PVH Corp (PVH) — Q3 2019 Earnings Call Transcript

Thank you, operator. Good morning everyone and welcome to the PVH Corp. third quarter 2019 earnings conference call. This webcast and conference call is being recorded on behalf of PVH and consists of copyrighted material. It may not be recorded, rebroadcast or otherwise transmitted without PVH's written permission. Your participation in the question-and-answer session constitutes your consent to having anything you say appear on any transcript or replay of this call. The information being made available includes forward-looking statements that reflect PVH's view as of November 25, 2019 of future events and financial performance. These statements are subject to risks and uncertainties indicated in the Company's SEC filings and the Safe Harbor statement included in the press release that is the subject of this call. These risks and uncertainties include PVH's right to change its strategies, objectives, expectations, and intentions and its need to use significant cash flow to service its debt obligations. Therefore, the Company's future results of operations could differ materially from historical results or current expectations. PVH does not undertake any obligation to update publicly any forward-looking statement including, without limitation, any estimate regarding revenue or earnings. Generally, the financial information and guidance provided is on a non-GAAP basis as defined under SEC rules. Reconciliations to GAAP amounts are included in PVH's third quarter 2019 earnings release, which can be found on www.pvh.com and in the Company's current report on Form 8-K furnished to the SEC in connection with the release. At this time, I am pleased to turn the conference over to Mr. Manny Chirico, Chairman and CEO of PVH Corp.

