PVH Corp (PVH) 2016 Q2 法說會逐字稿

Good morning, everyone, and welcome to the PVH Corp.

second-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 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 August 24, 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 a 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 statements 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 second-quarter 2016 earnings results which can be found on www.pvh.com and in the Company's current report on Form 8-K furnished [in] 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.

Thank you, Jen.

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

Joining me on this call will be Mike Shaffer, our Chief Financial Officer; Dana Perlman, our Treasurer and Head of Investor Relationships; as well as Ken Duane, who runs our wholesale businesses here in the United States and North America.

We are very pleased with our second-quarter and first-half results.

Our strong performance year to date exceeded our expectations and demonstrates our ability to deliver against our 2016 plan despite a challenging macro environment.

Overall we had a terrific quarter with revenues increasing 5% on a constant currency basis while earnings per share grew approximately 40% on a constant currency basis.

The momentum across our Calvin Klein and Tommy Hilfiger international businesses continued during the quarter.

Our European and China businesses continue to be our healthiest markets.

The strength has been seen across all channels of distribution, wholesale, retail and our digital channels.

Speaking of digital, we continue to see outsized growth across all of our digital e-commerce businesses.

For the second quarter we continued to generate revenue growth in excess of 20% and this channel continues to be our fastest growing distribution channel.

Key measures we have taken include enhancing the navigation on our own sites; elevating our own sites to focus less on promotions; investing and mobile capabilities; and taking steps to ensure that we are in-stock in high core demand items, which is a key to the profitability on digital commerce.

In the second quarter the US market continued to be our most volatile market that we operate in.

Similar to the first quarter, our US wholesale business continued to grow and show improvement.

For the first half we are running well ahead of our wholesale plans and our prior year actual results.

However, our US retail businesses have not seen much improvement in trend from the first quarter and continue to experience soft traffic and higher promotional trends.

Specifically our international tourist traffic and spending continues to weigh on our US retail business and, as we began August, these sales trends have not improved.

Looking ahead to the balance of the year, given the strong momentum in our businesses, we are increasing our earnings guidance for the year while also further investing in our brands.

We have also taken a prudent approach to planning our business in the second half of 2016, particularly our US retail businesses which we are now planning second half comp store sales trends at the same levels that we experienced in the first half.

Let me move on to a brand update to discuss each of our key brands.

Moving to Tommy Hilfiger let me start with an update on some of our brand marketing activities.

A major focus of our fall campaign will be our women's businesses.

As we previously announced, Gigi Hadid will be our global ambassador for Tommy Hilfiger's women's representing apparel, footwear accessories and fragrance.

This initiative reflects the brand's strategic commitment to expand its women's businesses globally.

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

As part of her exclusive ambassadorship, Gigi has partnered with Tommy Hilfiger to launch her first collaborative collection.

The collection will launch globally at the New York fashion week with Tommy Hilfiger's first consumer fashion show where all looks will be immediately available for purchase.

The collection will be available in over 70 countries around the world, in over 200 Tommy Hilfiger stores and 150 wholesale partner stores all with dedicated in-store marketing installations.

The collection will also be available on our own e-commerce sites.

Another important brand initiative for us has been Tommy [Jeans].

Now in its second season Tommy Jeans celebrates the most iconic styles from the brand from the 1990s revived as nostalgic classics with a fresh youthful energy.

We first launched the jeans collection in April 2016 in 15 countries across Europe with strong sell-throughs on both e-commerce and at retail.

The collection has allowed us to establish new wholesale partnerships that support our efforts to attract a new, younger consumer base.

In the US and the UK we have invested in a strategic partnership with Urban Outfitters.

We have also established similar partnerships with specialty stores in France, Germany and Scandinavia.

The second delivery of the Tommy Jeans capsule has hit stores in August and the collection continues to perform very well and has excellent sell-throughs.

Moving to the financial performance in the second quarter, overall revenues for Tommy increased 7% on a constant currency basis and EBIT was up over 20% on a constant currency basis.

Our revenues were driven by the outstanding performance of our international business which continued to generate 11% constant currency sales growth in the quarter.

Moving to our European business, we saw solid performance in all major European markets demonstrated by an 8% comp store increase in Europe for our retail business, with strength across all major markets.

I think it is important to comment that our UK business continues to show strong momentum despite a short lived slowdown around the Brexit vote.

