PVH Corp (PVH) — Q4 2017 Earnings Call Transcript

Thank you, Ashley. Good morning, everyone and thank you for joining us on the call. Joining me on the call is Mike Shaffer, our Chief Financial Officer, Dana Perlman, our Treasurer and Head of Investor Relations and Strategy, and Ken Duane, CEO of our PVH Heritage businesses. Overall our fourth quarter and annual 2017 performance exceeded our expectations and demonstrated our ability to overdeliver against our strategic and financial plan. We grew 2017 non-GAAP EPS above our long-term targets and grew at 17% even with the additional marketing investments we made during the year. Overall, we grew fourth quarter and full year revenues 19% and 9% respectively. Throughout the year, our performance was driven by the momentum across our Tommy Hilfiger and Calvin Klein businesses, with our heritage businesses achieving their financial plan. In particular, our international businesses continue to be the highlight of our performance. Europe, China, and Japan continue to be our healthiest market and today our international businesses represent over 50% of our revenues and over 60% of our EBIT. Throughout 2017, despite the bankruptcies and store closures in the North American market, we saw a relatively strong performance in our wholesale businesses as we executed well and gained market share. We also experienced an improving trend in our retail business in the second half of the year as international traffic stabilized and domestic consumers shopped. Broad-based strength was seen across all distribution channels, wholesale, retail, and online. Digital continues to be our fastest growing channel; we saw outsized growth across our owned and operated and third-party digital e-commerce businesses with revenues up over 20% for 2017. Our diversification of revenue and earnings streams will be further highlighted in 2018 as our international mix grows and we expand across all channels of distribution. Now moving to our brands, let me begin with Tommy Hilfiger. Speaking about the brand, the Hilfiger brand health and relevancy only further strengthened in 2017. The brand continues to experience significant demand especially from new and younger consumers with both brand awareness and interest to purchase up on a year-over-year basis. Additionally, we are seeing broad-based strength across all businesses and I'm very pleased with the strong growth in our women's business in particular. Consumer engagement continues to be a critical part of our strategy this year. Our recent Tommy Now spring 2018 show in Milan continued to highlight the incredible consumer engagement and excitement around the brand. We have seen double-digit increases across all key metrics from engagements to earned engagements and most importantly we have seen e-commerce traffic and sales increase. In 2017, we leveraged our brand ambassador and key influences from Gigi Hadid as our women's brand ambassador to The Chainsmokers, our ambassadors for all of the Tommy Hilfiger men's category. And Shawn Yue as our local ambassador for Greater China. We believe that investing in the Tommy Hilfiger brand via these brand ambassadors has and will continue to drive performance in our global growth category. For spring 2018, we announced two new exciting partnerships. First, Tommy announced a multi-year strategic partnership with four-time Formula 1 world champions Mercedes AMG Petronas motorsport. Starting with the 2018 season, Tommy Hilfiger will be the official apparel sponsor of the Mercedes AMG Petronas motorsport, building on the sports sponsorship heritage that Tommy has embraced since the founding of its brand. Second, we announced our newest brand ambassador, Formula 1 world champion Lewis Hamilton. Lewis will represent the world of Tommy Hilfiger men's. These partnerships underscore Tommy Hilfiger's vision to continuously elevate and expand the brand in key markets and further drive the global growth of its men's business, bringing the next generation of fans to the brand. From a business perspective, driven by these initiatives, Tommy increased sales 22% in the quarter and 11% for the year, with earnings up close to 50% for the fourth quarter and 28% for the year. A truly outstanding performance. We continue to be extremely pleased with the response from consumers and are benefiting from market share gains in all regional markets. Our international revenues increased 37% in the fourth quarter and 19% for the year. Retail comp stores were up 6% for the fourth quarter and 8% for the year. Our Tommy Europe outperformance continues as we saw incredibly strong business across all markets with strong sell-through at retail with lower year-over-year promotion. As I previously mentioned, our Spring/Summer 2018 order book is up over 10%. We are now providing our full 2018 order book outlook and I'm quite happy to report that fall orders are again running up over 10%. We continue to be impressed by the continued strength of the brand and the reception from customers across all of our product divisions and across all of our markets. Moving to Tommy Asia, the performance continues to be very strong there as we continue to build upon the continued momentum in China benefiting from the integration and investment in the Tommy Hilfiger China business. Additionally, our Tommy Hilfiger Japan business had a terrific end to the year. That business has found solid footing and we have demonstrated our ability to successfully elevate the brand position in the highly competitive Japanese market, and we see future growth for the brand as we move forward. Moving to North America, I'm pleased to say that we feel strongly we have seen a clearance action point in this business. We started to see a turn in our retail business in the beginning of the summer and the momentum has accelerated in this business as we move through the second half. For the fourth quarter, we saw our business up 5% in revenues with an outstanding 10% comp in our retail business for the quarter along with solid gross margin improvement. Importantly, we not only saw an improvement in our retail business but also saw continued strength at wholesale. Our Macy's business in particular has been outstanding with strong sell-throughs at higher overall margins. Moving to Calvin Klein, creatively the Calvin Klein brand had a tremendous year. We believe the one singular brand vision articulated by the design team can be felt throughout the product category from the runway in our 205 campaigns down to our