Thank you, Dana. Good morning. Joining me on the call is Mike Shaffer, our Chief Operating Officer and Chief Financial Officer; Dana Perlman, our Treasurer and Senior Vice President of Business Development and Investor Relations. Our President, Stefan Larsson, is traveling and visiting some of our international locations and will be joining us on our fourth quarter call. I am pleased to report that PVH posted strong third quarter results, especially in light of the challenging and volatile global backdrop. We reported earnings per share of $3.10, which exceeded the high-end of our previous guidance by $0.10, despite the higher than planned interest and taxes of approximately $0.10 per share. This outperformance was principally driven by our European businesses and better than planned performance in our Asia Pacific businesses. Revenues rose 4% on a constant currency basis, which also exceeded our previous guidance. Although we are raising our annual earnings guidance for the year, we continue to take a conservative approach to planning the fourth quarter holiday season. Our sales and earnings guidance assumes a competitive and promotional macro holiday environment. And we expect continued headwinds from uncertainties surrounding trade and tariffs. Before I go into the specific brand details, I would like to provide a few key highlights from the quarter. First, beginning with our performance by region. Our European businesses continue to post strong results, despite the macro situation and uncertainty around Brexit. Tommy Hilfiger and Calvin Klein are outperforming their competition, demonstrating strong performance across the vast majority of markets in Europe. Both brands are resonating with consumers, and our fall holiday product is experiencing strong sell-throughs. We believe this favorable trend should continue as we move through the fourth quarter. Moving on to the ex-U.S. business, as many of our peers and key customers have indicated, the U.S. market was challenging during the third quarter. During the third quarter, we saw traffic under pressure with no change to the soft international tourism trends. We’ve also seen a highly promotional environment, which pressured margins. We believe that the increasing focus on inventory turns and the cautious stance by our key retail partners on spring 2020 open-to-buy levels will continue in this U.S. market. Finally, in Asia, we continue to see volatility in the Greater China region, driven by ongoing protests in Hong Kong, the continued U.S.-China trade tensions, and a stronger U.S. dollar. Our teams continue to be nimble and react to emerging business trends, especially in Hong Kong, as the business disruption has gotten worse over the last few months. As we turn to November, I’m pleased to report that we did have a strong 11/11 Singles' Day in China, and we’re seeing improved sales trends across Mainland China. We have great confidence in the underlying power of Calvin Klein and Tommy Hilfiger, and we believe we are positioning our businesses to succeed in this ever-changing consumer landscape. Looking at the business today and where we believe the company's opportunities continue to build, PVH is well positioned to capitalize upon our targeted purposeful investments. We are dedicated to ensuring our brands remain authentic to their core DNA with a clear purpose to connect with consumers, as consumers are increasingly focused on purchasing brands that connect with their core values. We continue to progress on our consumer data journey to learn and connect more with our consumers and leverage these insights to power our marketing and product decisions. We believe this will allow us to better deliver unique consumer shopping experiences with the goal of improving our sales and margins and providing a more seamless consumer experience. Additionally, our investments in digital, from our e-commerce sites to mobile platforms, and incorporating digital elements into our stores remain a priority. Today, digital sales continue to track at over 10% of our total revenues, and we continue to see robust online growth with sales growth exceeding 20% in our owned and operated businesses going forward. Looking ahead, we remain committed to seeking and achieving efficiencies across the business, from our supply chain, including our design and go-to-market processes to warehousing and distribution to optimizing our global retail footprint and our operating models around the world. In summary, we are focused on executing against our strategic priorities, which over the long term will drive stronger brand loyalty, capture the hearts of consumers, and deliver sustainable sales and profitability. Let me now move onto the brand results and I will begin with Tommy Hilfiger. We continue to be extremely pleased with how strong our Tommy business brand is performing. In particular, the brand is experiencing outstanding traction globally as we deepen our connections with our core Tommy consumer while, at the same time, converting the next generation of consumers. The offerings of both our Tommy Hilfiger and our Tommy Jeans lifestyles will allow us to capture and target the full spectrum of consumers out there and make them part of the brand. We see strong growth across our sportswear categories as well as through our global growth categories such as jeans, footwear, and accessories. During the quarter, we continued to embrace our global and local ambassadors with exciting consumer activations to drive brand heat. Our collaborative collection with Lewis Hamilton for Fall 2019 has proven to be the most successful commercial collaboration to date. We are doing it at a one-night experiential event in Milan, which has generated strong sell-throughs and earned media value versus spring 2019. The successful launch of the Fall 2019 Tommy Hilfiger collection in China with brand ambassador Shawn Yue has outperformed all our sales plans. As we look into holiday and spring 2020, we are excited about the activations ahead of us, which will leverage local ambassadors and influencers in key markets to further create unique engagements and differentiated Tommy experiences for consumers. Moving to the business, Tommy's revenues increased 10% in the quarter and 12% on a constant currency basis, with earnings flattish or up 3% on a constant currency basis, driven primarily by outperformance in Europe. Internationally, revenues rose 20% on a constant currency basis with retail comp sales rising 8%. International revenue growth was primarily driven by outperformance experienced in Europe, as well as the addition of revenues resulting from the acquisitions of our Australia and Central and Southern Asia Tommy businesses. We continue to be extremely pleased with Tommy Europe's business, which was the driver of double-digit international revenue growth. Significant growth continues across all channels of distribution and key markets, highlighting the market share gains we have been able to deliver. For 2019, sell-throughs continue to be very healthy, and we have seen retailers continue to pull orders forward, which we believe bodes well for our 2020 order books, where early indications are quite positive. As a reminder, spring/summer 2020 order books are up 12% versus the prior year. In Asia, our Tommy Japan and Australia businesses continued to experience strong performance amid a favorable consumer backdrop, while pressure in the Greater China region persists as a result of the protests in Hong Kong and the U.S.