PVH Corp (PVH) — Q3 2018 Earnings Call Transcript

Thanks, Jim. Good morning, everyone and thank you for joining me on the call. Mike Shaffer, our Chief Financial Officer and Dana Perlman, our Treasurer and Head of Investor Relations are also on the call. I’m pleased with our earnings performance in the third quarter, which exceeded our expectations, driven by the power of our diversified global business model. We continued to over-deliver against our 2018 earnings plan and are raising our full year earnings outlook based on our third quarter outperformance and our confidence in the opportunities for the fourth quarter, despite the recent bankruptcies in the U.S. and the U.K. and increasing geopolitical volatility around the world. In the quarter, consolidated revenues grew 7% and 9% on a constant currency basis, while our earnings per share of $3.21 for the quarter was $0.08 above the top end of our guidance, despite a $0.06 unplanned charge relating to Sears and the House of Fraser bankruptcy. This earnings beat was driven by the outperformance of our Tommy Hilfiger and Heritage brands businesses, partially offset by the underperformance of our Calvin Klein businesses. I’ll get into the discussion about our three brands momentarily, but I think first let me touch on our regional performance. Our international businesses continue to experience momentum, driven by strong growth in Europe, where our performance has been outstanding. Our brands are very desirable, and we are gaining share with both new and existing consumers. In Asia, our business performed well as a whole. I do want to note that while our Chinese business performed well and was ahead of plan, we have experienced some softer trends in traffic relating to a softening economy and the related trade concerns between China and the U.S. Despite this backdrop, we continue to see strong results out of China. I’m pleased to report that we continue to see healthy trends in our North American business, particularly in our wholesale businesses. In our retail business, we are experiencing growth with our domestic consumers, particularly at Tommy Hilfiger, yet we continue to experience a slowdown in international tourist traffic in the U.S. relative to the strength we experienced in the first six months of the year. From a digital sales point of view, we continue to see growth at an accelerated rate with revenues growing over 20% across our third-party and our owned and operated businesses. Again, our digital sales for the company represent about 10% of total revenues. We are off to a strong start in the fourth quarter, including an excellent Black Friday weekend. As we look to the full year, we are raising our earnings guidance by $0.10 per share at the high end of our range. It is important to note that we are projecting underlying business to be more than $0.10 per share while covering an incremental FX headwind related to the strengthening U.S. dollar and the unplanned write-offs related to our Sears and House of Fraser businesses. Our new earnings per share guidance range implies a year-over-year EPS growth of 18%, and we continue to prudently forecast our holiday season, especially given the strong start to the fourth quarter business. Mike will further quantify some of those results. Now, moving to our brands results, let me begin with Tommy Hilfiger. Tommy Hilfiger had a truly outstanding quarter, continuing the outperformance we’ve had throughout the year. The brand continues to experience global momentum with strength across all product lines and channels of distribution. This has been fueled by strong product offerings and consistent brand execution around the world. We believe that our consumer-centric brand approach is helping us gain meaningful market share, particularly among younger consumers. For example, Tommy’s capsule collection with streetwear label Kith sold out online in 37 minutes. Notably, our recent brand studies have confirmed the average age of a consumer has come down several years as we continue to connect with more millennials and Gen Z. We also are delivering compelling marketing campaigns both from a regional level and a local influencer perspective, which demonstrates to consumers all of the outstanding products that Tommy Hilfiger has to offer and doing it in a way that highlights the diversity of our markets and the needs of our consumers. Our current marketing campaigns personify this from Lewis Hamilton to Hailey Baldwin, Winnie Harlow, and Maggie Jiang, as well as diverse global influencers that are featured in our Tommy Jeans campaign. We also are excited that Zendaya will serve as one of our global women’s wear ambassadors beginning in 2019. We believe that this will help drive the momentum of our women’s business, further expand our women's consumer base and capture both Zendaya’s and our commitment to self-expression and individuality. Looking at the business, revenue for Tommy grew 11% and earnings rose 16%, primarily driven by strong revenue growth and expense leverage. International revenues increased 16% in the third quarter and comps were up 13%, again exceeding our expectations as Europe and Asia both posted outstanding performance. Beginning with Europe, performance continues to be robust, despite its challenging consumer backdrop. We continue to be impressed by the strength experienced across all channels; retail, wholesale, and digital. Notably, the recent turn in weather to more seasonal temperatures has been beneficial for our sales of cold weather categories, particularly sweaters and outerwear. As a reminder, our spring and summer 2019 order book is up over 10%, positioning us very well for the upcoming 2019 fiscal year. The momentum in our