PVH Corp (PVH) — Q2 2018 Earnings Call Transcript

Good morning. Thank you, Ellen. Joining me on the call are Mike Shaffer, our Chief Financial Officer; Dana Perlman, our Treasurer and Head of Investor Relations; and Ken Duane, CEO, PVH Heritage brands. I am pleased to report that PVH experienced a strong second quarter which exceeded our expectations, solidifying a terrific first half of 2018 as we continue to see broad-based strength across our businesses. Our EPS increased 29% to $2.18 for the quarter which was $0.08 above the top end of our guidance. Revenues grew 13% which was also above our plans and reflected momentum across all of our businesses globally. Broad-based strength was seen across all distribution channels, wholesale, retail and digital. And digital remained our fastest growing channel with revenues growing over 20%, of course, our third-party and owned and operated businesses. Again our digital sales for the companies represent about 10% of our total revenues. Our first half performance continues to highlight our focus on executing against the strategic priorities, which we've had discussed before. First, we are driving consumer engagement through innovative designs and personalized brand and shopping experiences that capture the heart of the consumer. We continue to invest in the brand experiences across all channels of distribution from stores to wholesale presentation and digital experiences. From more frequent newness in our stores through capsule collections and more frequent product drops to new omni-channel capabilities in store, which continue to focus on creating authentic brand experiences. We believe that our increased use of regional brand ambassadors, balanced with our global energy campaigns is allowing us to reach new consumers and build our share of voice globally, resulting in clear global market share gains for Tommy and Calvin. Second, we are expanding the worldwide reach of our brands through organic growth and acquisitions. We continue to be pleased with the growth trajectory of our European and Asian businesses. And we see opportunities to take control of some of our license geographies and product categories over the next two years. Third, we are investing and evolving how we operate by leveraging technology and data to be dynamic, nimble and forward-thinking. We are making significant investments and enhancements to our data analytics and our data capabilities, which we believe will drive future growth. Importantly, we continue to make the right investments in our infrastructure to support the long-term growth of the business beyond just the systemic perspective, including investments in our supply chain which is delivering critical speed to market capabilities, enabling us to more effectively react to changing business trends. Increasingly as the mix of our business shifts to digital, our investments in digital sites continue to deliver against consumer expectations. Finally, as we look to our projections for the year, we raised our earnings guidance by $0.10 per share at the high end of our range. Our new earnings per share guidance range implies a year-over-year earnings growth of about 16% and we continue to conservatively forecast our second half sales and earnings estimates. We strongly believe that if our current business trends continue that we have opportunities to significantly exceed our sales and earnings guidance for the second half of the year. Michael will quantify this in his comments. Now moving to our brand results. I'll begin with Tommy Hilfiger. Tommy Hilfiger had an outstanding quarter exceeding our expectations and posting outperformances across all regions. We believe that we are putting the consumer first giving them strong product assortment at great value propositions including engaging brand experiences and marketing campaigns to really build our lifestyle connection. I'm pleased to give you an update on some of our exciting fall initiatives. Hopefully most of you have seen Lewis Hamilton, Formula 1 world champion, our Tommy Hilfiger global men's ambassador. He has been wearing Tommy Hilfiger sportswear on and off the racetrack. He is resonating with the Tommy consumer across the globe particularly in Europe and Asia. We will be launching our fall 2018 campaign over the next few days and which will include Lewis as well as our new women ambassadors Winnie Harlow and Hailey Baldwin. In addition, Maggie Young, the prominent Chinese actress was recently announced as our Greater China regional ambassador to help support our strategy to drive growth in the China women's business. Lastly, we will host our Tommy now Fashion Show in Shanghai on September 4th and the Tommy X Lewis product capsule will be available during that live show. In addition to the show taking place in Shanghai, we are also partnering with Tmall for a super brand day on September 4th which will bring the full impact of the brands see now buy now platform to China together with some special offers for consumers and exciting activations on tmall.com. From a business perspective Tommy's revenues increased 15% and earnings rose 34% in the quarter driven by strong revenues, gross margin expansion and SG&A leverage. Internationally, revenues increased 20% in second quarter with continued strengths in Europe and Asia. International comp rose 11% which exceeded our expectations reflecting the health of the brand and the quality of our execution. Our performance in Europe has been outstanding against even tougher comparisons which we attribute to strong product assortment and our effective efforts to connect with a new, younger consumer. As we convert this consumer, we believe we are getting share versus our peers. We are pleased to see strength across all channels, retail, wholesale and digital. And as a reminder, our fall holiday 2018 order book is up over 10%, and we expect our spring/summer 2019 order book to be up about 10% as well. Tommy Asia continues to perform as well. Both our China and Japanese businesses continue to deliver strong growth across all channels with exceptional performance in our e-commerce businesses. In particular, we continue to be very pleased with the growth trajectory of our Tommy China business. As we continue to grow the brand, invest in the business and directly operate more Tier one and Tier two cities. I'm pleased to note that we are becoming more visible in the market together with our local activations we are seeing brand awareness and the desire to purchase continue to improve. Moving to North America. Our overall revenues were up 9% with broad-based strength across all channels. Retail continues to drive strong growth in the quarter with comps up 5%. We saw strength across