jeans and underwear marketing and product. In particular, over the last few months, the momentum around the CK brand has intensified with its cultural relevancy resonating and consumer interest in conversion to purchase seeing nice improvements. We believe we continue to reach a new consumer and we are expanding our distribution reach across all channels, from premium luxury doors to new specialty retail accounts. Our family by Calvins marketing campaign continues to perform very well for us across the globe. I'm happy that I can finally talk about the Kardashian and Jenner sisters as well as the entire brand family from Solange, and A$AP Rocky, to the Gerber siblings, Millie Bobby Brown, and Paris Jackson, all of which are driving engagement with the brand. The impressions and engagements we have seen as we rolled out this campaign have been amazing. We are seeing strong engagement and most importantly strong spring selling as we move into the first quarter. Specifically, we believe these marketing initiatives underline our commitment to our consumer-centric approach and engaging the consumer to live the Calvin Klein brand. While we discussed our Calvin Klein Amazon fashion partnership for the holiday retail season last quarter, I'm pleased to report that it really helped to drive awareness to all our channels of distribution and continues to show that Calvin Klein is thinking first about the consumer and is thinking digital first as well. From a product perspective, 2017 also delivered strong performance across all major product categories with an incredible improvement in selling, of course, our jeans and accessory business around the world. We feel really good about the direction of the brand from a creative and fashion relevancy perspective, but most importantly about the traction we are getting in our core existing categories as well as our newer, faster growing businesses in Europe and Asia. From a business perspective, revenues increased 23% for the fourth quarter and 10% for all of 2017 reflecting strong global trends. With a 30% increase coming from our international business in the fourth quarter and revenues up over 20% in 2017. As we discussed previously and planned for the fourth quarter was the first quarter we lapped our investments from 2016 and we saw a 5% increase in overall earnings despite the planned $15 million increase in brand marketing investments. We continue to see strong top-line growth out of Europe and China with North America experiencing improved sales trends across all channels. North America and international retail comp sales both decreased 4% in the quarter. From an international perspective, our Calvin Klein Europe business continues to deliver terrific results with market share gains across the region and strong sell-throughs across all channels. As we previously mentioned, the Calvin Klein spring 2018 order book is up over 25% and based on the strong selling we experienced during fall 2017 and spring today our fall 2018 order book is projected to be up again over 25%. We are quite pleased with the broad-based strength across the business with Calvin Klein jeans showing tremendous strength and outsized growth above our average order book growth. The elevated jeans product we have been focused on in rolling out has paid huge dividends for us. In Asia, Calvin Klein continues to perform well with improving trends across the region. China, which represents over half the business, continues to outperform other markets across all product categories. During the quarter and throughout the year, we are pleased to report that we have continued to see strong performance and momentum across our Greater China business and Southeast Asia. Calvin Klein North America saw an acceleration of growth across all channels of business in the fourth quarter. Importantly, we saw tremendous growth in our digital businesses, in part driven by our Calvin Klein Amazon initiative, and our Calvin Klein North America retail business saw an improvement in comp store trends versus the first nine months of the year with comps up 4% for the fourth quarter. Finally, in our heritage business, revenues for the quarter and the year were flat in line with our plans and earnings were up 2% over the prior year. Retail comps were up 1% in the fourth quarter and 2% for the year. Given the challenging overall North American dynamics, we are quite pleased with the financial performance of our heritage businesses. Looking out to 2018, overall, I believe our 2017 performance demonstrates our strong execution and our continued commitment to execute against our strategic priorities. In 2017, we purposely invested in the areas most impacted by the changing dynamics in the industry, the growing prominence of digital, the importance of having a nimble and responsive supply chain, and our ever-present commitment to driving consumer engagement. In 2018, we continue to build upon the investments made in 2017 around talent, our global operating platforms and systems, our consumer experience, and most importantly, our brand. From a regional perspective, business perspective in North America in the first quarter the environment continues to improve. Despite door closures and the recently announced Bon-Ton bankruptcy, our North American stores continue to see improving traffic trends with comps up mid-single digits for Calvin Klein and high single-digits in the Tommy Hilfiger business. Our heritage business is also seeing low single-digit comp store increases. Our international business continues to see great momentum to date with Tommy Hilfiger international business up mid-single digits and Calvin Klein international comps running up high-single digits. Asia is also benefiting from a strong Chinese New Year selling season. We believe that the incredible brand power behind Calvin Klein and Tommy Hilfiger positions us well in the marketplace against our competition and will drive continued momentum with earnings growth projected this year of between 13% and 15%. This earnings growth outlook reflects the macroeconomic and geopolitical volatility around the world and the uncertain global retail landscape. Given that backdrop, we are conservatively planning for the second half of 2018. If this global landscape continues to stabilize and our business trends continue at this current level, we are in an excellent position to outperform our 2018 financial guidance. And with that, I'm going to turn it over to Mike to quantify the fourth quarter and full year results.