Tommy Asia business also continues, both our China and Japan businesses continue to deliver strong growth across all channels with exceptional performance in e-commerce businesses. Beginning with China, we see significant opportunity to expand Tommy in China as many of our lifestyle offerings are underpenetrated. While we did see some slowing in retail traffic, our business delivered strong performance overall, and we capitalized on the immense consumer demand to shop digitally. Our Super Brand Day with Tmall was exceptional, and we continue to be opportunistic leveraging our digital partnerships. Another brand highlight from the quarter was our TommyNow fashion show, which we hosted in Shanghai in September. The event was extremely successful and helped us to continue to grow our visibility in this market, driving consumer engagement towards the full breadth of our lifestyle offerings. Overall, we remain energized by the strong opportunity to grow Tommy Hilfiger in China. The health of the brand continues to improve, and we believe that we can realize the full brand potential by growing our category offerings, investing in the business, operating more tier 1 and tier 2 cities directly and leveraging our local brand ambassadors. Finally, for Asia, moving to our Japan business which experienced very strong results as we continue to invest in the market through our recent Tommy Icon acquisition event and our digital partnerships with Zalora. We continue to see strong performance out of our Japan business as we boost our top line and bottom line basis in this important market. Moving to North America, our overall revenues were up 3% and earnings increased 13%, driven by strong gross margin performance. Our wholesale business performance had another outstanding quarter with strong sales across all categories. Our wholesale customers continue to be excellent partners for us as they are giving us strong support to Tommy in terms of marketing, promotions, and product positioning on the floor. On the retail side, our comps were flattish. However, profitability improved as we were significantly less promotional than last year, resulting in a higher level of profitability. On the licensing side, we saw strong results across the board and in particular in the Tommy Hilfiger women’s business that’s being operated by G-III, where we saw outsized performance there. Moving to Calvin Klein, our business came in below plan for the third quarter. Revenues increased 2% and EBIT declined 15%. While most of our businesses are performing very well from underwear to men’s and women’s apparel, tailored clothing, footwear, and accessories, we did experience some issues in our 205 collection business and in our Calvin Klein Jeans business as we offered more elevated, fashion-forward product at higher price points, particularly with our jeans relaunch, which did not sell through as well as we planned, resulting in more promotional sales and higher overall markdowns. Despite this, we remain confident around Calvin Klein’s long-term growth opportunities. From a brand health perspective, Calvin Klein remains extremely strong. Global brand awareness continues to be exceptional. The earned media value of our marketing campaigns was almost $160 million year-to-date with our ranking among our competition accelerating two spots, putting us ahead of key peers. However, our tracking studies indicate opportunity in terms of Calvin’s consideration for purchase ranking, particularly for our collection and jeans businesses, which suggest that we have work to do on the product and marketing side of the business. Calvin is an incredible brand with tons of potential, but there are several execution issues that we are addressing to better capture the brand's top and bottom line opportunities. First of all, we’ve been disappointed that our investments in the 205 collection business have not delivered the results we expected. We will cut back on a number of these planned investments in the 205 collection business, and as we move forward we will retake a more returns-oriented commercial approach to this important business. Second, we will shift the focus of our marketing campaigns going forward, as they have been too skewed towards our higher-end 205 line and the high fashion consumer. Further, we will focus on driving a digital-first approach to the brand. Importantly, marketing is one of the faster leverages that we can address. For holiday 2018, we are shifting more of our media spend from halo marketing to more commercial, digital, and social media advertising. We have increased the frequency of our posts on social platforms like Instagram, and we are increasingly using micro-influencers and hosting local activations to drive meaningful engagement, particularly with millennials and Gen Z. These changes are just the beginning of what you will see as we head into 2019. Currently, we believe that there are some elements of the new Calvin Klein jeans relaunch, which have been too elevated and too fashion-forward for our core consumers, which led us to taking earlier and deeper markdowns than we previously planned. From a product perspective, we went too far, too fast on both fashion and price. We are working on fixing this fashion miss and we believe that our CK jeans offering will be much more commercial and fashion-right beginning in 2019, especially for the full 2019 season. Let me focus now on our third quarter segment results. Calvin Klein international rose 3%, reflecting healthy top line results in Europe. Consumers have a strong desire to purchase the brand, and they have started to discover and purchase our newer product lines in Europe, including sportswear and performance. While these