all categories which we attribute to our assortments and the impact of our consumer engagement activities. Our wholesale performance had another strong standout quarter with strong sell-throughs across all major product categories. On the licensing side, we continued to be extremely pleased with the performance of our women's business on the G III, which continues to experience strong growth. Now I'd like to move to Calvin Klein. With our new Chief Marketing Officer in place and the brand really focusing during the quarter, we are increasingly focused on how we can leverage our already successful #mycalvins. In particular, we have focused on evolving our consumer engagement programs from leveraging not only our global brand ambassadors, but local and regional influences to drive local market activations in an effort to further connect with the younger and wider audience. For fall 2018, we have announced a few exciting campaigns and initiatives so far. I'm sure many of you have seen this Kardashian-Jenner 2.04 campaign that recently launched. We are getting great traction from a customer engagement and sales perspective. With our new monogram launch and our modern cotton programs experiencing strong second quarter performance to date. We announced our Calvin Klein women's fragrance featuring Lupita Nyong'o and Saoirse Ronan as part of this campaign. We are using #IAMWOMEN to allow our consumers around the world to pay homage to the females in their life that inspire them. Our strategic partner, Coty, is putting a significant amount of marketing dollars against this campaign, and should be very visible as we move into the back-to-school selling period. As we head into our global CK jeans relaunch this fall, we just launched today our multimedia campaign for fall 2018, reflecting the next chapter of the #mycalvins movements, which embraces a digital first socially powered mindset. The campaign will have extended digital content featured across all social platforms throughout the season. Initial read on product in stores has been very positive with a great response to the new fits, upgraded washes and fabric treatments. Lastly, we have some great activation plans for the second half of the year. Many of which will launch over the next month or two and unfortunately I cannot spill the beans today. So be on the lookout for some more exciting collaborations and activations from Calvin Klein. From a business perspective at Calvin, revenues increased 18% for the second quarter reflecting strong global trends and total earnings were up almost 10% during the quarter. Our earnings improvement was driven by our outperformance of our sales plan; however, operating margins declined 80 basis points and missed our margin plans. Beginning with Calvin Klein internationals, revenues rose 16% reflecting healthy top-line growth in both Asia and Europe. We are pleased to see broad-based strength across Asia with healthy growth in China, Korea, Central and South Asia despite some macro volatility during the quarter. In particular, digital commerce experienced exceptional growth as we continue to embrace the channels that are most relevant to our consumer. Calvin Klein Europe continued to experience momentum and we remain excited about the brand's opportunity to expand product line and capitalize on the white space opportunities for the brand. Building upon the momentum from our 2018 order books being up over 25%. Our spring summer 2019 order book is up 20% reflecting continued growth in all key categories. Additionally, as a reminder, we will launch Women's Wear and Calvin Klein performance beginning with the fall 2018 season and we look forward to building out those categories over the next few years. Calvin Klein North America saw revenues up 19% in the quarter, as we experienced improved trends through the quarter particularly at wholesale where we saw strength in underwear, sportswear and our men's denim business. Average unit retails rose across most categories. Additionally, digital was the healthiest channel across our department store customers, our own site and our pure-play partners. In our retail business, we posted a 2% comp store increase driven by healthy domestic consumer. Looking ahead, we are excited about the upcoming brand initiatives including our denim launch for the fall 2018 season. Moving to Heritage. Finally, in our Heritage business, revenues for the quarter were above our plan for the quarter but declined about 3%. In general, we saw a nice performance across our wholesale business with continued share gains and our retail business posted a 3% comp store sales increase. During the quarter, we officially launched our Heritage digital e-commerce site this summer including vanheusen.com, izod.com and stylebureau.com and we have been pleased with the initial performance of these sites. Additionally, beginning for 2018, we will launch Izod in Europe to customers in Spain, Germany, the Netherlands and Scandinavia, offering our classic American Izod signature lifestyle products including t-shirts, polos, sweaters, heavyweight knits, pants, denim and outerwear. We believe this is an opportunity for us particularly as we look into 2019 and beyond. From a marketing perspective, we recently launched our new campaign for a Van Heusen brand which includes a partnership with the UFC. The partnership establishes Van Heusen as the UFC's first-ever official men's dress furnishing provider, bringing its innovative and flexible men's wear choices to the UFC's worldwide fan base. To kick off the campaign and partnership, UFC Bantamweight Champion TJ Dillashaw; and UFC Welterweight Contender Stephen Thompson, are starring in a new commercial highlighting the innovative Van Heusen Flex Collection of men's shirts and pants which incorporates stretch features in a corporate business life-looking look without sacrificing the range of motion or comfort that is found in casual clothing. We think this is an exciting partnership and continue to keep you posted about it. With that I think as you can see from our updated 2018 guidance, we've experienced a terrific first half executing against our strategic priorities in the face of the changing dynamics in the industry. Looking at the second half of the year, third quarter to date trends are signaling a strong start to the quarter with comps running up similar trends as we experienced in the second quarter. We believe that the incredible brand power behind Calvin Klein and Tommy Hilfiger continues to position us well in the marketplace against our competition, and will drive continued momentum into the future. And with that I'd like to turn it over to Mike to quantify our second quarter earnings and 2018 outlook.