-China trade tensions. Moving on to North America, revenues were flat and margins were also under pressure, down 590 basis points. While our wholesale trends continue to be strong despite the tough North America department store landscape, we experienced continued softness in our retail stores as comparable store sales declined 5%. As many retailers have commented over the last few weeks, there were weak traffic trends across retail during the quarter, which was largely driven by lower levels of international tourists coming to the U.S. These factors, in fact, led to higher promotional activities than we planned, which pressured margins. We are planning for these pressures to continue throughout the fourth quarter. Let me end with licensing. This continues to be a very positive story for us across the majority of our businesses, demonstrating that the Tommy Hilfiger brand is extremely healthy. In particular, we continue to be very pleased with the performance of our North America women's sportswear business under G-III, which is experiencing strong growth and excellent sell-throughs. Moving to Calvin Klein, during the quarter, I'm pleased to report that we saw an uptick in the Calvin Klein brand engagement and awareness as we remain in the top 10 for earned media value against its competitive set, demonstrating the health of the brand. As important as consumer engagement is to the health of the brand, I'm pleased to see that we are experiencing healthy sell-throughs for our fall in our core go-forward denim, our core men's underwear and women's intimate franchises, as well as in accessories. In October, Calvin Klein celebrated 50 years of self-expression with the CK50 Collection, a special capsule of iconic styles featuring Justin Bieber alongside his wife Hailey Bieber, which marked the couple's first marketing campaign together. The collection was celebrated globally with events in Brazil, Mexico, and Peru and activations across Asia and Europe. We saw strong success with the product capsule and the campaign resonated with our consumer base, delivering stronger engagement and earned media value results. Overall, our teams are delivering targeted consumer experiences that not only drive better engagement but also sales conversion. One recent example was our event in Berlin, which focused on amplifying the brand engagement in our largest European market and supporting product stores for fall, with campaign star Hailey Bieber, which generated celebrity influencer and product content across Europe. Additionally, we are very excited about the opening of our new multi-brand lifestyle store in Paris, which will have a soft opening in December. Finally, as we look to cater more unique products and consumer experiences in our Asia region, we continue to work with Lay Zhang as our brand ambassador and are launching our capsule collection celebrating Chinese New Year in the fourth quarter, which will offer products from Calvin Klein Underwear, Calvin Klein Jeans, and Calvin Klein Performance. From a business perspective, Calvin Klein increased revenues 3% on a constant-currency basis in the quarter and reported earnings increased 7% to $129 million, driven by strong margins in North America, partially offset by continuing weakness in the Greater China business. By region, Calvin Klein International revenues increased 7%, and international store comps declined 3%. Calvin Klein Europe saw improved momentum in the business during the third quarter as strong year-over-year growth was demonstrated across all channels and across the majority of product offerings, specifically as new fall products hit stores; we experienced better sell-throughs in our key categories, including in jeans, accessories, and underwear. As a reminder, our spring 2020 order books are up 12%, and we're getting early indications for fall 2020, which are quite positive, demonstrating the health of the brand in the market. As those Calvin Klein lifestyle products are increasingly resonating with the European consumer, it reinforces our confidence in the long-term growth opportunity for the brand throughout Europe. Moving on to Asia, we continue to experience weakness in traffic trends in our brick-and-mortar stores in the Greater China region, as the business disruptions caused by the ongoing protests in Hong Kong and the U.S.-China trade tensions continued to impact business. These declines were partially offset by favorable results across our digital businesses and the other major markets throughout Asia. As a reminder, Calvin Klein has a significantly larger business presence in Hong Kong than most of our competitors. Moving to North America, revenues declined 5% as planned, largely driven by our decision to license the women's jeans business to G-III. Despite the challenging North American environment, our Calvin Klein North America business posted a healthy increase in earnings driven by significantly higher gross margins than last year. At wholesale, we continue to see positive results from the digital businesses. In our retail business, comps were down 4% as we continue to experience weakness in traffic and consumer spending trends, especially in our international tourist locations. We saw a significant margin improvement compared to last year driven by lower clearance markdowns. We continue to focus on enhancing our store productivity as well as our merchandising efforts, which we believe will pay dividends as we move forward. Finally, our heritage businesses had a difficult quarter. Revenues for the quarter were down 13% with comparable store sales down 2%. EBIT margins remained under pressure, down 180 basis points as the wholesale and retail businesses experienced gross margin pressure attributable to the weakness in the overall North American retail landscape. Our mass and pure-play businesses continued to outperform our department store and mid-tier accounts in line with industry trends. As we look to 2020, we continue to seek ways to optimize and streamline the Heritage Brands business to generate enhanced returns. In our wholesale business, we are looking at which brands serve the business best and are reevaluating the licensed brands in our dress furnishings and sportswear businesses. In retail, we continue to be keenly focused on how we can further rationalize our store portfolio as we move into 2020. Finally, as you look to the fourth quarter and as we are reporting before the Thanksgiving holiday, I can only comment on trends for the first two weeks of November, which have started off somewhat ahead of plan, but given the calendar shift, business is difficult to read. Although I am cautiously optimistic about the holiday season, we’ve taken a conservative approach to projecting our fourth quarter results. I believe we are well-positioned for the fourth quarter to outperform our sales and earnings guidance, despite the overall uncertainty of the retail landscape. Now I will turn it over to Mike to provide more insight into our third quarter and our fourth quarter outlook.

