PVH Corp (PVH) 2016 Q1 法說會逐字稿

Good morning everyone and welcome to the PVH Corporation first-quarter 2016 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 used without PVH's written permission.

Your participation in the question-and-answer session constitutes your consent to have 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 May 25, 2016 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 it 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 revenues or earnings.

Generally the financial information and guidance provided is on a non-GAAP basis as defined under SEC rules.

Reconciliations to GAAP are included in the referenced 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.

Please go ahead, sir.

Good morning and thank you for joining me on the call.

With me this morning is Mike Shaffer, our Chief Financial Officer; Dana Perlman, our Treasurer and Head of Investor Relations, as well as Ken Duane, who runs our wholesale businesses throughout the United States.

We are very pleased with our first-quarter results which exceeded our expectations despite the challenging global environment and the difficult retail market in the US.

Overall we had a terrific quarter with revenues increasing 3% on a constant currency basis while earnings per share grew 33% on a constant currency basis.

The momentum in the quarter was primarily led by the strength of our Calvin Klein and Tommy Hilfiger international businesses.

Our European and China businesses continued to be our healthiest markets while Hong Kong and Brazil are under pressure.

From a macro perspective, the US market continues to be the most difficult and volatile market we operate in.

Despite that, our US wholesale businesses are running ahead of plan and the prior year actual results.

However, our US retail businesses are seeing weaker traffic and higher promotional trends.

Overall international tourist traffic and spending continues to weigh on our US retail business and we are experiencing a deceleration in sales trends in the US especially after the early Easter.

Our digital commerce businesses saw revenue growth in excess of 20% for the quarter and this channel continues to be our fastest-growing distribution channel.

Given our overall strong first-quarter financial performance and the momentum we see in our international businesses, we are pleased that we were able to raise our full-year earnings guidance and significantly increase the bottom end of our earnings forecast.

Let me move into each of our individual brands, moving to Tommy Hilfiger.

Overall revenue increased 4% on a constant currency basis and EBIT was up 20% on a constant currency basis.

Our revenues were driven by the outstanding performance of our Tommy international business which was up 11%.

We saw solid performance in all major European markets demonstrated by our 8% increase in comp store sales for our retail business with particular strength in the UK, Germany and Central European markets.

Comp trends in the second quarter have continued to be strong, running up high single digits.

Moving to wholesale, the Hilfiger brand continues to resonate with the European consumer and we are seeing growth in our fall 2016 order book which is now up 6% versus our previous indication of plus 4%.

Growth in the order book was generated across all product categories and strong growth is coming out of markets like the UK, Germany, Scandinavia, Spain and even Italy which we have not seen in many seasons.

Our Tommy Hilfiger China acquisition which closed in mid-April had a minimal impact on the first quarter.

This business continues to demonstrate strong results and is tracking to our plan which will be slightly accretive to our earnings this year.

As we have said before, we will be deploying more marketing spend into this business particularly in the second half of the year which we believe will help set the foundation with sustainable growth in 2017 and beyond.

Moving to North America, our US retail business continues to be under pressure driven by the weakness in traffic and consumer spending.

Comp store sales declined 10% in the first quarter and we have not seen any improvement in second-quarter sales trends and we are not forecasting for this trend to improve for the balance of the year.

Moving to wholesale, I am pleased to say that our Tommy men's wholesale business has performed very well in the first quarter highlighting the design improvements and product quality enhancements we have made to the men's line.

We are posting positive retail sales results, strong sellthroughs and higher average unit retails.

We are seeing this performance continue into the second quarter of the year for wholesale and are excited about the development there.

I want to comment also on some recent news around the Hilfiger brand.

From a brand perspective, we continue to be focused on driving brand relevancy and consumer engagement.

We are leveraging our Rafael Nadal relationship which began with Rafa as our brand ambassador for Tommy underwear and is now expanding to our tailored clothing business.

In conjunction with the French Open, we just hosted a great event in Paris with Rafa for TH flex suits, which are performing very well at retail.

In September, we will launch our Gigi Hadid capsule collection with to wide reaching e-commerce players, Amazon and REVOLVE.

In addition, we will be offering the product in our Tommy Hilfiger stores and other key wholesale accounts around the world.

This underscores the focus we are placing on our women's business for fall 2016 and beyond.

We believe that we have a significant future global growth opportunity in women's and we are beginning to see positive momentum in this business.