Thanks Manny. The comments I'm about to make are based on non-GAAP results and reconciled in our press release. Due to the 53rd week in 2017, comp store sales for 2018 are more appropriately compared on a one-week shifted basis. Comp store sales I mentioned for the second quarter are compared with the 13 weeks ended August 6, 2017 instead of the 13 weeks in the July 30th, 2017, which was the end of the prior year second quarter. Our reported revenues for the second quarter were up 13% which exceeded our guidance. It was inclusive of a 2% benefit from FX. Tommy Hilfiger revenues were very strong up 15% inclusive of a 2% benefit from FX. Tommy Hilfiger International revenues increased 20% inclusive of a 4% benefit from FX. The Tommy Hilfiger revenue increase was driven by the strong performance in all regions and channels. Tommy Hilfiger North America revenues were up 9%, fueled by strong wholesale performance and solid retail growth. Our Tommy Hilfiger International comps were up 11% and North America comps were up 5%. Calvin Klein revenues were up 18% inclusive of a 2% FX benefit. Calvin Klein International revenues increased 16% inclusive of 3% benefit and FX driven by outstanding Europe and Asia performance. Our international comp store sales were up 5%. For North America, our revenues increased 9% for Calvin Klein; strong wholesale performance in all categories drove the increase. Heritage revenues were down 3% to the prior year. Our Heritage retail business comp store sales were up 3%. Our non-GAAP earnings per share of $2.18 was 29% higher than the previous year, and $0.08 better than the top end of our previous guidance. The EPS beat versus previous guidance was driven by strong business for $0.05. Interest and taxes were also favorable by $0.03. We ended the second quarter with inventories up 16% versus the prior year due to a shift from the timing of inventory receipts as a result of the 53rd week in 2017 and our projected sales increase for the third quarter. We also continue to make investments in basics and core products to capitalize on opportunities for the balance of the year. For the full year 2018, we are projecting non-GAAP earnings per share to be $9.20 to $9.25, 16% growth over the prior year, which is a $0.10 increase at the top end and a $0.15 increase at the low end compared to our previous guidance despite a reduced foreign currency benefit for a full year. Now included in our earnings per share guidance is the reduced positive impact of foreign currency translation of $0.07. This is a $0.05 benefit reduction compared to our previous guidance of $0.12 and consists of the positive impact of $0.23 in the first half of 2018, partially offset by an estimated negative impact of $0.16 in the second half of 2018. Our new guidance at the high end when compared to our prior guidance at the high end now reflects a $0.10 improvement in business, $0.05 in improvement associated with interest and taxes, and this is partially offset by $0.05 of unfavorable currency. Overall, we're projecting revenues to grow by about 7% including the positive impact of 1% related to foreign currency. Overall, operating margins are expected to increase approximately 30 basis points for the company. Tommy Hilfiger revenues are planned to increase 9% inclusive of a positive impact of 1% for currency. Tommy Hilfiger operating margins are planned to increase about 80 basis points. We project Calvin Klein revenues to grow 8% with no impact from foreign currency. We're also planning Calvin Klein operating margins to be down about 50 basis points, which is a reduction of 30 basis points to our previous guidance. This reduction is a result of our Calvin Klein businesses underperforming their gross margin plans. We've reflected lower gross margins for Calvin Klein for the balance of the year. Our Heritage businesses planned to have revenue growth of about 1% and operating margins will be higher by 10 basis points to last year. Interest for the year is planned at $117 million compared to the prior year at $122 million. 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 $250 million. Our tax rate for the year is estimated at 13.5% to 14.5%. IRS regulations are expected to be issued later in 2018 related to the recent Tax Reform Act. Our current estimates could be subject to change if the regulations differ from our current interpretations. Negatively impacting our second half earnings per share projections is a $0.16 unfavorable impact versus the prior year due to FX. In addition, revenues are negatively impacted by about $150 million in the second half of 2018, compared to 2017 from the 53rd week and resulting calendar shifts. The $150 million reflects about $80 million of revenue that does not repeat from 2017 into 2018 due to the loss of one week of business from 2018 compared to 2017. In addition, the $70 million of revenue that moves into the first half of the year from the second half of the year as the calendar shifts a high-volume retail selling and wholesale shipping week out of the second half and into the first half. In addition, we continue to plan that the second half of 2018 will include an increase of approximately $15 million in marketing compared to the second half of 2017 primarily related to Calvin Klein. Marketing as a percentage of full-year revenue in 2018 continues to remain consistent with 2017. Third quarter non-GAAP earnings per share is planned at $3.10 to $3.13 includes approximately $0.09 of negative impact for foreign currency. Revenue in the third quarter is projected to increase 7% including the negative impact of 2% foreign currency. Tommy Hilfiger revenues are planned at 10% increase including the negative impact of 2% related to currency. Calvin Klein revenues are planned at 5% increase including the negative impact of 2% related to currency, and our Heritage brands revenues are projected to increase 8% in the quarter. Interest expense is projected to be about $30 million and taxes will be 4% to 5% in the third quarter. And with that operator, we will open it up for questions.