Thanks, Manny. The comments I'm about to make are based on Non-GAAP results and are reconciled in our press release. Our non-GAAP earnings per share for the quarter was $3.10. It was $0.10 better than the top end of our previous guidance. The beat was driven by strong Tommy Hilfiger performance in Europe and Asia-Pacific. The actual beat from the business was about $0.20 with interest also better than guided by $0.02, partially offset by tax expense, which was higher than guided for $0.12 as a result of timing. Part of the business beat was due to the acceleration of $20 million of Tommy Hilfiger international shipments and a shift in the timing of marketing expenses, which both benefited Tommy Hilfiger in the third quarter. These shifts will negatively impact the fourth quarter earnings projections by about $10 million. Moving on to guidance, we are still planning revenue and earnings conservatively for the fourth quarter. Pressure continues in the channels we operate in North America as we look at the balance of the year. We continue to see heavier industry-wide inventories in the channel than last year, along with a decrease in traffic. Our international consumers who shop in our tourist outlet stores are not in the USA at the same levels as last year. In Asia, our businesses continued to be impacted by Hong Kong protests, along with overall weaker traffic trends across China. In our European businesses, we see Tommy Hilfiger outperforming plans and Calvin Klein slightly better than plan. With significant amounts of business to be done in the upcoming holiday period and with our earnings release earlier than prior years, we've not reflected our current trends and instead have reflected trends more in line with third-quarter figures for the fourth quarter. Our current trends are somewhat better than our plans. We’ve also not planned to change the level of promotions in our business. We anticipate a highly promotional macro retail environment as elevated industry-wide inventory levels in all channels will result in higher markdowns and, in turn, lower gross margins. For the full-year 2019, we're projecting non-GAAP earnings per share to be $9.43 to $9.45, which is a much tighter range than our previous guidance, with an improvement of $0.13 on the low end of the range and $0.05 on the high end of the range. Our total FX headwind on the year continues to be estimated at $0.35 of translation. No change to our previous guidance. Our guidance continues to include a negative $0.20 impact from tariffs. Overall, for the year, we're projecting revenues conservatively and to grow approximately 1% as reported and approximately 4% on a constant-currency basis. Tommy Hilfiger revenues are planned to increase 6% as reported and 9% on a constant currency basis. We project Calvin Klein revenues to be down 2% as reported and flat to last year on a constant currency basis. Our Heritage business is planned to be down 3% to last year. Overall, our operating margins are planned down 60 basis points for the year. Tommy Hilfiger operating margins are planned down about 120 basis points versus the prior year. Fourth quarter Tommy Hilfiger operating margins will be down almost 400 basis points. The majority of this operating margin decline is in North America. But it's also negatively impacted by the timing in Tommy International I mentioned earlier. Calvin Klein operating margins are planned up 50 basis points for the year, and our Heritage business operating margins are planned down 150 basis points for the year. Although we are holding our overall operating margins to our previous guidance, we aggressively cleared inventory in the third quarter, resulting in gross margins lower than we had planned. We plan to continue to aggressively clear inventory through the fourth quarter and end the year with inventories flat versus the prior year. Lastly, we continue to plan share repurchases for $300 million on the year and our long-term debt repayments are planned at $50 million. And with that, operator, we will open it up for questions.