We continue to be encouraged by healthy comp trends we have experienced so far in the third quarter which continue to run up high-single-digits throughout Europe.

Moving to wholesale, the Hilfiger brand continues to resonate with the US -- with the European consumer and our fall sales are projected to be up 6% while our spring 2017 order book is running up 7% over the prior year.

Growth in the order book was generated across all product categories with acceleration across our denim and women's businesses.

Strong growth is coming out of all markets, the UK, Germany, Scandinavia, Spain and even Italy, which has not seen growth in many seasons.

The only challenging market for the brand is Turkey, which is understandable given the current geopolitical situation there.

Moving to Asia, as a reminder, we closed our acquisition in China in mid April for the Tommy Hilfiger business there.

That business continues to demonstrate strong results and is tracking to our plan.

This plan has added about 300 basis points to the top line during the second quarter and we see it being slightly accretive to our full-year earnings.

We have firmed up our planned marketing spend in China that we spoke to you previously about.

And we believe this will help further support the brand and our fall initiatives that are primarily focused on promoting women's, as well as the foundation for sustainable growth in 2017 and beyond.

Moving to North America, starting with our wholesale business, I am pleased to say that our Tommy's men's wholesale business continues to perform very well.

And during the quarter and first half we continue to see good sell-throughs and higher sales.

During the quarter we continue to see stronger sell-throughs and higher average unit retails.

We believe this healthy performance from the first half of the year will continue into the second half and we are excited about the developments in the men's business.

Lastly, we are working with G-III to handle the women's sportswear business in the fourth quarter and that transition continues to run on plan and we continue to see strong positive reaction to the lines by our wholesale partners.

Turning to our US retail business, unfortunately we have not seen a material improvement in this business year to date, with comps running down year to date about 8%.

The business continues to be under pressure driven by weakness in traffic and consumer spending in the international tourist stores.

As a reminder, we are taking a prudent approach and are not forecasting for the first half trends to improve for the balance of this year.

Moving to Calvin Klein, let me take a moment and discuss some of the recent news around the Calvin Klein brand.

We announced a few weeks ago that Raf Simons has been appointed our Global Creative Officer to drive our new global creative strategy for the brand which will unify all Calvin Klein brands under one creative vision across all [product] categories of the brand.

We believe that this undertaking will further solidify the brand's positioning worldwide and pave the way for future growth.

As Raf has only been in the building a few weeks, he is working with the teams as he builds out how the brand will continue to evolve from a creative direction point of view.

As it relates to the overall 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.

The fall 2016 global advertising campaign continues to roll out featuring a provocative blend of talent and deeper storytelling while continuing to leverage #mycalvins.

The campaign is featured in 26 global markets with a diversified media mix comprised of digital, print and outdoor advertising.

As a reminder, we are also the official apparel partners of the European Justin Bieber's Purpose Tour which kicks off in September.

And we will have dedicated branded pop up shops at the tour's Berlin, London and Madrid stops, similar to what we did for Justin's US tour.

Specifically from a brand perspective, I want to call out a few exciting launches for fall 2016.

On the jeans front we have a major global launch of our sculpted jean which will hit stores at the end of this month.

This launch will be supported by a global ad campaign that features Bella Hadid, Gigi's sister.

This campaign will focus on all major markets with a diversified mix of media, both digital, print and outdoor.

As a product category we have seen significant growth in our Calvin Klein underwear and intimates business.

And this is far and away been our most successful growth category posting explosive growth and consistently growing its leading global market share position.

We believe women's intimates will continue to be our most significant growth area and we have a number of fall growth initiatives taking place.

Our Modern Cotton logo business continues to gain momentum and has enabled us to capture the number one market position in the bralette category.

For fall 2016 we are taking this logo application to tailored bras and are launching our seamless logo bra.

It marries bra technology with the great CK logo.

This will allow us to continue to cater to a younger consumer and offer those that want more support the ability to purchase logo product as well.

Additionally on the bra side, we continue to expand our Black Label offering, particularly in Asia and Europe, and have launched two new products for fall to address our broader tailored bra segment, offering seductive comfort with lace, adding new fashion [details] to our well-known proven seductive comfort silhouette and offering a three-piece lace bra that focuses on our attempt to gain a larger portion of the large size cup market both in US and in Europe markets.