We will also introduce a Tommy jeans capsule collection in the US which will hit Urban Outfitters stores in August.

This exciting partnership will allow us to further tap into a younger consumer base which is critical for the brand.

This jeans capsule collection has already been a huge success for us throughout Europe and we look forward to leveraging this opportunity in the North America market.

Last week we also announced that we entered into an agreement to form a joint venture in Mexico with Grupo Axo, a long-term licensing of the Tommy Hilfiger brand in Mexico.

This is an important strategic development for the business as it allows us to maintain a direct ownership interest in our Calvin Klein and Heritage businesses in Mexico while gaining control over our Tommy Hilfiger business in that region as well.

Grupo Axo's Hilfiger business is a larger business in terms of sales and profits than our Mexico business.

However, given the strength of our brand position in the market, we were able to negotiate a favorable 50-50% ownership split.

The closing of this transaction is expected to occur early in the third quarter of 2016.

As a reminder, we are still on track for the handover of our women's wholesale business to G-III for holiday 2016.

Our key department store customers' initial reaction to the G-III collection have been very positive and we continue to be very optimistic about the future prospects for this business.

Moving to Calvin Klein, the first quarter was another solid quarter for Calvin Klein as we generated topline growth of 13% on a constant currency basis.

EBIT was up about 20% on a constant currency basis as well.

Let me start with the international businesses for Calvin which is really driven by the significant momentum in our European business.

Europe continued to experience double-digit retail comps and very healthy wholesale selling.

Our fall 2016 order book has accelerated to high teens growth versus our previous indication of midteens growth.

The strength of the business is coming from all major markets and across all of our product categories beyond just jeans and underwear including menswear and accessories.

We are seeing our brand presence across the markets continue to improve by the season.

Growth is coming from new doors and incremental square footage being dedicated to the brand.

In the second quarter, comp store sales in Europe continued to post strong double-digit sales increases.

Our CK Asia businesses continues to perform with China outperforming the other markets.

We are seeing strength across jeans, underwear, accessories and our newer CK performance business.

As we look at the region, Hong Kong and Macau remains under pressure due to lack of mainland Chinese tourists and Korea continues to be pressured by the macro environment in the department store sector.

However, our Taiwan, Singapore and Malaysia businesses are growing significantly.

Second quarter comp sales in Asia have improved and are now running about mid-single digits.

In North America, our revenues are up about 14% on a constant currency basis driven by growth of over 20% in North America wholesale due to the strong performance across all categories particularly to men's underwear and to women's intimate businesses.

During the quarter, we saw continued strong momentum in our underwear business as our women's business continues to see tremendous growth both in bras and panties with our market share growing to the number five position in bras and the number two position in panties in the department store sector.

In men's, we continue to hold the number one market share position and we saw our market share in the first quarter grow to over 30% which is a record performance for the men's business.

Our jeans and men's sportswear business saw an improvement from the fall season with better AURs and strong sellthroughs especially on the men's jeans side of the business.

Women's continues to see outsized improvement through our specialty store accounts like Urban Outfitters.

Moving to retail, the business in the US remains challenging with international tourist traffic and spending under the same pressure as we are seeing in our Hilfiger US business.

Retail comp trends continued to decelerate into May and we are not planning for this sales trend to improve for the balance of the year.

Let me take a moment and discuss some of the recent news around the Calvin Klein brand.

In April we announced a new global creative strategy for the Company which will unify all Calvin Klein brands under one creative vision across all categories of the business.

As the Company continues to build itself into a $10 billion global retail sales business, this undertaking will further solidify the brand's positioning worldwide and pave the way for future long-term global growth.

We look forward to providing an update on this strategy over the next few months.

As it relates to the brand's relevancy and the power of the brand globally, we continue to see our awareness levels and willingness to purchase metrics continue to improve in all markets.

Consumer engagement across the brands showed an over 35% increase in social media followings globally with a 60% increase in global engagements.

We are connecting art with Converse through our partnerships with Zalando, Urban Outfitters and key social media platforms and of course the brand continues to draw controversy with tremendous industry buzz be it us sponsoring Justin Bieber's worldwide tour, our #MyCalvins campaign, or many of our digital partnerships.

Moving on to our Heritage businesses, the Heritage business revenues declined 12% driven by the ongoing rationalization of the business including the exit of the Izod retail business and a discontinuation of several licensed product lines in the dress furnishing business.

Partially offsetting this decline was a 12% comp store sales increase in our Van Heusen retail business.