Hi, good morning. I was wondering if we can spend a little more time on the Calvin Klein businesses. In the quarter, can you talk about the margin performance in the quarter, elaborate on that a little bit and I'd be curious just the preparations on the denim relaunch. How that's gone and I think you said it's off to a good start but I was wondering if you could maybe update us on pricing around the denim piece as well.

Thank you, Bob. We are somewhat disappointed with the Calvin Klein margins for the quarter. We have taken that result and projected it for the rest of the year. First and foremost, we have been more aggressive in clearing out the old jeans product, which is beneficial and will position us well for the second half of the year. We have been more proactive than initially planned in moving those items, which led to some allowances and additional markdowns. Additionally, we are launching several new Calvin Klein businesses internationally, significantly expanding women's performance and men's sportswear. Given the current circumstances, we have chosen to be more conservative with our margin expectations for these launches moving forward. Although our inventories are clear, when introducing new products, we need to be cautious in planning for these new businesses. Overall, Calvin Klein is not performing at the margin levels we believe it should be at. Historically, Calvin has matched or surpassed the Tommy business, but we are currently lagging behind by 200 basis points. We see this as a significant opportunity in the second half of this year and into 2019 to address this gap and achieve that margin expansion as we gain traction with these new products. With the denim cleanup behind us, the outlook is positive, and while we face some short-term challenges now, we are optimistic about the future.

Got it and okay thanks Manny. And I guess just Manny a bigger picture question for you which is VF recently announced that they were going to spin-off their businesses. I was wondering if this is something that you would consider I was wondering if you could give us your perspective on any sort of possibility around that. Thanks very much.