Lastly, we launched the brand's latest women's fragrance, Deep Euphoria, earlier this month which will help expand the Euphoria business.

The print and video advertising campaign for the fragrance features Margot Robbie and will receive support through a global campaign with print, broadcast and digital media.

From a financial performance perspective in the second quarter, overall the global momentum in Calvin Klein continues as we posted revenue growth of 15% on a constant currency basis and non-GAAP EBIT growth of close to 50% on a constant currency basis.

Let me start with the International businesses for Calvin.

International revenues were up approximately 17% on a constant currency basis with comparable-store sales growth increasing by 11% in the quarter.

Europe continued to experience very healthy wholesale selling and comparable-store sales increases across every major market and our branded presence across the major markets continue to improve each season.

The wholesale business continues its strong performance.

Our fall 2016 sales are projected to be up high-teens and I'm pleased to provide you with an update on spring 2017's order book which is running up about 20%.

The strength of the business is coming from all major markets and across all product categories with an acceleration in both jeans and the underwear categories.

And we have seen growth in some of our newer categories particularly accessories.

Our European retail business continues to gain momentum with comps running up in the mid-teens in the second quarter.

As we have moved into the third quarter, comp store sales in Europe continues to post strong double-digit sales increases.

Moving to Asia, our businesses continue to perform very well with China outperforming our other markets.

However, it is important to note that we did experience a nice improvement in our Korea business.

The trends from our first quarter continues as we see strength across jeans, underwear, accessories and our newer performance athleisure business.

We continue to see my square footage growth across the region with some key new store openings in Hong Kong and mainland China this year.

Additionally, by the end of the year our Asia CK.com sites will be shipping to all major markets across Asia including Australia and New Zealand.

Second-quarter comp sales in Asia saw a nice improvement and we continue to see that trend into our third quarter running up about positive mid-single-digits.

In North America our revenues were up 15% on a constant currency basis driven in large part by the strong performance of our wholesale business across all categories.

During the quarter we saw continued momentum in our underwear business as our women's business continues to see tremendous growth and market share gains in the department store sector.

We have seen market share grow in the bra business to the number five position overall in department stores and the number one position in the bralette category.

We also have grown to the number two position in panties with strong momentum in the logo bottoms business.

In men's we continue to hold the number one market share position in bottoms and the number two position in tops.

Our newest launch in bottoms in the US is the three pack micro, which is off to a strong start.

Historically we have not offered micro product in multi-packs but only in singles and the consumer has reacted very positive to this.

While the department stores continue to drive the lion's share of our volume growth, penetration of our e-commerce and growth in this channel continues to outpace the brick-and-mortar trends.

Continuing on the solid momentum from the first quarter is our men's sportswear and jeans business, which continue to see improvement from the fall season with better AURs and strong sell-throughs.

Women's jeans continues to see outsized improvement through our specialty store icons like Urban Outfitters, and we did see improvement trends across all of our department store businesses there as well.

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

Retail comps continued to remain soft in the second quarter at mid-single-digit negative, and we are not planning for this sales trend to improve for the balance of the year.

Finally in our Heritage businesses, the Heritage business revenues declined 14% driven by the ongoing impact of our rationalization initiatives including the exit of the Izod retail business and the discontinuation of several licensed product lines within dress furnishing.

Additionally, our Heritage Brands business was impacted by a shift in timing of our wholesale shipments into the third quarter from the second quarter.

Our Heritage businesses continue to track positively against our full-year 2016 financial plan.

We are very well-positioned in these businesses, inventories are very clean and our sales orders at wholesale are very healthy.

We believe we are poised to post a significant earnings turnaround in the second half of the year.

Finally, I would be remiss if I didn't mention Speedo and its Olympic performance.

I would like to congratulate team Speedo on their performance during the summer Olympics.

The Speedo brand was dominant during the games and very prominent to our consumers and we believe this exposure will continue to have a positive impact on our business.

Finally to conclude my remarks, overall we are quite pleased with our performance in the first half and believe that our world-class brands, proven business model and best-in-class management teams are well-positioned to navigate through the macroeconomic and geopolitical volatility that we are seeing, while being positioned hopefully to outperform against our second half projections.

And with that I will turn it over to Mike to quantify some of the financial results.

Thanks, Manny.

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

Second-quarter revenues were in line with guidance with a 5% constant currency increase over the prior year after excluding a negative impact of 1% from foreign exchange.