Earnings were close to flat versus the prior year as the gross margin rate improvement offset the planned revenue declines in the quarter.

Overall, we have seen the department store channel continue to be under pressure from a traffic perspective but we believe that our Heritage brands are in most cases outperforming their respective categories.

During the quarter, we continue to see positive response in sellthroughs from our Van Heusen Flex Collar product and we celebrated the launch of Speedo Fit.

Speedo fit is a platform designed to inspire and equip athletes at all levels to explore the power of training in the water.

We held major events both in the New York City and Los Angeles with our Team Speedo athletes to launch the campaigns.

We are looking forward to the Olympics for Speedo and have some exciting events planned around the games and around our business.

Just to conclude my remarks, overall we were quite pleased with our performance in the first quarter and believe that our world-class brands, proven business model and best-in-class management teams are well-positioned to navigate through this uncertain and volatile environment while continuing to deliver strong financial results.

With that I will turn it over to Mike Shaffer, our CFO, to quantify some of my comments.

Thanks, Manny.

The comments I am about to make are based on non-GAAP results and are reconciled in our press release.

First-quarter revenues were in line with guidance with a 3% constant currency increase over the prior year after excluding the negative impact of 1% from foreign exchange.

Our Calvin Klein and Tommy Hilfiger businesses had a strong quarter and both exceeded our guidance.

Calvin Klein revenues were up 13% on a constant currency basis driven by strong growth in Europe and North America wholesale particularly our underwear business.

Tommy Hilfiger revenues were up 4% on a constant currency basis for the quarter driven by strong performance in Europe as our Tommy Hilfiger international comp store sales were up 8%.

Our Calvin Klein and Tommy Hilfiger US retail businesses remain under pressure due to continued declines in our stores located in international tourist destinations.

Heritage revenues were down 12% primarily due to the exit of the Izod retail business and the discontinuation of several licensed product lines in the dress furnishings business.

EPS for the quarter was better than the top end of our guidance by $0.05.

The beat was driven by a strong Calvin Klein and Tommy performance for $0.03 as well as FX and the timing of taxes for another $0.02 combined.

Looking ahead to the remainder of 2016, we are increasing our earnings guidance on a non-GAAP basis for the year while continuing to take a prudent approach to planning our business as foreign currency and global consumer spending remain unpredictable and volatile and the US retail market is increasingly more promotional.

For the full-year 2016, we are anticipating based on current exchange rates that we will be impacted negatively by about $1.55 of earnings per share for foreign exchange.

The $1.55 impact was approximately 90% driven by transaction and 10% driven by translation.

For the full-year 2016, we are projecting earnings per share at $6.45 to $6.55.

If we exclude the negative impact of FX of $1.55, we have earnings per share growth of 13% to 15% over the prior year.

We have increased our guidance $0.15 from the bottom of our previous range and $0.05 on the top end of our previous range which reflects a prudent view of our business for the second half of the year.

Included in our full-year guidance is increased marketing spending versus the prior year which is mostly second half weighted.

Overall we are projecting revenue to grow approximately 2% both on a constant currency and GAAP basis.

This guidance reflects a revenue reduction of approximately $55 million in the second half of the year related to our proposed joint venture in Mexico which is expected to close in the early third quarter and will primarily impact our Calvin Klein business.

Overall we expect the Mexico transaction to be earnings neutral for 2016.

Overall operating margins are expected to increase approximately 75 basis points on a constant currency basis and expected to decrease approximately 100 basis points on a reported basis.

Our Calvin Klein business is projecting revenues to grow 5% on a constant currency basis with operating margin to increase about 50 basis points excluding a negative impact of 150 basis points of FX.

Tommy Hilfiger revenues are planned to increase 5% on a constant currency basis with operating margins planned to increase about 50 basis points excluding a negative impact of FX of 225 basis points.

Our Heritage businesses plan to have a revenue decrease of 8% due mostly to the exiting of our Izod retail business and several licensed product lines in our dress shirt business.

Operating margins in our Heritage business are planned to increase about 30 basis points.

The impact of foreign currency on our Heritage business is relatively immaterial.

Interest expense for the year is planned to be between $117 million and $120 million compared to the prior year amount of $113 million and reflects a decrease from our previous guidance as a result of our recent amendment to our credit facilities.

As a reminder when compared to the prior year an interest rate swap converting variable to fixed interest began in February and is the reason for the increase.