businesses will continue to ramp up over the next 12 months, Calvin Klein Europe continues to experience healthy growth, and our new businesses are on plan. As we look to 2019, I would like to reiterate that our European spring 2019 order book is up 20%. Overall, we remain excited about the brand's long-term opportunity to expand its core product lines in Europe and capitalize on the white space opportunities we have identified. Moving on to Asia, our business in Asia experienced some softness during the quarter, which we attribute to a combination of the geopolitical issues and consumer sentiment that are affecting the consumer in this region, as well as the consumer reception to the new jeans product. We continue to see digital as our fastest growing and best performing channel, especially in China, reflecting how consumers prefer to shop. In response to this, we continue to enhance our own digital experience and partner with the key pure-play accounts in Asia to offer the best product, exciting capsule collections, and deliver the best overall consumer experience. Moving to North America, we saw revenues up about 1% in the quarter. By channel, our transit wholesale was very healthy. We continue to see strength across the majority of our product lines. In our directly operated businesses, men’s underwear, women’s intimates, and men’s sportswear were quite strong. From a licensing perspective, our tailored clothing, footwear, and the women's apparel business from G-III were very strong during the quarter and continued to show outsized growth. Our North America retail business was challenging during the quarter. Comps declined 2%, reflecting the weaker traffic from international tourists, as well as the softness in the new jeans line. As we look to 2019, we believe that many of the issues that we face in Calvin Klein in 2018 will reverse. We are taking critical steps to offer a more commercial brand and product experience that our consumers want. Our Calvin Klein operating margins are not currently performing at optimal levels, and we believe that there is an opportunity to increase operating margins by 200 basis points over the next two years. The two key letters to deliver on this operating margin opportunity are; first and foremost, our ability to deliver more commercial fashion-right Calvin Klein jeans product. We are working hard on addressing design and merchandise issues, and we believe that we will see improvement in 2019, especially for the full season. The second is that we continue to reevaluate our investment spending and the overall expense structure associated with our 205 collection business. This process is well underway, and we are taking current actions to ensure that we are well positioned to deliver 75 to 100 basis points of operating margin improvement in 2019. Finally, moving to our heritage business, which continues to perform very well for us. Revenues grew 8% in the quarter, in line with our expectations, while comps were down 1%. Overall, we expect the revenue growth in 2019 to be around 2% for our Heritage businesses. We continue to be pleased with the performance of our dress furnishing and sportswear businesses as we believe that we are gaining market share as consumers are responding well to our enhanced fabrication, such as stretch capabilities and temperature activation. The new technologies we have added to our core intimates business are also driving solid results as our consumers love key franchises like our Wire-Free Easy Does It bra and our Cloud 9 Collection. Digital continues to be a key initiative for our heritage brands division. We are growing our penetration with our department store partners online, and we continue to expand our partnership with Amazon to further enhance our business with them as the core offerings we sell in Heritage brands work very well on that platform. We have seen a nice response to date on our Van Heusen and IZOD commercials. Van Heusen celebrated our first of its kind sponsorship partnership with the UFC, featuring MMA fighters and new brand ambassadors TJ Dillashaw and Stephen Thompson, which had digital and social rates that far exceeded our expectations. Additionally, IZOD launched its largest media campaign to date featuring new brand ambassadors, Green Bay Quarterback Aaron Rodgers and comedian Cali Joseph from the Saturday Night Live production. This campaign is targeted at millennials and has performed very well to date, where we've seen excellent sales within our sportswear businesses. We're also excited to continue to work with these brand ambassadors for the holiday season as we look to drive our outsized sales growth. Finally, as we enter the fourth quarter, our early holiday sales and margin results are running ahead of our financial plan. Our international businesses continue to see nice momentum with Tommy international comps up low double-digits and Calvin International comps running up solid mid-single digits. We have seen a strong start to the North America holiday season with comps for Calvin Klein North America trending up one and Tommy North America trending up low single digits quarter-to-date. We also continue to see strong performance in our wholesale business in North America and in Europe. We are well positioned for the balance of the fourth quarter and believe given our underlying brand momentum and the strength across our businesses that we will continue to over-deliver against our financial plans. Our Calvin Klein business is a priority for us and I believe we will be able to see significant top and bottom line growth as we head into 2019. And with that, I would like to turn it over to Mike to quantify some of the third quarter results and outlook.