Bob, we typically don't comment on that. However, if I approach it from a different angle, I won’t discuss VF specifically, but we view our heritage businesses as a strong foundation that provides us with efficiency in sourcing, infrastructure, and solid cash flows. Unless someone can clearly show how breaking that business model would lead to meaningful reductions in debt and significant increases in valuation, I remain unconvinced. It has been challenging to persuade me otherwise. As Calvin and Tommy continue to grow at double-digit rates over the past two years, our heritage business, which constituted 20% of our operations three or four years ago, is now around 10%. Even with their strong performance, the math indicates that it will become an even smaller part of our business, though it still provides stable cash flows and the efficiencies I mentioned. Therefore, I don’t envision us pursuing that path. We are always open to exploring ways to enhance shareholder value, but we’re uncertain if that approach aligns with our goals.

Great, thanks, good morning. Manny I was hoping you could talk a little bit more about the digital strengths that you saw in the quarter. You talked about it being up over 20%. How much of that is coming from pure-play versus your own.com? And then if you could elaborate a bit more about your relationship with Tmall? It sounds like you have some exciting events planned in the fall. How broad is your product distributed on that platform today? And what do you expect in the back half from just the overall China market as you kind of further catalyze that region?

Sure, let me provide some context. We are experiencing significant growth digitally across our owned and operated sites globally. Our partnership with macys.com is contributing to a notable increase in our business, and our share of sales from Macy’s and other department store accounts is also growing, becoming essential to our future expansion. Internationally, Zalando has emerged as a crucial partner, showing substantial growth and enhancing our brand presence on their platform for both Calvin and Tommy. In Europe, our owned sites continue to see significant progress as well. In Asia, Tmall and JD.com are key partners, and each season we expand our offerings on these platforms. E-commerce is becoming increasingly important in Asia, particularly in China, where consumers are actively shopping online, making it a vital growth avenue for us. Back in North America, our Amazon relationship, especially with Calvin Klein and our heritage brands such as Tommy Hilfiger, continues to grow. We're cautious with the expansion of product categories to ensure profitability, but the brand experience on Amazon is quite strong. In North America, our e-commerce focus is primarily on core, basic products, while fashion growth primarily occurs in our brick-and-mortar stores and through wholesale channels. Overall, we've seen growth in this channel exceeding 20%, with our sales penetration increasing from 8% last year to just over 10%. We are pleased with these developments and appreciate how our brands are represented on the site.

Got it, thank you. And then just a clarification on the guidance for Calvin. Could you just speak to the Calvin top-line expectations in the third quarter? I think you talked about them being up 7% constant currency which is a deceleration from the 16% in Q2. How much of that is just conservatism versus some of the timing of shipments just curious on some of the drivers behind that deceleration on the top-line.

I believe it’s crucial to approach this with the right perspective. We often get caught up in quarterly analysis, but the better approach is to consider the second half of the year. When we account for the currency fluctuations—where it positively impacted the first half and had a somewhat negative effect in the second half—and the calendar shifts mentioned by Mike, you’ll find that we are planning for an overall increase of about 9% across all our businesses. For the second half, we are projecting a growth of around 6% overall. Calvin Klein is more or less aligned with this trend but is expected to lag by about 200 to 300 basis points on a like-for-like basis. It seems there are two key factors at play: what's happening with Calvin Klein and our own caution as we develop plans for the second half of the year. We are facing stronger comparisons, and we are not factoring in the same level of growth. Current trends suggest that our estimates may be too conservative, but we are just a few weeks into the quarter, which gives us optimism about the outlook for our plans.

Thanks and congrats on a nice quarter, guys. On the margin front, so underlying the 30 basis point EBIT margin expansion guide, and I think you reiterated. I guess any change to your gross margin expectation for the year maybe how best to think about performance in the back half. And then just multi-year, any change to the larger picture gross margin opportunity as you see it multi-year?

So, Matt, regarding gross margins, we have adjusted the Calvin expectation, and consequently, I also reduced their operating margins. This adjustment was solely based on a decline in gross margin for the second quarter and an anticipated decrease for the third and fourth quarters. Initially, we projected gross margins to increase by about 90 basis points for the year, but we are now guiding for an increase of about 80 basis points. Looking ahead, I believe in the strength of our business model and feel confident about it. At this time, we do not foresee any changes to the model, and we still expect growth as previously discussed.