Hey, good morning. Manny and Mike, when you talk about the promotional levels in the third quarter and your expectations around promotions in the fourth quarter, can you just talk through a little bit the assumptions around markdown support and the absolute risk that you have in the environment versus just how conservative you are planning the fourth quarter, especially around gross margins?

Sure. I think we’ve seen results from key accounts in both the department store sector and the off-mall sector. The third quarter has been somewhat disappointing in terms of comparable trends and margins, and we expect this to continue in our projections. I believe there is minimal risk in our guidance for the third quarter, as we have incorporated conservative estimates regarding margin support and necessary markdown activity. If there is improvement in the market, we are well-positioned to take advantage of it as we move forward. We will be responsive to consumer behavior and holiday trends, especially with the shorter time frame between Thanksgiving and Christmas, which complicates projections for the holiday season. We have a solid understanding of the situation, and our systems allow us to analyze deals and respond quickly. We will closely monitor this, and I am confident in our guidance and projections for the fourth quarter, as I believe we are well-prepared to exceed that guidance.

Got it. And, Manny, I was just wondering if you could spend a little bit more time on China and Hong Kong. Are you seeing the impact from the China U.S. trade relations affecting the brands of Tommy Hilfiger or Calvin Klein? Can you just discuss the total exposure that you have at this point on Hong Kong?

Sure. Let me take the last part first. Hong Kong accounts for just over 1% of our business, around $100 million in volume for that market. When we look at that specifically, it's a big business for us relative to our competitive set and is highly profitable. So that's putting pressure on the region. During the third quarter, we did some brand work in China regarding the issue you just mentioned. We did not see, from talking to consumer panels and consumers leaving our stores, probably over a thousand consumers, any deterioration in the strength of our brand or the receptivity to buy both the Calvin Klein and Tommy Hilfiger brands. So we haven't seen significant negative reactions in China. What we've seen is contextually, Calvin, in particular, was a first mover into the China market. We have a large presence there, larger than most of our competitors, and we see pressure in the brick-and-mortar stores throughout the third quarter. We are positioned as a premium brand, not a luxury brand, but a premium brand, and that part of the market is feeling the pressure as consumers may be more reluctant to spend. We're seeing negative comp store trends in our brick-and-mortar stores. Despite the strong growth on the digital platform, the size of our brick-and-mortar business means this decline is difficult to offset. Some of our competitors have relatively small store bases and are growing similar to us online, but they don't have the pressure we face in our stores. As we turned into the fourth quarter, we've seen sales improvement, which I mentioned in my comments. This could be a positive sign as we move forward into important retail periods.

Thanks, Manny. Happy Thanksgiving.

Happy Thanksgiving, Bob.

Great. Thanks. Good morning. Manny, I was hoping you could talk a little bit more about your view on the current logo cycle, particularly as it relates to the Tommy Hilfiger brand. It seems like some of your peers are starting to see pockets of slowdown in that trend. So just curious how you feel the Tommy brand is positioned as we go into 2020 and just your views on the overall logo cycle.

Look, I think it's a good call out. The logo cycle is still a key portion of the business. As we move into spring in the United States, you will really see a shift back to our core sportswear categories and key items driven by core products rather than logos. The brand will always have an important logo component, but we are not counting on that exclusively as we go forward. Both in performance and in denim, logos remain a key part of that business, and we're seeing strong trends in the Tommy Jeans segment overall. Internationally, I think we moved even faster to shift away from logo trends, particularly in Europe and Asia. I believe we are benefiting from that shift. We're seeing strong growth, particularly in our jeans business throughout Europe and Asia, and I think that trend should continue. It's clear that both Calvin and Tommy's brands remain important, but we are reducing exposure to logo products as we move forward.