Our tax rate for the year is planned to be about 20% which is in line with previous guidance and the prior year.

Second quarter earnings per share is planned at $1.25 to $1.30 and includes $0.45 of estimated negative impact from foreign exchange.

Excluding this negative impact, we are expecting earnings per share to increase 24% to 28% for the second quarter.

Revenue in the second quarter is projected to increase 5% on a constant currency basis.

Calvin Klein revenues are planned at a 13% constant currency increase and Tommy Hilfiger is planned at a 7% constant currency increase.

Heritage brand revenues are projected to decrease 12%.

Interest expense is projected to be $26 million and $28 million for the second quarter and taxes 24% to 25%.

With that we will open it up for questions.

(Operator Instructions).

Bob Drbul, Nomura.

Good morning.

Manny, I have two questions.

The first one is when you look at the sales trends domestically with either your own retail business or within the wholesale business in department stores, can you just talk about how your sales plan for the fall specifically or in the second half of the year has changed given some of the weakness that you are seeing domestically?

The second part of it is within the US, can you just talk a little bit about where you see current inventory levels and where the pressure is and how you feel positioned both in your retail business but also at the wholesale level?

Bob, when we look at sales trends, I guess there's a couple of stories going on.

You can't just generalize because we are seeing really substantial strength in our Calvin Klein brand and I think that is really going counter trend to what is going on in the market.

So at wholesale, be it our underwear business, our sportswear businesses, the women's business, the G-III's operating, despite the challenges that we have all read about over the last couple of weeks in the US department store channel, that Calvin brand continues to grow across department stores and continues to grow in some of the key specialty store accounts as well as online.

Our retail businesses, the Tommy business I would also say particularly on the men's side of the equation continues to perform very well and we are planning the second quarter conservatively but continue to grow from a topline point of view from us.

When you look at the department store environment, I think one thing you have to take into consideration is that the overall comp trends have been challenging but I think if you look at the categories that have been stronger, men's clearly have been stronger than women's overall.

Apparel has been under pressure but really where I think they are seeing a much more significant pressure on the business is [center] core, the accessory business is under major pressure.

We play in that but to a limited extent compared to the depth of our apparel business.

So I think you've got to factor that in when you think about our department store business because as I said, Calvin continued to grow 20% in the quarter at wholesale so clearly there is positive results going on there.

Moving to our own retail business, look, the biggest factor we are dealing with is a lack of traffic particularly in the international tourist markets.

We are continuing to see a downturn in international tourists coming out of South America as well as the Chinese consumer really taking a step back in the first quarter.

So I think that has to do with currencies, what is going on with travel into the US.

And to be honest, I think it is some of the strength that we are seeing though than our European business and in our Asia business as well with tourists saying home in market meaning Europeans staying within Europe, the Asian consumer traveling either to Europe or into the Asian market as well.

So that is how I would characterize it.

Inventories, I am concerned.

I think our inventories are really under good control.

We have made a decision to invest in core inventory for the second quarter and beyond because we really see a sales opportunity particularly in the underwear category and we wanted to be in a position to fill those sales trends both in men's and women's and to remind you last year the sales trends were so positive we were surprised by them, we were chasing inventory all year last year in that category.

So we really ourselves well-positioned to really fill at the 100% rate given the current sales trend.

So we are making that commitment on our inventories but given these sales performance, inventories are building as we go into Father's Day and it is going to be a promotional second quarter.

We are hopeful that the pain has been factored in at retail and we are hopeful that as we come out of second quarter, inventories going into fall will be well-positioned and I think most retailers are really planning for a turnaround in second half sales performance given the difficult environment that they had to deal with last second half, last year's second half.

So a long-winded answer.

I really do believe inventories will be under pressure and promotions will be more significant in the second quarter in the US.

Great.

Thank you very much, Manny.

David Glick, Buckingham Research Group.

Thank you very much.

Just a follow-up on the outlet business, Manny.

Can you talk about the difference in trends in your local markets versus tourist?

And how much tourist business do think really is going to be left after 2016 as we think about what sort of a normalized trend might look like in that business?

Then I have a follow-up on Calvin Klein.

Sure.

I think what we are seeing in our domestic store base is low single-digit comp store increases overall.

I think that business is healthy but what you have to take into consideration is international tourist particularly in the Tommy business had represented somewhere in the 40% rate range of business for us and I think that business over a two-year period when we complete this year will be cut in half and I think that is what we are weathering as we go forward.