Thanks, Manny. The comments I'm about to make are based on non-GAAP results and are reconciled in our press release. Due to the 53rd week in 2017, comps need to be compared on a one-week shifted basis. Comps store sales I mentioned for the third quarter are compared with the 13 weeks ended November 5, 2017 instead of the 13 weeks ended October 29, 2017. Our reported revenues for the third quarter were up 7%, inclusive of a 2% negative impact from FX and in line with our guidance. Tommy Hilfiger revenues were very strong, up 11% inclusive of the 2% negative impact from FX and above our previous guidance. Tommy Hilfiger international revenues increased 16% inclusive of a 3% negative impact from FX. The Tommy international revenue increase was driven by strong performance in all regions and channels with comp store sales up 13%. Tommy Hilfiger North America revenues were up 3%, including a 1% negative impact from FX with retail comp stores relatively flat. North America had significantly more full-price selling in the current year quarter versus the prior year quarter, yielding strong gross margins and operating margin expansion. Our Calvin Klein revenues were up 2%, inclusive of a 2% negative impact from FX in the quarter, and were below our previous guidance. Calvin Klein international revenues increased 3%, inclusive of a negative 4% impact from FX. Our niche international comp store sales were up 1%. Calvin Klein North America revenues increased 1%, including a negative impact of FX of 1%. North America comp store was down 2%. As Manny discussed, our Calvin Klein business was negatively impacted by our collection and jeans business. We have taken all appropriate action in the quarter and have lowered prices on slow-moving product creating a gross margin shortfall for the quarter. Heritage revenues were up 8% from the prior year and in line with our previous guidance. Our heritage retail business comp store sales was down 1%. Our heritage business performed well in the quarter but was unfortunately negatively impacted by the Sears bankruptcy. Our non-GAAP earnings per share of $3.21 was $0.08 better than the top-end of our previous guidance. The EPS beat versus prior guidance was driven entirely by strong Tommy Hilfiger business. Interest and taxes for the quarter were as guided. We ended the quarter with inventories of 15% versus the prior year due to a shift in the timing of receipts as a result of the 53rd week in 2017, or 8% on an aligned calendar basis. We have also accelerated receipts to the U.S. sales as a result of potential new China tariffs and we continue to increase our investments in basics and core products, particularly in Tommy to capitalize on strong business trends. In addition, at year-end we expect inventory levels to be in line with future sales growth. For the full year 2018, we are projecting non-GAAP earnings per share to be $9.33 to $9.35, an 18% growth over the prior year, which is a $0.10 increase at the top end and $0.13 increase at the low end compared to our previous guidance. This is despite a reduction of $0.04 to our foreign currency translation benefit for the full year. Our new guidance at the high end, compared to our prior guidance reflects $0.12 of business improvement despite a $0.06 negative impact resulting from the recent retailer bankruptcies in the U.S. and the U.K. $0.02 improvement associated with interest and taxes is partially offset by $0.04 of unfavorable currency. Overall, we are projecting revenues to grow approximately 7% with an immaterial impact from currency. Overall, operating margins are expected to increase approximately 30 basis points for the company. Tommy Hilfiger revenues are planned to increase 10%, inclusive of a positive impact of 1% related to foreign currency. Tommy Hilfiger operating margins are planned to increase about 100 basis points. We project Calvin Klein revenues to grow 7% with an immaterial impact from foreign currency. We are also planning Calvin Klein operating margins to be down about 70 basis points, which is a reduction of 20 basis points to our previous guidance. This reduction is a result of Calvin Klein's business underperforming the sales and margin plans in the third quarter due to softness in our jeans and collection business. Calvin Klein operating margins for the fourth quarter are projected to increase about 70 basis points compared to the prior year. Our Heritage business is planned to have revenue growth of about 2% with operating margins remaining relatively flat to last year, including the negative impact of the Sears bankruptcy. Interest expense for the year is planned to be about $117 million compared to the prior year amount of $122 million. This decrease is primarily due to lower interest on the €600 million Euro bonds issued in December, partially offset by higher interest rates on our variable debt. In 2018, we plan to pay down around $200 million of our debt. Stock repurchases in 2018 are planned to be around $300 million. Our tax rate for the year is estimated to be between 13% and 14%. Additional IRS regulations are expected to be issued in the near term related to the recent tax reform act. Our current estimates could be subject to change if the regulations deviate from our current interpretation. Negatively impacting our fourth quarter earnings per share projections is an $0.11 unfavorable impact versus the prior year due to foreign currency translation. In addition, revenues are negatively impacted by about $125 million in the fourth quarter of 2018 compared to 2017 from the 53rd week and resulting in a calendar shift. The $125 million reflects about $80 of revenue that does not repeat from 2017 into 2018 due to the loss of the one week of business in 2018 versus 2017, and $45 million of revenue that moves earlier in the year as the calendar shifts of high-volume retail sales and wholesale shipping week out of the fourth quarter. Fourth quarter non-GAAP earnings per share is planned at $1.58 to $1.60 and includes approximately $0.11 of estimated negative impact from foreign currency. Revenue in the fourth quarter is projected to decrease 4%, including a negative impact of 3% related to foreign currency. In addition, the impact of $125 million in the fourth quarter due to the 53rd week equates to 5% of revenue. When adding back the negative impact from foreign currency and the 53rd week impact, our fourth-quarter revenue increase is approximately 4%; Tommy Hilfiger revenues are planned down 4%, including the negative impact of 4% for foreign currency; Calvin Klein revenues are planned down 6%, including the negative impact of 3% related to foreign currency; Heritage revenues are planned down 2%. Interest expense is projected to be about $30 million for the quarter and taxes to be about 13% to 19% in the fourth quarter. And with that, operator, we will open it up for questions.