Okay. That's helpful. And then just my second question is on the Calvin Klein margins in North America. They’re up nicely as you lap last year, but just curious if you can unpack a little bit more on the drivers there and just the sustainability of recapturing that market here in North America for the Calvin brand. Thank you.

You're seeing it in the third quarter, and I expect gross margin improvement to continue into the fourth quarter. As operating margins adjust due to shifts in marketing and other factors, it's important to consider the overall six-month season. If you evaluate the third and fourth quarters together, gross margins should improve in both, and operating margins for that period should also be higher as we concentrate on product execution moving forward. I anticipate this trend will carry into 2020. We're beginning to see enhanced performance in operating income and gross margin, and I believe this positive trend will persist.

Got it. Thank you, and happy holidays to you all.

Thank you. Same to you.

Hi, guys. Thanks for taking all my questions here. Manny, I know you don't want to get ahead of yourself here, but as we look out past 2019, I know there are some fairly tangible puts and takes in the business next year that we can see coming with pretty good visibility this year. I remember on this call a year ago, you and I talked about there being some translational FX coming in 2019. But you said there was no transactional FX; it's all been translational. So far, as you've reported in the past, transactional has provided an impact in the following year. Is it fair to assume we should already expect that to show up next year a little bit? And then who knows on tariffs obviously, but all else equal, the $0.20 headwind this year was largely in the second half; if there's no change, we probably get the other half of that in the first half of next year. Are there any other broad brush strokes puts or takes we should think about as we consider our long-term earnings algorithm for the business as we try to look at 2019?

You've identified the two main challenges we are facing. Foreign currency transaction issues will definitely impact us depending on the dollar's position. These have been problematic for us since we have hedged out for nine to twelve months. When we analyze the situation, past performance could indicate future outcomes, so you should anticipate that this aspect will also play a role. Understanding the tariffs is quite complex, especially given the uncertainties surrounding the protests in Hong Kong. Your assessment of the situation is accurate, and it had an effect of about $0.20 this year, with a larger impact expected next year. Even with our reduced exposure to China, you can anticipate similar effects in the coming year. While these two factors are critical for us to manage, I don't believe they undermine our long-term earnings projections. We are confident that our sales can grow in the range of 3% to 5%, and we expect our bottom line to show double-digit growth going forward. That strategy remains intact. We'll need to adapt to the fluctuations in currency, but the underlying strength of our brands continues to be robust.

Got you. And let me ask you I guess a longer-term question, Manny. As you think about reflecting back on this year and last year, and looking at the next several years in the business, how do you feel about your U.S. distribution footprint today?

I believe our brands, both Calvin and Tommy, have strong potential, and we will consistently identify the appropriate distribution channels to sustain growth for both. Department stores like Macy's and Nordstrom will continue to be essential partners as we progress. Our direct-to-consumer business in North America remains manageable. As you know, there is a surplus of retail real estate in the United States, and we expect this trend to persist. We have always viewed the U.S. market as one with slow growth, and we anticipate this will continue in the future. Our online presence in North America has been expanding, both through our direct operations and partner retail platforms. I am optimistic about our ongoing growth, especially in international markets, as we move ahead.

Okay. Thanks a lot for all the detail, Manny.

Thank you.

Great. Thanks so much. Maybe I just follow-up on the tariff question. It seems like for this third quarter and fourth quarter prices were sort of locked in, which has placed the burden of absorbing the tariff costs more on brands and maybe other parties. Just looking back over the last three months as negotiations have gone on, do you see more of a sharing of the cost burden, or an ability to pass it on? Can you provide any color about how that dynamic is changing concerning who absorbs the tariff as we look into fiscal '20?