And then a follow-up on CK, obviously really strong double-digit trends, your annual sales guidance in constant currency implies a deceleration.

I know you have the Mexico joint venture which impacts your second half growth.

You have some tougher comparisons but just trying to understand why the guidance appears to be at a lower growth rate in the back half on Calvin Klein?

Thanks.

I guess, David, in the US we are taking -- you pick the word -- we are taking a prudent posture where we are anticipating that the sales trends that we have seen in the first quarter are going to continue into May are going to continue for the balance of the year in Calvin Klein.

We are not looking for a sequential improvement as we get to the second half of the year.

I think most other apparel companies in this market and most other retailers based on what I have read are looking for a sequential improvement as we start the third and fourth quarter.

We are not but we've positioned ourselves with core product to be able to capture that sales growth if it were to come.

So I think we are sitting in a good position in that given the momentum in our international businesses we have been able to plan our US businesses conservatively and I think that is partially what you are seeing is pulling down some of the sales growth that we see in the Calvin business.

That coupled with the other two factors, I mean we are coming off of double-digit growth in the third and fourth quarter of last year, we are growing on top of that but we are not anticipating it is going to be double-digit growth going into the third and fourth quarter.

You mentioned Mexico which is worth over $50 million to us for the quarter but from a profit point of view, won't have any impact on us for the year.

So I think there is opportunity.

Let me just sum it up by saying I think there is opportunity to outperform those sales projections if the environment just improves slightly.

One last question if I could on Tommy Hilfiger's women's, obviously there are a lot of new categories that you could benefit from from a licensing perspective which can transition the profitability of the Hilfiger business to an extent more similar to Calvin given a higher licensing income.

What kind of opportunity do you see in licensing income of the new Tommy Hilfiger women's licenses that you just signed with G-III?

Over time I could see licensing revenues increasing ever $30 million.

If you just think about a 7% royalty and if you think about above what we have got planned in our business over the next three years, what that could be worth given G-III is expertise just in the North America market.

And using as a barometer the Calvin Klein business, that doesn't bring that business up to where the Calvin Klein business would be.

So I think there is a real opportunity to outperform what we are currently projecting given the positive reaction to the collections, given G-III's expertise and given the enthusiasm which retailers seem to be getting on board with the product at Tommy.

I also think if you think about the women's opportunity for us the opportunity is even bigger internationally.

And I think the investments we are making starting in the second half of this year from a marketing focus around the Tommy women's business I think really positions us to take advantage of some of that momentum we see in the business.

So you would expect women's to be bigger than men's.

Obviously for us it is not.

Men's represents over 60% of the Tommy Hilfiger volume worldwide so there is a real opportunity to continue to grow men's but really outperform in women's and that is not in any of our forward-looking projections.

Great.

Thanks, Manny.

Good luck.

Erinn Murphy, Piper Jaffray.

Great.

Thanks.

Good morning.

I was hoping, Manny, you could talk a little bit more about the comment you made about driving the global retail size of the Calvin Klein business of $10 billion over time.

I think it stands somewhere in that $8 billion range today.

Could you just talk about what the biggest incremental category or regional drivers are to really bridge that gap as you think about the future?

Sure.

I think the growth I think is easier to understand if we talk about regional.

Clearly the growth will be driven more significantly out of the international markets.

Europe can grow dramatically over the next few years.

If you think about the European business, this year it will probably approach around $600 million for us, the Tommy Hilfiger business is well over $1.7 billion just to put that into perspective.

We haven't even launched any kind of women's sportswear or related classification businesses with Calvin outside of North America.

We've got a big jeans business but very limited sportswear offerings on the women's side of the business and our men's sportswear businesses internationally are significantly under developed as well as tailored clothing which is big businesses here.

So we see dramatic growth for the Calvin Klein brand continuing coming out of Asia and coming out of Europe as those markets really can provide us upside growth as we move forward.

Okay, that is helpful.

Maybe if you could just talk a little bit more about your e-commerce, your digital strategy, just remind us where does e-commerce stand today as a percent of your total?

And then if you could just elaborate on some of the initiatives you highlighted earlier about your partnership with REVOLVE, some of the other platforms you are working with going forward and then just if you could add on what you are doing with Amazon right now in the conversation, that would be great.

Thanks.

So our e-commerce business in total when you consider our sales to dot-coms as well as our own internally managed business is over $800 million in retail sales.