Manny, I wanted to start with you, just focusing on the Calvin Klein business. I mean, you've clearly invested a lot behind this brand from talent, marketing, products, and with the setback you're seeing in denim, and kind of the halo areas of brand, what gives you the confidence that you have the fix under control? And then as we go into '19, what are some of those guideposts that we should be looking at whether it's pricing or product or even how you're thinking about evolving the marketing message?

I want to begin by discussing the Calvin Klein business. First and foremost, we acknowledge that there is a product issue, primarily concerning our jeans line. I want to emphasize that this is not a brand issue. The Calvin Klein brand is one of the most recognized and understood brands globally, with an awareness rate of approximately 90%, placing it among the top brands. Additionally, we see a high relevance and intent to purchase among consumers, around 65%, which is consistent across the U.S. and North America. Awareness does decrease somewhat in Europe and Asia, particularly as markets like China develop, making it a strong growth opportunity for us. As I mentioned in our previous discussions, our management team is proactive in addressing issues. Over the past two and a half months, we've focused intensely on our jeans product as we prepare for 2019. We're not completely redesigning it but making crucial adjustments to our spring buying and merchandising strategies to bring our pricing back in line after initially setting them too high. We are also planning a complete re-engineering of the product and design for the fall, gathering feedback from local markets in Europe, North America, and Asia to tailor our brand positioning more effectively. Secondly, over the past three years, we have made significant investments in the Calvin Klein brand, especially in the 205 collection. During this time, we have invested between $60 million and $70 million in this business, which has allowed us to grow into the increased expenses. However, we now feel we are not receiving the full return on these investments and are carefully reevaluating our planned spending for 2019. This includes determining the necessity of these expenditures, considering redeployment of some resources, or reducing our overall expenses related to the 205 collection and Calvin Klein. We are confident that we can enhance operating margins in the Calvin Klein business by 75 to 100 basis points as we move into 2019.

And I appreciate the candor, thank you. And then just a follow up, Manny, on China. You mentioned you still outperformed your expectations in the market, but you are starting to see traffic flow a little bit. Is that in the mainland, is that in the tourist markets? And then when did you start to see that flow down? Thank you so much.

It seems to coincide with the trade tensions, as you would expect. Clearly, as I've traveled throughout Asia, but in particular in China, there are real concerns about what's going on there. I mean, I know everybody quantitatively is thinking about tariffs. But I consistently have been talking about this issue and that’s managed as we try to have as flexible a sourcing base as possible. And if we have time, meaning that some lead time with some of the tariff concerns, we'll be much more effective in managing that. But I guess secondarily, what I'm concerned about is Calvin Klein and Tommy Hilfiger are two great American brands, and if there are tensions in different parts of the world about America's position in the world, I think in and of itself, it does create some concern. We haven’t seen that kind of backlash anywhere, but we have seen in China is just that the consumer has slowed down from the accelerated pace we saw in the first two quarters of 2018. So we’re still comping positively, we’ll still move but the traffic levels in the store are not what they were in the spring season, and it does give us some pause as we go forward, and we’re managing that business a little tighter than we have in the past.