It is a volatile environment. The uncertainty continues, with talks ongoing. We're hearing from sources about a Phase 1 agreement suggesting that there may not be new tariffs. It is hard to plan. We are partnering with our key factories, which are working with us as we go into spring. The real question is whether these tariffs are long-term or short-term. Should they continue, our factories will partner with us moving forward. At the same time, we are reducing our exposure, and our U.S.-sourced inventory out of China will be around 10% of our overall sourcing mix, down from around 35% to 40% a few years ago. We will consider targeted price increases as we proceed, while being mindful of the consumer's willingness to absorb those costs quickly. Our retail partners are also in ongoing discussions with us. It’s a challenge, and the uncertainty complicates that process.

Got it. I apologize in advance for asking a short-term question, but just on the calendar this year with six fewer days between Thanksgiving and Christmas, many retailers are looking at their comps over the last week and seeing significant year-over-year declines. Is the assumption that everything gets back to where it should be or are there concerns that the retail environment may suffer and that might necessitate more promotions than expected once we get through Cyber Monday?

That's a loaded question, but let me start by acknowledging that our guidance assumes promotional activity. Christmas has been arriving later every year. This compressed calendar will put additional pressure on sales and thus we're managing our margins conservatively for the fourth quarter based on our projections. I expect to get a clearer picture once we move beyond Cyber Monday and into early next week. If a catch-up occurs, we’ll see how significant it may be. Even if we fall short, I anticipate that the first two or three weeks will show positive comps year-over-year due to the calendar compression. Nevertheless, we maintain our expectation that this holiday season will be more promotional in nature. Given that, the third quarter performed below expectations and those seasonal weather patterns weren't favorable for early orders in spring, we have to be watchful as we navigate the final stages of the season.

Got it. Super helpful. Thank you so much.

Hey. Good morning, everyone. I guess, Manny, just a question I want to focus on Tommy Hilfiger profitability. We saw the margins in Q3 and when you gave guidance for Q4. What exactly is driving the margin degradation? Is it the promotions and the deleverage in the North America retail fleet? Also, assuming no improvement in tourism and the dynamics causing that, should we assume these pressures continue in the first half of next year, because we really didn’t feel that pressure until this quarter? So I guess my follow-up is: assuming that, is it safe to assume there’s probably more upside or more earnings growth in the back half of next year relative to the first half? Just curious how you'd respond to all that.

Okay. Look, we're not providing guidance for next year, but let me contextualize what you said. Tommy Hilfiger's North America business came off a strong trend, with comp growth between 6% and 7% last year. Starting in early 2019, we noticed a pullback in international tourism trends into the U.S., leading to negative comps that intensified in the second and third quarters. Thus, we start to lap these negative trends. Given that, the clearance inventory we needed to offload began to create margin pressure, particularly during the second and third quarters of 2019. We're assuming promotional activity will remain, leading margins to be under pressure in Q4. This should ease a bit entering Q1, and as we cycle through the tougher retail environment, we could see a better trend moving into Q2 of 2020. That’s the perspective we need to keep in mind. Tommy Hilfiger North America is coming off three strong years, so the comparable quarters are challenging.

Thanks, Manny. That's helpful. And just a quick follow-up. We've had some consolidation in the luxury space announced this week. Given your state of the industry, would you expect more M&A activity in the sector? How are you thinking about that concerning your company?

Sure. I believe that over the next 12 to 24 months, we will witness a consolidation in the retail apparel sector. It's almost a given due to current dynamics. From an M&A perspective, financial markets are strong, and credit is readily available. We have a robust balance sheet that will support possible transactions. However, it’s essential to note that since the sector has experienced multiple compression, upcoming valuations need careful assessment relative to where they were 12 to 15 months ago. In general, I believe there will be consolidation, and that will also be a strategic focus for PVH as we look for opportunities.

Great. Thanks. Happy Holidays to everyone.

Thank you.

Good morning, everyone. Manny, just following up on M&A acquisition. You've done small acquisitions and large acquisitions. You’ve done acquisitions with online and data, and then you've also done brand acquisitions. What do you think is most appealing to you that helps to move the needle in enhancing the platform of the entire business going forward? Thank you.