Our strategy has been in North America to utilize our sites as flagship sites, as really to present the best of the brand, to present the brand in a way that we are showing in Calvin, we are showing collection product, we are showing bridge product.

And then we also show a white label product.

But we don't promote dramatically, we try to keep the site pure.

Our average unit retail selling on that site is significantly higher than what you would see average at retail in department stores in the United States.

And we really are trying to do the business in North America through our wholesale partners and a number of the pure plays here in the United particularly Amazon which is growing dramatically.

When you move internationally, it is really a two-tiered approach for us.

We are focused on our own e-commerce sites, Tommy Hilfiger is very large in Europe it is by itself our site is over $100 million there and it is nicely profitable as well.

And we are also selling to our wholesale.com accounts as well as the number of the pure plays like Amazon and Zalando.

In Asia where with the Warnaco acquisition, we probably started a little bit later, we are really seeing strong momentum in that business as we move forward.

Our key sites that we operate ourselves are doing well but even more dramatically, Alibaba through Tmall and our JV partnerships are really driving outsized growth for the business there.

So it is a channel that we are really focused on, it is a channel that we are making significant investments in and it is a channel that is our fastest-growing channel and distribution for both brands.

Great.

Thanks for the context and congrats on the quarter.

Thank you.

Michael Binetti, UBS.

Good morning.

Congrats on a great quarter.

I know it is a very tough environment.

I know you have been asked about the guidance for the second half.

I want to ask about the Calvin Klein guidance for 2H a little bit differently.

In the North America wholesale business in particular has been such a nice driver and you are seeing good 20% growth rate there now.

There is obviously some really strong selling going on but I think some of the industry data we see shows good sellthrough as well.

So it looks like the growth rates in the US wholesale that you are baking in for second half are much lower, you start to lap much bigger growth rates a year ago so obviously that should decelerate and I think that is in your guidance.

But maybe you could help us talk about what kind of growth rates in North America wholesale you think we will be talking about when we have this call with you 90 days from now, just so we can think about where you are headed.

Michael, a couple of things.

Let me just take a step back.

I know everybody feels that there is opportunity in the second half and we would agree.

But look, if this was a different environment, if we were sitting back and sales in the department store channel were flat, slightly positive, a more normal attractive environment, you can be sure that we would be much more aggressive in forecasting results and projecting numbers.

It is the first quarter.

Most companies are missing, taking down guidance in going forward.

We are really, really just going to try and continue to go along hopefully continue to outperform, raise our guidance as the year goes and see how it moves forward.

This doesn't seem like the environment to try and be a hero in.

So let's see how the year progresses.

The second quarter is projected pretty aggressively.

We are looking for double-digit sales growth in Calvin Klein.

We will have better insight as we get into the third quarter, hoping the buy dollars being planned more specifically at the retail department stores and even though projections might be strong for the Calvin Klein brand, we are being cautious about how much of that is going to materialize as we move into August and September of this year.

I guess my total message is let's see how it moves forward and we will be sure to be as transparent as possible.

Okay.

Let me ask you about maybe some of the components that are driving the 20% growth rate that you are seeing today.

Could you help us think about how much of that is coming from AUR or just [philosophy] to help us think forward in our model as to what rolls off and what seems more sustainable as we do get into the back half of year?

I think AUR increase is up out 25% of it and I think the balance is really unit growth.

We are seeing AUR improvement in those numbers particularly in the jeans business.

The underwear business is very strong on the women's side.

Men's has always been a high AUR so clearly we are not seeing 25% increases in men's AUR because we were the highest AUR in the category to begin with.

But it is very healthy and holding together.

So this is much more driven by units than just AUR and I think you probably see the AUR improvement even more specifically on the gross margin line and I think there you see the performance in the quarter and I think you will see it even more so as we get into the second half of the year.

Okay, thanks.

Very helpful.

Dana Telsey, Telsey Advisory Group.

Good morning, everyone.

As you think about -- and congratulations -- as you think about the underwear business, how big could of the underwear business be, Manny?

And then overall as you think about revenue by channel for each of the brands, what is the opportunity whether it is the new specialty channel you are engaging in, department stores, outlets and what is the margin implications for that?

Thank you.

So the first part of the question, the underwear business, how big can it be?

The growth opportunity is women's.

Women's overall for us is about 40% of our underwear business.

The women's market is five times the size of the men's market so clearly there is a huge opportunity for us in women's here in North America.