I think you'll see that our international margins and as that business grows taking currency out of all of those noise, as that business will grow faster than our domestic that mix will also improve margins as we go forward. And I think as I said is focused particularly on the Calvin business because all we're seeing is in the Tommy Hilfiger and our Heritage businesses is continued gross margin improvement, is the Calvin Klein business really gives us the opportunity I think over the next 18 months to have a significant improvement in gross margin. Obviously, that would flow through from an operating margin point of view as well to deliver upside against where we are today. So it's clearly a 200 basis point opportunity, and I think we're well positioned to capture that as we start to get into fourth quarter and beyond.

Okay. Maybe you can help us a little bit with the near term. I'm going to turn to Manny and Mike. Regarding the third quarter EBIT, I believe you're anticipating about 120 to 140 basis points of compression. How should we think about the breakdown between gross margins and SG&A? Looking back a bit, we’ve discussed how the company has added a significant amount of SG&A over the past few years, much of which stemmed from critical investments like integrating the creative side of Calvin and moving some of the Tommy international businesses onto your IT platform. However, the second quarter was the first indication that we may be moving toward a better path for SG&A leverage. Can you share your outlook on SG&A in that regard?

A significant portion of the SG&A leverage will depend on the balance between our International and North America businesses moving forward. We will need to communicate clearly as we implement this because as international growth continues, we should expect to see an improvement in gross margins. This growth will also lead to a notable reduction in SG&A expenses since that segment involves a higher SG&A cost structure. As we evaluate the situation, I want to emphasize that the Calvin opportunity is where we anticipate potential for expanding operating margins in the future.

And look, I guess, I would add couple points. One, there is an additional $50 million in marketing baked into the third quarter. It's year-over-year, our percent remains consistent, but we did have a timing spent, a difference in timing of how we're spending that's in the third quarter. And look, there is a little bit of shift because of the shifts and the fourth and the third quarter, I think you are going to lose a week of revenues in the fourth quarter. So de-leverage on expense is going to be tougher while you pull out one week and you shift that high-volume November week out of the quarter, and put in a low February week. So more opportunity I think in the third than the fourth quarter.

Good morning, everyone. Thanks for taking my questions. Manny, I think this question is for you. The top-line performance has been obviously impressive but inventory for the last four quarters has now grown far in excess of sales. I just wondering how you're thinking about inventory as we go into the back half of the year? There's clearly been some Calvin margin pressure but how should we think about inventory and the ability get some of this off your balance sheet as we go into next year?

John, I believe the timing is completely misaligned. We're off by a week, which may seem minor, but it has a significant impact, particularly as we prepare for back to school with shipments arriving in the first week of August. It's not a straightforward comparison, and I can't change that. However, I can assure you that for the past four quarters, our top-line sales for those two brands have increased in the mid-teens overall. While our inventory is also up in the mid-teens entering this quarter, I can't generate sales without inventory. I understand your concern. Historically, we've managed inventory tightly. As we aim to seize the opportunities I mentioned, we will need to maintain some inventory levels beyond our sales plan. Rest assured, most of this inventory is in our basic categories. On the Tommy side, we have a significant replenishment business, and on the Calvin side, we also have a strong core replenishment business. Think about our underwear and denim lines, along with some other basic products. There are substantial opportunities for growth, and I want to reassure you that our balance sheet does not reflect any inventory issues that would negatively impact our gross margins moving forward.

Okay, that's helpful. And then just one follow up the Calvin business, obviously a source of margin pressure here, the Calvin International segment margins were down, domestic was up. Just wondering if you can help us understand which channel, wholesale, retail, international is driving the bulk of the margin pressure at this point in Calvin.

I believe the issue stems from the challenges we faced with the jeans business, particularly regarding the markdowns and discounts we offered in the second quarter. Moving forward, you shouldn't encounter the same issues we experienced in the second quarter for Calvin, both internationally and domestically. I am confident that the international segment will show improvement in the third quarter.

Good morning. Thanks for taking my question. We continue to hear about how tight inventory is in the wholesale channel. So I wondered if you could talk a little bit about gross margin with respect to having more full price fell through specifically in the US x jeans wear.