Thanks, Manny. The comments I'm about to make are based on non-GAAP results and are reconciled in our press release. I'm going to briefly touch on 2017 and then move on to 2018. Overall, our fourth quarter benefited from the 53rd week in 2017. Comparable store sales percentages that I mentioned exclude the extra week of sales. Our reported revenues for the fourth quarter were up 19%, which exceeded our guidance and was inclusive of the 6% benefit from foreign exchange. Tommy Hilfiger revenues were very strong, up 22% inclusive of the 7% benefit from foreign exchange. The Tommy Hilfiger revenue increase was driven by exceptional international performance of 37% inclusive of a 13% benefit from foreign exchange. Outstanding performance in all geographies and channels drove the increase. Our Tommy Hilfiger international revenues included a comp store sales increase of 6%. Tommy Hilfiger North American revenues were up 5% inclusive of a 1% benefit from foreign exchange. North America was driven by strength in retail with 10% comps offset in part by a planned decline in off-price sales. Our Calvin Klein revenues were up 23% inclusive of a 5% benefit from foreign exchange in the fourth quarter. Calvin Klein international revenues were very strong increasing 33% inclusive of the 10% foreign exchange benefit driven by outstanding performance in Europe and Asia. Our international comp store sales were up 4%. Calvin Klein North America revenues increased 13%, strong wholesale performance across all categories and retail comps of 4% drove the increase. Our Heritage revenues were flat to the prior year with our retail business running comp store sales up 1%. Our non-GAAP earnings per share of $1.58 was $0.28 higher than the previous year and $0.14 better than the top-end of our previous guidance. The EPS beat versus the prior year – versus the previous guidance was driven by strong business for approximately $0.10, favorable foreign exchange of $0.02 and favorable taxes net of interest were approximately $0.02. We ended the full year 2017 with record revenue of $8.9 billion an increase of 9% over the prior year inclusive of a 2% benefit from foreign exchange, and non-GAAP earnings per share was $7.94 which was 17% higher than the prior year. Moving on to 2018. For the full year 2018, we are projecting non-GAAP earnings per share to be $9 to $9.10, 13% to 15% growth over the prior year. Included in our earnings per share is the positive impact of foreign currency translation of $0.35. Overall, we are projecting revenues to grow by about 7% including the positive impact of 3% related to foreign currency. Overall operating margins are expected to increase approximately 20 basis points for the Company. Tommy Hilfiger revenues are planned to increase 8% inclusive of a positive impact to 4% related to foreign currency. Tommy Hilfiger operating margins are planned to increase by about 50 basis points. We project Calvin Klein revenues to grow 9% inclusive of the 2% related to foreign currency. We are planning Calvin Klein operating margins to be down 20 basis points due to our highest operating margin business, the licensing business will be down as a result of the impact of the Bon-Ton bankruptcy. In spite of the headwinds created by the Bon-Ton bankruptcy, we are still planning Calvin Klein earnings growth to be in the high-single digits. Our Heritage business is planned to have relatively flat revenues and flat operating margins and is also negatively impacted by the effects of the Bon-Ton bankruptcy. Interest expense for the year is planned to be about $120 million compared to the prior year amount of $122 million. This decrease is primarily the result of the lower interest on EUR 600 million bonds that were issued in December of 2017, partially offset by higher interest rates in some of our variable debt. In 2018, we are planning to pay down at least $250 million of our debt. Stock repurchases in 2018 are planned to be between $200 million and $215 million. Our tax rate for the year is estimated at 14.5% to 15.5%. As IRS regulations are expected to be issued later in 2018, related to the recent tax reform act, current estimates could be subject to change if the regulations differ from our current interpretation. Capital expenditures for the year are planned at $450 million and reflect the $50 million shift from 2017 into 2018. First quarter non-GAAP earnings per share is planned at $2.20 and $2.25 and includes approximately $0.20 of estimated positive impact from foreign currency translation. Revenue in the first quarter is projected to increase 15% including a positive impact of 6% from foreign exchange. Tommy Hilfiger revenues are planned at a 19% increase including 9% related to foreign exchange. Calvin Klein revenue is planned to increase 17% including the positive impact of 5% related to foreign currency. Heritage brands are projected to increase 2%. Interest expense is projected to be $29 million for the first quarter and taxes to be about 16% to 17% in the first quarter. And with that operator, we'll open it up for questions.