In men's, the opportunity here in North America continues to be the channel diversification that is somewhat going on.

Calvin Klein is a department store brand from Nordstrom's to Macy's.

Those are our key large accounts, Bloomingdale's.

As you think about it with the growth of pure plays, it is opening us up to a newer consumer and we are capturing that marketshare be it in on Amazon or urbanoutfitters.com.

So really the channel play there in the United States is important for us as we move forward as well.

Internationally it is just all white space.

We have huge opportunity in Europe to continue to grow that business as the brand continues to expand there both in men's and women's.

And in Asia which is a direct retail play for us, we continue to see strong comp store sales performance there and I think both men's and women's can continue to grow.

So I think the underwear business could continue to grow in the mid to high single digits for an extended period of time.

Thank you.

The second part of the question, I'm sorry.

Dana, could you repeat it?

Of course.

As you think of the changes that you are making with entering the specialty channel and obviously online that you mentioned for the overall business, what is the opportunity, how do the channel change as a percentage of the penetration in your business and what is the margin implication?

Okay, I think the second part of the question is easier to understand because we are agnostic about where the consumer buys products.

By that I mean we have a very profitable retail direct to consumer channel, our wholesale business is highly profitable within 100 basis points of each other.

And as e-commerce scales both our own and the pure plays and our wholesale.com business, our profitability in that channel is similar to our profitability in the wholesale channel.

So from a profitability point of view, we are going to manage the distribution from a brand point of view but it really doesn't change or dramatically impact our profitability at all.

On the distribution channel, what we do find is the specialty store channel and the dot-com channel opens us up to a younger consumer, not only for underwear but for all of our businesses.

That is exciting for us and we are connecting with that consumer from a marketing perspective, a marketing campaign to engage.

Our digital spend in Calvin and Tommy today is over 65% of our marketing spend is really occurring on a digital basis and we are really trying to move and connect with that consumer emotionally and they shop differently.

At the same time, we are not looking to alienate our core department store customer in North America or around the world and we believe are able to balance that through our channels of distribution.

So we think we are in a strong position to manage the brick and mortar evolution that is going on at the same time take advantage of the growth that is occurring in the e-commerce channel.

Thank you.

John Kernan, Cowen and Company.

Good morning.

This is Krista Zuber on behalf of John Kernan.

Most of my questions have been answered but as we model out CK and Tommy over the next several years, where do you think their respective margin profiles can recover to?

Thanks.

That is an excellent question and an interesting question.

Clearly the currency situation levels are off.

There is an opportunity to really get back the margin that we have given up in the business and I think between both businesses internationally we have lost about 300 basis points of operating margin driven by the strengthening US dollar.

I think if currencies just stayed where they are and more or less level here, I believe we can capture back half of that over the next three years.

I think if currencies were to start to swing the other way marginally and start to improve, that is how you capture back the other half of it as we move forward.

So it is something that we really need to watch.

We've got very -- Dana and Mike have very sophisticated hedging strategies to really get us through the next 12 months from a transaction point of view but as you go long-term and since inventory throughout the world in Europe, throughout Asia is bought in US dollars, you can hedge and you can go out probably 15 months.

But once those hedges fall off, if currencies remain weak against the US dollar, you are going to have to deal with that at that point in time and that is what is happening to us in 2016.

So hopefully we are optimistic that we will see some strengthening of some of the currencies against the US dollar, particularly the euro given the strengthening of that economy as we move forward.

But who knows what it is going to be in the short term.

I hope I answered your question from a profitability point of view.

Yes, thank you.

Eric Tracy, Brean Capital.

Good morning and I will add my congrats.

As we think about the domestic retail business, certainly understood the international tourism is putting pressure.

But correct me if I am wrong, we should start to lap some of those compares starting in 3Q.

And then just a little bit bigger picture, where is that business in terms of profitability?

Just not total DTC, but just the stores and maybe a breakdown between CK and Tommy.

Well, our international stores even with the hit we are taking in topline are by far our most profitable stores.

The volumes that you do, just think about the volumes that we do in Orlando and Miami and [Harlem] in New York which are by far -- and Las Vegas which are probably the three or four largest centers in the country.

The sales per square foot despite experiencing a comp store decline that is probably over 20% in those stores continues to be our highest performing comp stores.

So it is not a profitability issue from the point of view of overall profitability but just given the decline in sales volume and the margin pressure that that caused over the last 12 months, it is taken out of the performance of that business.