I have a question about Calvin jeans. Looking back 90 days from the last quarter, could you help us understand the situation? You’ve cleared out some inventory from the second quarter that was previously ordered. Can you explain your perspective on the supply-demand dynamics in the denim business and where we stand with eliminating the products that aren't performing? You mentioned adjusting the purchases for spring; can you elaborate on how you plan to influence the product to reach a better balance? What steps do you still need to take? Additionally, regarding the design team, are they on board with the necessary changes for the denim business?

Let me break this down. Regarding our inventory, as we moved forward, we noticed that the stock delivered in August didn't perform as well in terms of sell-through as we had expected. This indicated that there was some resistance to pricing on key denim products. We had raised prices by 20% to 25% on some key categories, aiming to showcase our product attributes, but the consumer response, whether due to fashion trends or price points, didn't meet our weekly sell-through targets. Early August readings were promising, but that was just the beginning of the season. Upon seeing the deliveries, we concluded that we were too ahead of the fashion curve and that our pricing was too high. We've taken decisive steps to clear out inventory, not just through markdowns but also by adjusting prices on the sales floor. We've made both permanent markdowns and temporary ones that will last through the remainder of the fiscal year. Our aim has been to resolve these issues quickly and strategically manage our inventory on the sales floor and in the warehouse, preparing for upcoming shipments in November and December. By the end of January, we expect our inventories to be well-positioned and properly priced, eliminating concerns about carryover stock that could affect margins. We've accounted for this scenario in our third- and fourth-quarter planning, so we believe we've addressed those challenges. The focus now shifts to refining our product and design moving forward. While we can influence spring collections, lead times in our industry limit our ability to make drastic design changes quickly. We feel we have adjusted our pricing for spring and shifted our product focus away from high fashion, enhancing our buying strategy. Significant design alterations will be more evident as we progress into the selling season. On the talent front, our design center of excellence in Amsterdam for jeans is fully staffed. Our team is well-equipped, with many members also working on Tommy jeans, ensuring they understand the market dynamics. We have the necessary design talent to effectively manage our jeans assortment and must return to the essence of the Calvin brand.

And Manny, as you get through all the denim products that you have in mist, is this disposition through like online with Amazon or your outlet business or off-price? Can you just talk us through how you manage it from the brand perspective going forward?

Bob, everything is happening in the channel. Just to clarify, we don’t have a surplus of inventory; we have millions of dollars’ worth of inventory, and there is a flow to this business that we are adjusting as we move forward. We didn’t only just discover this issue today. We’ve been tracking it, recognizing it, and managing it for some time. I’m confident that as we move through 2018, everything will be addressed. The resolution will be seen in the seasonal promotions within the distribution channels, including department stores and our retail outlets. This isn’t about having excess inventory to clear out; it’s current inventory that isn’t getting the sales it should. Regarding promotion at lower rates, we will need to ramp up our promotional efforts, but this effort will be integrated into the overall retail presentation during this highly promotional season. I don’t believe this will adversely affect the brand, and we have tried to be as conservative as possible in our guidance.

So Manny, on the Calvin business, I guess what's your confidence in the 70 basis points CK margin expansion forecast for the fourth quarter? And then as we exit this year, anything at all that changes your view on this brand as a mid to high-single-digit top-line grower next year and beyond?

I think on the 70 basis point improvement, I guess that’s implied in our annual guidance. I think, obviously, there are two components to that. The first piece is on the gross margin side. I think we’re looking for something between 10 and 20 basis point improvement in Calvin Klein business gross margins. Given the reserves and markdown reserves we've built up in our third quarter, I think we are very confident. More importantly, given the trend of business right now that we're seeing through November, we're outperforming our sales plan and we’re outperforming our margin plans in the businesses as we go forward. That gives us a lot of confidence as we go forward. There is still a big Christmas season to go, and everybody knows this is an extra week in December. So we don’t want to get ahead of ourselves, but it feels good now. I think we got a brand, and a product that’s poorly positioned on the floor at the right retail selling price that the consumer is reacting positively to. So I think we’re getting momentum and velocity on the brand, which gives us confidence. On the SG&A side, we don’t miss SG&A. We know what the numbers are; it's the way we have our marketing plan. It’s the way we feel about the business and how we’re moving forward. So given the investments and where we are, we are highly confident about the 70 basis points.