Manny, I was surprised Mike didn't correct it, but it's A$AP Rocky.

You said A$SP Rocky, but that's – we're going to give you a pass on that one.

But speaking of that, when you look at the marketing initiative underway at both of your big brands now, the Tommy brand and now the Calvin business, where do you think we are in terms of like the dollar expenditure or the rate? Do you think that you know – are you at a good level in dollars or rate? Can you just talk us through like how you think about the business investments that are going on around your two big brands there?

Okay Bob. I guess as I would say as a percentage of sales, I think we're at an appropriate level today to continue to drive the business and to drive the growth going forward. We've taken advantage over the last couple of years. Our outperformance to do what I think is interesting brand-moving initiatives, and to really build upon that, so I guess I would say as I think we're more than covered from a marketing point as we go forward. As we hopefully continue to outperform our financial results, I think we might – we would like to take some of that incremental profitability and put it back into the brand and event or initiatives that really I think could – are game changers like the Kardashians, like some of the things that we've done with Amazon and I think it's really trying to connect with that younger consumer, that next generation that's coming into both brands, you know making those emotional connections with them. So, we are clearly at a very strong level today from really where we were three years ago and we'll look to continue to do it opportunistically as we go forward.

Okay. And I guess just my second question is on, whether it's in the North America market in the first quarter, you know or even throughout Europe, is the weather impacting your business at all? Do you think it's hindering it, or can you just maybe address that a little bit for us please?

Well, I would say in the first quarter here in North America, our business trends are very strong. We're living through a bunch of snowstorms that clearly didn't help business and trends and it doesn't seem like we can get out of this, especially in the Northeast and Middle America and Midwest. We can't seem to get out of this dreary winter weather and move to spring early. So, we're really not seeing our business trends in North America. So, I'm very happy with our trends, but from what I hear from other people, it is having an impact. In Europe, it's just very cold, it's very dreary, and it is having some negative impact on traffic and conversion at those stores. So, we are so clear with goods, we are very well setup for spring. We are ready to really rock and roll for spring and I think just working our way through that, we get some normal weather. I think business will really pop again in Europe.

Great. Thanks very much Manny. Good Luck.

Thank you.

Great. Thanks, good morning and really nice end to the year. I guess just expounding on Bob's questions on North America in Q1, broadly you do sound pleased with the environment. Could you talk a little bit more just about how you feel about the inventory in the channel, the promotional environment and then if you think about the summer and fall business, how are retailers effectively positioning the forward business there?

Okay. So, I think inventories have really come out of January in a very strong position, not just in our businesses, which you know given the sales trends we were chasing product constantly through the fourth quarter. But I think, you know when I walked the stores, I was in Macy's, I was in a number of retailers, I just see a very clean inventory position. I don't see the aggressive clearance sales that we saw this time last year. So, I think it's really benefiting in North America. Everyone's profitability as we move forward, and I think as – if I think the top-line will be falling, but I really think most retailers are going to be benefiting on a gross margin basis as we move forward to the spring summer.

Okay. And then maybe just talk a little bit more about the denim category you referenced some positive traction there. I believe you are launching Calvin's denim globally. Can you just talk about how you are expecting that launch to kind of unfold as we get throughout the back half of the year and how big is denim overall both for Calvin and Tommy, and just any other context for that category which seems to be picking up?