And we report our North American and our European international businesses and you can see North America the margin pressure that we have been under and the top line impacts that it had.

But even with that, we continue to report double digit operating margins in those businesses.

And I think once that starts to level out -- and as you said, the comparisons do start to get easier as you get into September and October.

So we are all hopeful that on a stacked two year comp basis that we can start to see a better trend in our retail comp performance in the second half but we are not counting on it to significantly improve.

Okay, then switching gears a little bit to the Gigi Hadid the collaboration with Tommy again I believe you said sort of kicks in in August.

Maybe just talk about sort of distribution and marketing campaign around that.

Sure.

It is an exciting campaign.

Gigi is so hot and she is such a great ambassador for the brand.

We are investing significant dollars in that campaign and as Mike said in our comments, we are planning marketing expenditure increases throughout the second half and that focus really will be on Calvin and Tommy and Gigi is a key part of that marketing investment.

I think the opportunity is not so much just the GG collection.

I think that creates buzz with the consumer, I think you will see it all over and you will see the key retailers and you will also see it really advertised significantly globally but I think it really provides a platform and a foundation to really move the Tommy women's business as we go forward.

And then lastly if I can just squeeze in one more, as you think about -- you said you are channel agnostic and clearly wholesale distribution domestically is challenged secularly here.

Talk about the level of investment you feel like you need to continue to make or what is incremental to support the digital migration be it your own sites and or a third-party player like an Amazon?

I think we for the last three years we have been making significant investments in our e-commerce platform.

That is not going to slow down but I think that is all factored into where we are.

Capital spending for us is between $250 million to $300 million in a given year.

I can assure you that systems are a big piece of that, platforms are a big piece.

If we made a decision that the commerce business is growing so strongly that we need a separate warehouse for e-commerce, that would be a major capital investment but you could be sure that there would be a significant expense benefit associated with making that investment based on the efficiencies that would come out of a standalone warehouse facility here in North America or Europe or Asia.

So I think we are very comfortable with the investments we have made which we continue to make and I think the business will continue to evolve and our business and our investments will evolve along where we see those growth initiatives.

Perfect.

Thanks, guys.

Best of luck.

Okay, if I could we are going to take one more question so we can all get back to work for the second quarter.

Operator?

Kate McShane, Citi Research.

Thanks for taking my question.

Many, I was just wondering, with the success that you have seen at Calvin Klein at wholesale and all of the opportunities that you mentioned during the Q&A and on the call about opportunities for incremental distribution, do you think your conversations and relationships with the department stores have changed at all and how do you manage this going forward?

I think they have strengthened.

I think one of the things, we listen to our customers and one of the things that we talked about three, four years ago is they wanted us from an e-commerce point of view, from a dot-com point of view.

They wanted us to help drive traffic to their sites.

So we made the decision in North America not to compete directly with them on line.

And by that I mean is I think competitors whoever they are, have much bigger direct e-commerce sites than we have.

We have made the strategic decision to partner with our department store customers to really expand their e-commerce businesses to make investments on their platforms that our brands are well-positioned not only in their brick and mortar stores but also in their e-commerce sites.

And obviously we are seeing outsized growth with that channel of distribution be it Macys.com or LordandTaylor.com.

So we are really making investments along with them to drive that business so I don't feel a [constant] growing there.

I think the Amazon situation, it is an opportunity.

We try to have different merchandising strategies for both players, it is not the same performance.

Obviously the fashion quotient at Macy's is much stronger, much deeper.

Amazon really knows how to sell core product.

They are trying to get into the fashion world but they haven't proved that yet and we will see how that all plays out.

But clearly for us comparative wise, it hasn't been a major discussion point.

Calvin and Tommy depending on the retailer in North America, we are two of the top four brands in every major retailer in north America where it is appropriate for us to sell our goods.

So the relationships really have never been better and the channel conflict that we manage every day has been going on for the last 20 years whether there was concerns about our own retail stores, whatever and that is -- being a global brand that is what we do, that is what we get paid for so I have not seen that intensify significantly.

Thank you so much.

Thank you so much, everyone.

I wish everyone a happy, safe Memorial Day weekend to kick off the summer and hopefully some better selling at retail here in the United States.

And we look forward to speaking to you in August about the second-quarter performance.

Have a good day, everyone.

Thank you.

That does conclude today's conference.

Thank you for your participation.