And then just a follow-up for the total company, Manny, what should comfort be today in your mid-single-digit top line and 13 to 15 bottom line algorithm, maybe as we look to next year?

I’m not going to give out all the guidance, but I would say nothing has fundamentally changed about our algorithm. I can't factor in especially the unknown and there are two big unknowns for us: current and related, to a great extent, all that’s going on with trade. I don’t have a crystal ball, I can’t factor that into where we are. Hopefully, that settles down and there is a solution. And what’s going on with currencies, which I think is a direct result of a lot of what’s going on with the trade tension, as the U.S. dollar over the last four or five months has continued to strengthen, which just mathematically puts pressure on such a big piece of our business as we try to translate that forward. We've been able to, in 2018, even with some of the issues that we've had to deal with, make up for currency hits that probably total somewhere about the 35% range this year against our initial guidance back in March and we've been able to cover all of that and continue to raise our guidance for the year. So there are levers to be pulled with some of this stuff. But the algorithm for PVH overall is intact, and we still have great confidence as we go forward. And I talked about the two external issues that have the potential to pressure that for 2019.

Thanks for all the help during the transparency, Manny, very, very helpful. I know you had a tough quarter there for Calvin. I just want to follow up on that quickly. Is the FX and the bankruptcies that we've seen recently and then some of the jeans overhang issues. You've walked us through how those extend into this spring. You've made some changes; a lot more confident reversing that by fall. Is there anything that gets us to a point where we’re saying 13% to 15% next year is going to be lower than that in the currency and anything that we should think about today related to those things that we're going to enter the year with perhaps?

You should be aware of currency fluctuations and the impact of tariffs. The bankruptcies we faced this year shouldn't affect our business significantly, as the Sears operation is relatively minor. It's hard to predict the future, but if Sears continues to operate, it's likely to be much smaller. The situation with House of Fraser appears to be a genuine restructuring, and they seem to be coming out of it with better financial stability. This should not negatively affect us either. As we approach the beginning of next year, we will provide the necessary guidance and keep you updated on how market developments might influence us in those key areas.

I guess just on the currency, as you guys – there have been some changes and I know in the currencies that are a little bit tougher to hedge that make the currency mile that we run a little bit harder to think about lately. So as we think about you guys have such a big input, if currency stays where it is today. How should we walk through the transactional effects into next year? I know that’s traditionally quite a lag, maybe anywhere from 12 months to 18 months even, as you look at that...

I believe that transactions next year will be quite limited due to our hedging strategies. We have a good grasp of our position, and I expect it to be a minor challenge at most, though it largely depends on future developments. We are hedged for certain purchases up to 12 months, but this coverage accumulates over the year. The real uncertainty lies with translation, as we do not hedge this, and I don't think many companies do either. In the first half of the year, the major currencies impacting us are not the smaller ones but the large ones like the Euro, Pound, Canadian Dollar, Chinese Yuan, and Brazilian Real. For example, when we provided guidance back in March, the Euro was at $1.24, and now it stands at $1.13. If this trend continues without any changes, it will create challenges. I believe this isn't new information for anyone. There’s not much that can be done in the short term to mitigate these effects. While we manage our expenses, there are limits because we must operate in the currency that supports our business. To sum up, I don't foresee transactional issues being significant due to our hedging, but translation might pose some concerns. I would like to emphasize that for a U.S. company with sales in U.S. dollars, more than 50% of our sales come from international markets with the currencies I mentioned, and over 60% to 65% of our profitability comes from those markets. This is why currency fluctuations affect us more significantly compared to some of our competitors who have less geographic diversification.

It sounds like there's a big distinction between the performance of the Calvin Klein Jeans and Collection businesses and just the balance of that brand. So, can you maybe just talk about the magnitude of the differential that you saw on the top and bottom line between Jeans and Collection versus the balance of Calvin in the third quarter? And just how you're thinking about that relative performance into the fourth quarter?