We are pleased with the trends we are seeing globally in both Calvin and Tommy within the denim segment. It feels like there is a resurgence of 1990s fashion influencing the brands. Particularly for Tommy, the logo-driven merchandise continues to drive strong T-shirt sales. The denim segment and even our performance lines are benefiting from this market trend for both brands. We feel confident moving forward. We are gearing up to launch new products this fall, which is primarily an internal initiative. Over the past few years, we have been refining our denim offerings in North America and Europe, and the two teams collaborated closely. We have now centralized our denim operations in Europe. The fall collection previewed to our retail partners reflects this new approach, creating a more cohesive global brand presentation, and we expect to see enhanced product quality, especially in North America, as we enter the fall season. Retail feedback has been overwhelmingly positive. From a consumer standpoint, we believe our diverse fit options will be presented more clearly than before. We've made necessary adjustments for more explicit messaging regarding our fits, which aligns with consumer expectations for the Calvin brand. This will be complemented by ongoing marketing efforts, including our partnership with the Kardashian-Jenner family throughout the fall and into 2018. This combination of great products and impactful marketing has boosted our confidence in this business line. We are observing significant growth in our order forecasts across Europe and Asia, and we've seen a remarkable improvement in retail sell-through in the entire jeans category over the last four months. We are in a strong position to take advantage of these developments.

Thank you.

Hey guys, good morning. Let me add my congrats on a great quarter.

Thank you, Mike.

Let me just pick on the guidance for a second. I want to think about after the first quarter, Manny you did mention that the momentum today could drive upside through the year based on what you see into the business today, but certainly understandable with the bankruptcy in the channel last month, why you'd want to be conservative. You know the implied revenue momentum slows down a lot in the back half. But you have things like pretty strong order books in Europe, 8-2, you've got great trends in the first quarter that's even with weather in both continents. Can you just talk about where you have confidence that we don't have any kind of macro shocks? Where do you see the most opportunities in the global model to deliver outside the back half of things continuing today's pace?

So, I'd say the biggest opportunity right now, I guess is – I think there's two big opportunities for us, it's North America particularly in all retail businesses which really seem to have momentum right now, and I think it's being driven by a couple of things. I think there's a strong consumer sentiment. There is a general sense that the consumer environment is fairly strong and some positive momentum around that consumer as we move forward, coupled with foreign currencies moving – you know where the dollar has weakened somewhat from where it was a year ago. We're seeing more and more international tourist traffic throughout the United States and for our two big brands, Calvin and Tommy that really plays very strongly. So, we've seen a real uplift in North America on international traffic that usually drives a higher consumer spend on average at higher average unit retails given the global brand perception – position of both brands elevated throughout Europe and Asia compared to North America. The value equation is that great. The other area where I think against our guidance, we clearly should really outperform as Europe. The order books are really running ahead of our guidance. We've been surprised by that, I think as we look – as we get through the first quarter and start to get even more visibility, we'll start to adjust the second half sales. But given the kind of growth that we've already been able to come out with and just our past practices of trying to be conservative in the guidance and moving it along with the trends and not wanting to disappoint, I think we have a real opportunity to outperform those two sales plans in particular, and that would clearly drive profitability in the second half of the year.

Can I just ask a follow-up? I think you've given us enough breadcrumbs on how you think 2018 plays. Maybe we could talk a little bit about non-core opportunities like licenses and M&A. I guess does U.S. tax reform change your ability to access cash to make some strategic moves? Do you see any licenses that make sense to bring into the business based on opportunities in front of you this year and then thoughts on the third big brand? Obviously, your playbook is working through more than one brand at this point. How actively are you looking at new ideas and if so, where are some of the more interesting areas that you might hunt?