Sure. I believe a significant advantage for everyone has been the absence of excess merchandise from spring and the transition out of fall and winter as we entered the first quarter this year and are now moving from the second to the third quarter. One of the noticeable benefits is the cleanliness of our inventory, which allows for quicker turnover and responsiveness. We're aiming to enhance our inventory position to capitalize on sales opportunities going forward. This is particularly evident in our wholesale business, especially with Tommy, which is experiencing an increase in gross margin as we progress. We're also observing fundamentally higher average unit retails at the department store level for both Calvin and Tommy, which is advantageous. The jeans launch for Calvin is anticipated to reflect product upgrades, leading to price point increases ranging from 10% to 10%, which we consider critical as we advance. We've incorporated a safety net into our margin expectations, but successfully relaunching the jeans and achieving an increase in average unit retails would be a significant advantage as we approach the fourth quarter and beyond.

Hey, good morning. So I wanted to ask about the Calvin women's and performance launch in Europe, and just a little more detail on the initial response you're seeing at wholesale. How you're thinking about the potential size of the business? And then if you can frame the contribution of those new businesses into the spring summer 2019 order books that you referenced, and what they would look like excluding these new categories? Thanks.

Sure. I think it's a good question. From a sales perspective, those businesses are still quite small. The increase we're seeing in sales from the order book might be around 200 to 300 basis points. In terms of opportunity, the long-term potential for the women's sector is about a $500 million business for us in wholesale and retail in Europe, making it comparable to the Tommy Hilfiger business. In other regions, the Calvin women's business is significantly larger than Tommy's, but we are using Tommy as a benchmark moving forward. Overall in Europe, when you compare the two brands, despite the strong growth Calvin has experienced and the successful repositioning of the brand over the last three years, it is still only about 45% the size of Tommy Hilfiger's European business when considering all categories. This highlights the white space opportunity for Calvin in Europe, which is estimated at about $1 billion across all sales channels, including wholesale, retail, and e-commerce, just to align with Tommy's business as we progress. The reaction to the product in the showroom has been very positive, indicating a strong response from retailers. However, to be fair, the product was only delivered recently, so we haven’t seen much sell-through yet. We'll have a clearer picture of that by our third-quarter earnings release.

I just want to follow up on your earlier comments about the negative impact of a stronger dollar on the domestic retail business, especially in tourist locations. They reported solid positive comparisons in the second quarter, and it seems the third quarter is starting off well too. Are you not observing any changes in tourist behavior, or are there other trends that are enabling continued growth despite a decline in tourist demand?

Yes. Based on the data from our North American retail operations, the domestic consumer in North America is performing very well. We assess this through credit card sales and their sources. This segment of our business continues to grow and has been a key factor in our comparable store performance in the second quarter, unlike the international tourist segment, which appears to be flat to slightly declining in terms of sales and has seen an even greater drop in traffic. This situation seems to be influenced by the strength of the dollar, and there are various views regarding consumer sentiment in China and other key markets related to ongoing trade disputes. While our retail business remains strong, it is primarily driven by the domestic consumer rather than by international tourists.

Good morning and congratulations on the nice progress. As you think of the denim cleanup Manny for Calvin Klein, when does that come to an end? How do you see that progressing? And then on North American wholesale and European wholesale what do you think are the trends there in the department stores? What new or different are they doing and how are they planning orders? Thank you.

Okay. The impact of the denim relaunch will be mostly felt by the end of the third quarter, and while we may experience some positive effects in that period, I expect it will fade afterwards. The trends in North American department stores are looking strong, with average unit retail prices increasing across the board. Traffic remains somewhat flat, but conversions and AURs are driving sales growth. There is significant market share activity happening in North America, and specialty retail continues to impact margins as they are sacrificing their own margins to keep pace with competitors. This trend is reflected in the performance of comparable store sales. Department stores are achieving positive retail comps as anticipated, and their profitability is largely attributed to higher AURs and margins made possible by cleaner inventories. However, they are still purchasing conservatively and demanding better inventory turnover. Despite our sales performance suggesting we qualify for more open-to-buy dollars, we continually advocate for that against their focus on inventory efficiencies, which has improved their gross margins. In Europe, trends have been promising overall, although we did notice a slowdown in retail during the extremely hot weather in late June and July. Fortunately, this situation has improved as we entered August, with our stores showing a notable increase in comparable store performance in the first three weeks of the month. Generally, the market is in good shape, although we are facing some challenges, such as the economic situation in Turkey, which is a smaller but profitable market for us at about $50 million. Additionally, we are monitoring the House of Fraser bankruptcy in the UK, which will impact our results in the third and fourth quarters, but the process appears to be proceeding in an orderly fashion. Overall, we are pleased with the retail metrics we are seeing throughout Europe.