Sure. Look, Dana, acquisition efforts have focused on recapturing Calvin Klein and Tommy Hilfiger’s international businesses. We've made significant transactions in Australia, Southeast Asia, Brazil, as well as in a few others, including China. Although consolidation regarding significant acquisitions has slowed down relatively speaking, there are still few opportunities that can move the needle. We are particularly focused on the branded side, and we continue to evaluate acquiring another brand as part of our broader portfolio. Scale is increasingly important, as is maintaining competitiveness through significant investments in various segments, especially digital. We have a track record of managing acquisitions effectively and integrating them, utilizing their unique strengths while benefiting from back office synergies.

Thank you.

Hi. Thank you for taking my question. Can you dig a little bit more into the Calvin business and your thoughts on expectations for operating margin? A couple of quarters ago, you’ve mentioned 200 basis points improvement, but the environment has changed. It sounds like the new denim product is resonating. Can you just discuss the trends you're seeing, especially in the U.S. channel, and is there more opportunity into next year on the product side? Thanks.

Okay. So I think, for the Calvin business this year, we're looking at operating margins increasing about 50 basis points. While we initially anticipated slightly higher margins at the beginning of the year, some pressures, particularly in Asia due to Hong Kong and China, have impacted that expectation. We anticipate a 40 to 70 basis points improvement next year. Regarding denim, we are indeed seeing strong results, especially in core products. The performances of jeans and bottoms in North America have been particularly positive. G-III just launched the women's denim line here, and the response to that product has been outstanding, seeing strong sell-throughs and receiving favorable placements. If you visit our Herald Square location, you'll see an excellent presentation of Calvin Klein Jeans products. Internationally, we are probably six months ahead of North America as we've witnessed strong sell-throughs across Europe and Asia, with the exception of China. Overall, we are confident regarding product performance and are optimistic about the upcoming season.

Great. Thank you for addressing my questions.

Thanks very much. Just picking up on the M&A topic, do you have a preference for brands with wholesale exposure given what you know about Calvin Klein and Tommy Hilfiger? Would you be more interested in brands with a direct-to-consumer go-to-market strategy?

I think it’s a blend; our balance of wholesale to retail today is around 55% to 45%. Internationally, our retail presence may be as high as 80% in Asia. In Europe, we maintain about that same 55% to 45% balance. Our wholesale businesses continue being our most profitable overall. Although our retail business is also strong, wholesale typically yields higher profitability. The department store channel is holding up well internationally. We’re comfortable managing both direct-to-consumer and wholesale channels effectively as we have a long-standing history as multi-channel retailers. The approach varies based on individual brands and their market positions.

Thank you.

Hey, good morning. Thanks for taking my question. Manny, can you talk about the theme of speed and the ability to flow inventory faster, control markdowns better throughout the entire retail ecosystem? It feels like there’s a long-term opportunity here. I know you're using data and have made a lot of investments in digital. CapEx has stepped up significantly in the last several years. When do you think PVH and the industry will see working capital and lead time improvements across the ecosystem?

I don't want to speak for the entire industry because I've found the apparel business to be undisciplined in certain areas. There's always excess product and advertising that creates more. The industry has maintained a chaotic order in many respects. However, we have made significant investments and we continue this trend in 3D design to shorten our replenishment cycles overall. You'll see this trend pick up more over the next two years, especially with retail pressures increasing. Although, the fourth quarter of 2018 saw a robust performance, forcing everyone to buy into that positive spin, we are now experiencing negative pressures. On the inventory front, lead times have declined from nine months to six months, but there's still a lag. At the same time, the leading time standards are being adjusted as we shift to lower inventory quantities while ensuring swift sales cycles. I believe next year will see less pressure on inventory management due to improved responsiveness to retail realities, but it remains a challenge overall. So with that, we want to wish everybody a happy and healthy Thanksgiving to you and your family. We also wish you a happy holiday season going forward. We look forward to speaking to you on our fourth quarter earnings call in March. Have a great holiday season and all the best. Have a good day. Thank you.