Sure, I think – let me take that in pieces. One is, I think the tax changes really don't impact our ability or access to cash in order to make investments, you know just demonstrated by the last year, we've made a number of license buybacks, we've made a number of investments, it's not slowing us down at all. Thankfully, we are not capital constrained and our capital – our capital allocation and our capital structure is just dramatically improved over the last two years. That gives us a lot of access to cash at these levels which I think are relatively attractive interest rates. So, we're not constrained at all from growth from cash and capital. We'll continue to look at license buybacks. I think the most interesting opportunities continue to be international with both Asia, particularly Greater China and the effort of Tommy Hilfiger brand, Hong Kong, Macau, Central Southeast Asia market which is with a license partner today, that's an area that we look to aggressively move in. Brazil is another area that we think is on the uptick. I think that's probably a little further out, but that's an area where we also like to take back the Tommy Hilfiger license over time and grow that business as aggressively as we have. We feel that that geographic region over the next 12 to 18 months is going to start to see some significant improvement against where they've been. So, we are looking at that opportunistically as well. And there are some product categories, opportunities. They are not large, but there are opportunities that we're looking at as well. As far as the third brand, it's clearly an area that we're spending time on. We're trying to be aggressive and at the same time prudent. We are looking at different opportunities. I think we're not going to go very far field from where we've been, so I don't think the market has to worry about going all the way to – skewing one way or another into categories that we don't have expertise in. So, I think we are looking, we are impressive and we would hope that some opportunity would come across that makes sense.

Thanks a lot guys and congrats again.

Thanks.

Congrats on a nice quarter, guys.

Thanks.

So, larger picture, Manny, do you see anything structurally constraining your ability to reach the 12% multi-year margin target? And just as we think across the brand portfolio, where do you see the most opportunity or low-hanging fruit remaining from here?

I don’t see it as a problem over time; in the next three years, we can reach that 12% operating margin. Our financial projections may not reflect that, but structurally there’s nothing stopping us. The biggest issue we’ve had to deal with has been currencies in the past. If currencies like the euro were closer to $1.30 to $1.35, we would have already achieved 12%. The transactional hit we've taken has really pressured our profitability, as seen in 2015 and 2016. We're starting to recover from that, and we expect improvements in 2018 and 2019. If currencies stabilize, there’s significant opportunity. The largest opportunity from a product, brand, or regional perspective continues to be Calvin Klein in Europe. Currently, Calvin Klein is about 40% to 45% the size of the Tommy Hilfiger business, which we use as a benchmark since Tommy Hilfiger has led the market share in Europe. We believe Calvin can achieve a similar size in Europe, effectively doubling in size over the next five years. This remains our biggest opportunity. Additionally, both Calvin and Tommy have tremendous growth potential in Asia, driven by opportunities in China and our position in the Greater China market. Given our development in these two areas, along with our operating platforms in Europe and Asia, we are well-positioned to capitalize on these growth opportunities as we move forward, just as we have over the past three years.

Great. And then just a follow-up question. So, the 20% growth in digital to me was a clear call-out. I guess what's your sales penetration of digital today? Do you think this kind of growth is sustainable and what's the best way to think about your digital margins versus your seller margin today and the best way to think about it going forward?

Our current digital penetration in retail sales is approximately 10%, given that many of our transactions occur through wholesale channels with pure play and retail department store customers. We aim to increase this to 20% over the next five years. The profitability in this channel is comparable to our other channels, with the wholesale business being quite profitable. While our direct-to-consumer e-commerce business is currently less profitable than our other distribution channels, we believe that profitability will improve as we scale. We expect to achieve a double-digit operating margin in this area, aiming for a 10% to 12% range on our direct-to-consumer e-commerce platform, similar to our retail model. These targets feel attainable as we advance the business.

It's great color. Best of luck.

Thanks.

Hi, good morning. Thanks for taking my question. Manny, I was wondering if you remind us with your Amazon business. Do you have a percentage or a general percentage of mix of what is pure fashion versus more replenishment? And I'm just asking because I wonder how this mix might change over the upcoming year? And any insights on how people are buying fashion versus more of the core product?

At this stage, considering our product mix and the fact that core items sell significantly better than fashion at this stage of their development, I estimate we're seeing between 70% and 80% core replenishment. Core products are the basics. While I believe this mix will evolve over time, the current situation is uncertain and varies depending on perspective. Presently, the transition seems slow as consumers become more comfortable with purchasing fashion online, especially with how well both Amazon and several dedicated fashion retailers showcase their products. Our business strategies, particularly our algorithms, are largely focused on replenishment to keep consumers satisfied in essential core categories. Amazon, specifically, still needs to enhance its fashion segment, which isn't currently at the right level of maturity. There's clear potential for growth, but they lack the necessary metrics and product presentations at this moment to truly capitalize on it.

Okay. That's helpful. Thank you and Mike, I just wanted to ask a question about gross margins. I wondered what was being contemplated for some of the higher commodity costs that's here like cotton? Will there be any planned price increases and any thoughts around the potential for that and how that might be managed?