So, I guess I'm not going to get into profitability by product category, but let me just try to put the Calvin business, the Jeans business in size perspective so you get a sense. Last night on Cramer, I did the math in my head, and I was wrong when I said that Jeans represented 10% of our business globally. It represents about 15% to 16% of our business globally. But for PVH, from an owned and operated perspective, more or less, half of our business is licensed and the other half is directly operated by us. Jeans represents about just over 30% of our business, to give you a sense. It has a bigger financial impact, given that on our own P&L. So, that's a bit of a background. All you have to do is just go to Macy’s or Dillard’s or some of the key department stores and see the Calvin Klein presentation at retail, and you'll see, on the women's side of the floor, it's been spectacular. The results for a brand that's as big as it is at Macy's, in particular, continues to see very strong growth out of the Calvin Klein business and our partner, G-III, does an outstanding job. The men's tailored business continues to be very strong. Our Calvin Klein dress furnishings business continues to be very strong. Our sportswear business is performing on the men's side the way we look at it. Our footwear business continues to be a good business for us. Obviously, the crown jewel of our portfolio is our men's underwear and women's intimates business, and that business is just off the charts. You can't help but walk in the store and just recognize that. So, to give you perspective, my point is I know this Jeans issue is something we clearly have to deal with and it's a key part of the brand, but I think it does sometimes extend its importance to the overall brand as we move forward. So, I think it's important to share that.

And just one quick modeling follow-up. I know that some of this is still in flux, but should we be thinking about the fiscal '18 tax rate, where we're looking to land at the end of this year, as a reasonable assumption to use on a go-forward basis?

Look, guidance is still coming, but the model did imply that and that's where we are at this point. We're still waiting. Regulations are being firmed up. There's so many moving pieces. But I think that's a safe assumption for now.

Hi. Thanks so much for taking our questions. I think we've touched on this tangentially but when you discussed 200 basis points Calvin Klein operating margin improvement ahead, would you outline what's also baked into those plans in terms of retailer bankruptcies, as well as FX, tariffs, and global macro risks? Additionally, would you break down the opportunity between North America and International? Thanks.

Tiffany, I'll do this. I'm not counting on any bankruptcies as we go forward, obviously. It'll be what it'll be. There's always something going on, and I don't think that really should be meaningful unless there's some major issue out there that I'm not aware of. I don’t think bankruptcies are an issue. I think, geographically, and we've said it, International will grow faster than the North America business, only because the North America business, on a relative size level, is so much bigger and the product categories here in North America are much more developed. We always talk about the European opportunity for Calvin Klein. Today, the Calvin Klein brand for us is doing just under $1 billion in sales in Europe. The Tommy business is more than twice as big as the Calvin business within Europe, and we think there's the opportunity to be as big in Calvin as we are in Tommy long-term. Developing our men's and women's sportswear business, developing more of a performance business, our tailored clothing, our footwear, and accessory opportunity exists for us. It's the only region in the world where Tommy is larger than Calvin. It gives us a lot of confidence. Plus, we have the management team, expertise, and model in place with our operating platform in Europe to really take advantage of that and have the credibility with our key retail partners there to have two of the premier brands in the world as we go forward. I have a tremendous amount of confidence that we can deliver against that. Not to go back too far in history, but when we took over that European business five years ago, it was $500 million and it was losing money. Today, it's $1 billion, making double-digit operating margins. That gives us big confidence. The continued growth within Asia, just as that market continues to grow, driven by China and the related Greater China markets, as we go forward, there's just significant growth and white space opportunities for the brand. Just like Europe, the product category offerings are much more limited overseas in Asia than they are here in the U.S. So, I think that's where we are. And keep in mind that the operating margins internationally for Calvin and Tommy are higher than the operating margins of our North American business. I think that gives us confidence as we move forward.

Hi. Thanks for taking my question. Just one small question with the tourism softness in the U.S. that you had mentioned. Is that across the board in tourism or was it just specifically with the Chinese tourists?

For us, I guess there's two big categories that we see. It's what you touched on, which is China, but it's also Brazil. Given what's gone on there in this hemisphere, particularly this time of year, that's always a strong consumer for us, particularly for our two brands that have great market positions in Brazil, both Tommy and Calvin. I think we outperform with that target consumer. So, it's really the South American consumer and the China piece that we've seen slow down. The European tourism we haven't seen really slow down at all in the United States. Other people have talked about it on their calls saying that international piece is not as strong as it was in the first half of the year. And with that, I think we're going to close the call. I want to wish everybody a healthy and happy holiday season. Happy Hanukkah, Merry Christmas, everyone, and a healthy and happy New Year to you and your families, and we look forward to speaking with you in our fourth quarter press release in March. Have a great day. Thank you.