this enthusiasm translates directly to consumers. We are anticipating our next show in early September, which will be Raf's second collection, and based on last year's response, we are very optimistic about the outcomes. We expect a significant positive impact from this. Now, I’ll pass it over to Daniel to discuss some initiatives at Tommy.

Thank you. So we continue in what we have started already last year, this great momentum in Tommy now together with Gigi Hadid Manny mentioned already as our ambassador that has materialized significantly into our business. What we also mentioned, Manny before is the next part so that we are going to continue with GT on the women's wear part but we also integrate now the Chainsmokers in a similar way as we've done with GT for the next season. And for next year there is more in the pipeline that we have not talked about. So in the combination of this Tommy now and with all our ambassadors we have in place we continue with our strategy that has really boosted the brand over the past 24 months in an incredible way and this is our vision to continue also going forward.

Good morning, everyone. Congratulations on the quarter. I would like to revisit Michael's question regarding Calvin. I assume there is some conservatism in your plan. The guidance for Q3 indicates a constant currency growth of about 4%, compared to the 8% achieved in Q2. Can you clarify where the slowdown might come from? Is it related to North America or the timing of shipments from overseas? I would like to understand the dynamics better.

We've mentioned that some retailers are moving their planned third-quarter shipments into the second quarter, so this is primarily a timing issue. As we've noticed improvements and accelerations in North America, particularly with business growth, the planned figures for the fourth quarter appear significantly increased. The challenge is predicting when any deceleration might occur, whether in late October or early November. It's essential to consider both quarters together. Based on Mike's comments, the implied growth rate suggests a double-digit increase. While I don't want to get too detailed regarding the fourth quarter, there is clearly no sign of deceleration. However, there are always month-to-month and quarter-to-quarter movements to consider. There is nothing at the Calvin Klein brand level to indicate any deceleration.

Hi, thank you for taking my question. I was wondering can you talk about how your online-only pure play partners manage inventory and how that compares to how your department store partners manage inventory. Is there any real difference between the two channels?

Okay. A couple of things. I think our traditional department store customers are very knowledgeable. They understand how to operate their businesses and have been doing it successfully for years. Their methods, especially regarding selling core fashion and apparel products, are significantly more advanced than those of our online competitors. When you consider the online players, they primarily function as tech companies. They excel at selling core products effectively and continue to do so across seasons. We are collaborating with several of these companies to enhance their analytics because selling clothing, particularly fashion items, is quite different from selling household products. You can't simply carry an item over from one season to the next; for instance, what's popular in the fall, like turtlenecks, won't be in demand come spring. This difference in dynamics represents a steep learning curve for the tech players. In addition, the profitability we observe from both sales channels is comparable, and we are indifferent as to where the sales occur, but I hope I addressed some of your questions. We haven't encountered additional pressure from department stores or tech companies regarding inventory levels or specific strategies. We are quite skilled at operating core replenishment businesses, which involves managing inventory effectively when sales are strong. We can strategically position inventory to maintain momentum, particularly when some of our partners may not have adequately stocked up. We are supporting them by filling in gaps in lower-risk categories like basic underwear, dress shirts, and core replenishment sportswear to keep driving that sector forward. I hope this adds clarity to your inquiry. Operator, we are going to take one more question before we close so we can all get back to business.

Hey, guys, thanks for squeezing me in and I'll add my congrats. Manny, if I could just follow up on the digital business. Right, I mean you guys are clearly taking share in North America within the existing wholesale, but we know there are secular long-term challenges to that overall business. So as you think about evolving your own digital or partnering with these online pure plays, maybe just speak to us, again, a little book in the strategically as you think about price transparency, product segmentation, where both Calvin and Tommy stand and what needs to take place?

We continue to operate as a multi-channel player with our own retail stores and an online direct-to-consumer business. Our primary distribution channel is our department store accounts and their online presence. We also have a developing relationship with several online-only retailers, including Amazon in North America. Our focus is on generating demand and desire for our products across all these different channels. Managing the complexities that arise with each distribution method is part of our responsibilities. There isn't a one-size-fits-all strategy; we have exclusivity with some brands while others are positioned to be available across all channels due to their strength and demand. However, being non-exclusive also places a significant responsibility on us to drive sales and manage risks, especially in terms of ensuring our partners achieve a satisfactory gross margin. Each brand has its own strategy, and distribution is not consistent across different geographic markets. That covers what I wanted to discuss on this topic. Okay. With that I'd like to thank everyone. I hope everyone enjoys the balance of their summer over the next couple of weeks. And we look forward to speaking to you in November with our beginning of holiday results. Have a great day and enjoy the rest of the summer. Thank you.