Okay. So, I guess overall product costs we're looking at low single-digit kind of growth, very low-single digits. We've seemed to manage to offset and move around, get the price benefits we needed to offset some of the hot link. We have been feeling some pressure on silk and a lot of talk about freight, but freight have not impacted us the nature of our contracts are a little longer-term I think the most. So, we've managed to not see any freight increases. On duties and tariffs, we do business, we do bring products in from China. If there were changes, we would be impacted to some degree; it is one of our larger countries. However, for the U.S., it's not as significant as one might think. So, while we're about a third of our business coming from China for the company, the U.S. is only between 20% to 25%. And I think when you look across the retail or the wholesale landscape, I think you'll find that that's much lower than most others in terms of how people source from China today. So there would be an impact, but we would over time look to raise prices and/or move product out of that country over time.

I would like to emphasize that we strongly oppose the use of tariffs as a solution to the challenges we face with China. It is clear that there are issues with China and that the playing field is not level. I believe the administration should be assertive and utilize tools to encourage reasonable negotiations with China. However, considering that the apparel category already faces tariffs of 20% to 30% on imports from China, adding another 25% tariff seems unreasonable. It is difficult to understand why apparel would be one of the targeted categories, even though there are no guarantees, but that is the impression I have.

And Kate, for our guidance for 2018, we've seen about 90 basis points of improvement in gross margin. This is partly due to our international businesses growing faster with higher gross margins, and there are other factors at play.

Thank you. Very helpful.

Hi, good morning. I just want to ask about the True & Co acquisition that you're now surrounded a year ago. Can you provide an update on how that integration has gone? And I think at the time of the announcement it was expected to see some benefits from their data mining expertise and sort of leveraging your capabilities to grow the brand? It would be helpful to get just a better sense of how that manifested.

Look, it's been from an integration perspective we've definitely seen the company move into PVH without a hitch. We've managed to retain the talent, we've managed to keep the systems up and running and it's been a good learning experience for us. Just to put it in perspective, it was a fairly small acquisition in PVH. As we look backward at the acquisition, we did talk about some of the benefits of data. We are working with the True team, and the True team is working with the PVH team. We have seen some benefits across divisionally, particularly in the underwear and the women's intimates categories, and consumer data is a focus for us and we are moving it forward through True and our underwear and intimates group with PVH. Yes. And the only thing I'd add is the learnings that we really gotten have been on the data mining side. We're really sharing across platforms both Calvin, Tommy, and True to really understand that consumer and his shopping behaviors. And we've also learned a lot about what's the most efficient way to gain eyeballs, drive sales and traffic. We really had some real learnings that I think will benefit particularly the Calvin Klein business as we move into 2018, our online digital business about having to be more efficient with some of our advertising.

Great. And then just sort of a quick follow-up. Can you just mention how you are thinking about the Chinese New Year shift in the context of the sales and EPS guidance for 1Q?

Yes. Sure, so the Chinese New Year was a negative for us in the fourth quarter of 2017 and was a nice positive for us in the first quarter of 2018. And I think it explains part of the reason why the sales momentum and the earnings growth in the first quarter significantly exceeds guidance for the full year besides our conservatism about the second half of the year, the first quarter is really benefiting from the Chinese New Year. And I think that does it well.

Perfect. Thanks so much.

Thanks.

Hi, thank you for taking my question. Can you just talk about your supply chain initiative and where you are in terms of the market and your ability to take down? Thanks.

Sure. Mike?

Yes, look speed to market is a focus for us. One of our opportunities continues to be more and more on the core product side. We've made great strides in terms of replenishment product and being able to do quick replenishment in 10 to 20 days in terms of getting product from factory or from order to North America and even in Europe now as well. So, we're very much up and running on the basic categories and on the core categories of our business and now we're moving more into the read and react and the fashion categories and trying to understand how to get quick replenishment or quickly back into goods there. So, we've made some great strides on the underwear side of the business and on the dress side of the business and now continuing to move that forward outside of those two categories.

And if I could just let, the last point I'd just add to that is particularly in our international markets which I don't think in general are as developed from a core replenishment point of view as our North American businesses, I think there's been a lot of progress made there. I think that has been a big part of our outperformance. If you're able to get, you get great sell-throughs and great selling. If you're not able to keep that momentum going, you lose the momentum and you lose the potential sale and the teams have done a great job of positioning product, positioning inventory and raw materials in order to really narrow that cycle and capture that growth opportunity. And I think that's one reason over the last six to nine months you've seen our inventory grow a little bit more than our sales growth because we're really making those investments in raw materials, positioning in order to have the goods in order to sell it, and the risk on that core replenishment business from a markdown point of view is very low when you think about it both even in core sportswear, it's very low and you just have to carry close to the inventory and given our margins globally and even in the United States on core being so high, the payback on that is tremendous. So, I think it's been a great investment for us and I give the management teams great credit for going after it.

Right. Thank you and as a follow-up on operating margin would you be able to help sort of break it down a little bit more for 2018? There are a couple of, I guess, one-time items like the Bon-Ton bankruptcy and the 53rd week and you're getting a benefit from currency. Could you just help us piece it all together? Thanks.

Yes. Look, I guess I have been trying to lump it all together and when I, the way I look at it is we've got about $0.35 in benefit from foreign exchange, we've got a hit of about $0.20 on the Bon-Ton which reflects both direct business as well as the hit on the licensing business and then the 53rd week losing it this year offset by the benefit of the Chinese New Year is worth a dime. And that's how I have been just pushing it altogether at this point.

Yes. I think that explains the earnings really well. And I think on the margin side Mike laid it out really well the details by business category. The Bon-Ton, particularly on the licensing side of the business, it's obviously licensing is a 100% gross margin business with no product cost. So, when you lose a nice stream like that and we're really planning it for zero this year that has a minor hit on the Calvin Klein operating margins for 2018, which I think if you took that out of it you'd be seeing growth on those operating margins.

Okay. Thank you, again.

Good morning, Manny and Mike. Thanks for squeezing me in. A follow-up question on the conservatism and the guidance for the back half. Would you consider reinvesting into SG&A if the environment does turn out to be better than what you're planning for at this point? You've obviously earned some fairly high returns on the top-line from the marketing investments in fiscal 2017. So just wondering if you ramp that back up in the back half should the environment get?

Well, I think a couple of things. John, we're maintaining even with the investments we made in 2017, the incremental investments. We're maintaining that marketing spend as a percentage of sale at that level. So, we're not backing away from where we are. I think there is a potential that we might potentially invest a little bit more if we outperform significantly. And I don't have the math in front of me because part of that outperformance would be driven by top-line growth and if we grow the top-line we'll increase the marketing spend as a percentage of sales and might be if there is something that's dramatic that we could do from a marketing point of view like we did with Amazon, what we've done with the Kardashians or Lewis Hamilton. Might we want to take advantage of that, yes. But we would only do that in the context of outperforming our plan. So, I think the guidance we've given, the projections we have more than enough marketing, SG&A investment in order to deliver the plan and beyond. It's just a question if we start to outperform, I think we will take some of that outperformance and put it back into the brand and the growth initiatives. And that formula for the last three years has worked really well for us as we've been able to in a tough environment continue the momentum keep going. So, the real focus will be marketing and digital investments and we're making substantial, but being able to do more could drive business in the future. I think operator will take our last question.

Hi. Thanks, good morning. And let me add my congrats. I guess Manny, just a quick one from me. You talked about how clean the U.S. whole channel looks right now. You also talked about a planned pullback at Tommy within the U.S., the off-price channel. Please talk about how you're looking at the off-price space maybe into 2018 now just for Tommy, but also just Calvin as going to think about how you are thinking about that channel as you balance your growth domestically.

Sure. I think that you used the last sentence is really the key. It's all about balance. I think as that channel distribution is not a channel I shop directly all that often, but it's a channel that continues to appear pretty healthy to me. I know there has been some blips along the way and some of those things. But I think as a channel, we off-price retailers continue to gain share in the overall market and it's a market that in the U.S., if done appropriately is a great compliment to your business and to your profitability, but it needs to really be done appropriately. For us, what we've done over the last four years is, as our top-line has grown, we've actually lowered the percentage of our exposure into that channel although the total dollars are about flat as a percentage of sales it's come down. I think that will be more of the strategy as we go forward and we want to especially for the two big brands Calvin and Tommy, we want to as we are really expanding our higher end component of that business both the Calvin with some of our key retailers in North America and Tommy with some of those key retailers in what I would call the premium distribution. Macy's up, we want to really support that, so we don’t want to be exposed in the off-price channel. But I think there is a balance given the dynamics of this market and we continue to press those levers going forward. And with that, we're going to close our call. I want to wish everybody a Happy Easter and a happy Passover and we look forward to speaking to you at the end of May and early June about our first quarter results. Have a great day everyone.