Our Calvin Klein and Tommy Hilfiger businesses had a strong quarter.

Calvin Klein revenues were up 15% on a constant currency basis, ahead of guidance, and driven by all returns.

Calvin Klein International comps were particularly strong with a comp store increase of 11%.

Tommy Hilfiger revenues were up 7% on a constant currency basis for the quarter driven by strong performance in Europe as our Europe comp sales were up 8% as well as the addition of our China business.

Our Calvin Klein and Tommy Hilfiger US wholesale businesses performed well in the quarter and exceeded plan.

However, our US retail businesses for these brands remain under pressure due to continued declines in our stores located in international tourist locations.

Heritage revenues were down 14% primarily due to the exit of the Izod retail business and the discontinuation of several licensed product lines and dress furnishings business as well as the timing of shipment.

EPS for the quarter was better than the top end of our guidance by $0.17.

The [beat] was driven by our strong Calvin and Tommy performance for $0.10, a favorable shift of marketing spend into the second half of the year of $0.05, favorable timing on taxes of $0.03, and a partial offset from FX of $0.01.

Our inventories were very clean at the end of the second quarter, relatively flat to the prior year despite acquiring inventory as part of the Tommy China acquisition.

Looking ahead to the remainder of 2016, we are increasing our earnings guidance for the year while continuing to take a prudent approach to planning our business in the second half as a result of global consumer spending remaining volatile and the US retail market continuing to be promotional.

In particular, we are now planning second half comp store sales trends in our US retail business not to improve.

Specifically we are protecting our second half comps to be at the same level as our first half trends.

For the full year 2016 we are anticipating, based on our current exchange rates, that we'll be negatively impacted by about $1.60 of earnings per share for foreign exchange, which is $0.05 worse than previous guidance and was primarily driven by the British pound.

The $1.60 impact is approximately 85% transaction and 15% translation.

For the full year 2016 we are projecting non-GAAP earnings per share of $6.55 to $6.65.

If we exclude the negative impact of FX of $1.60, earnings per share growth is 16% to 17% over the prior year.

We have increased our earnings per share guidance $0.10 despite the $0.05 negative impact from FX.

Our guidance continues to reflect a prudent view of our businesses for the second half of the year.

In total, the second half of the year will include an increase of $40 million versus the prior year in brand marketing as well as investments associated with the recent Calvin Klein creative leadership changes, versus our previous guidance of full-year marketing spend has increased approximately $10 million.

Overall we are projecting full-year revenues to grow approximately 3% on a constant currency basis.

This guidance reflects a revenue reduction of approximately $40 million in the second half of the year related to our proposed joint venture in Mexico, which is expected to close late in the third quarter and would primarily impact our Calvin Klein business.

Overall, we expect this transaction to the earnings neutral on a non-GAAP basis for 2016.

Overall operating margins are expected to increase 75 basis points on a constant currency basis and decrease 90 basis points on a reported basis.

Our Calvin Klein business is projecting revenues to grow 7% on a constant currency basis with operating margins to increase about 50 points excluding the negative impact of FX of 150 basis points.

Tommy Hilfiger revenues are planned to increase 5% on a constant currency basis with operating margins planned to increase about 75 basis points, excluding the negative impact of approximately 225 basis points of FX.

Our Heritage businesses plan to have a revenue decrease of 8% due mostly to the exiting of the 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 in Heritage is relatively immaterial.

Third-quarter non-GAAP earnings per share is planned at $2.35 to $2.40 and includes $0.45 of estimated negative impact of foreign exchange.

Excluding this negative impact we're expecting earnings per share to increase 5% to 7% for the third quarter.

Included in our third-quarter guidance we have increased marketing and investment spend of approximately $20 million versus the prior year.

Revenue in the third quarter is projected to increase 3% on a constant currency basis.

Calvin Klein and Tommy Hilfiger revenues are planned at a 6% constant currency increase while the Heritage business is planned to decrease 6%.

And with that we will open it up for questions.

(Operator Instructions).

David Glick, Buckingham Research Group.

Thank you and congrats on the progress.

A couple questions.

First, on the outlet business, can you talk through when you saw the big fall off last year?

And why at this point you decided to not bake in any improvement?

Then I have a couple follow-ups.

Thanks.

Sure.

I guess, David, last year the fall-off I guess really started late August into September.

We will start to anniversary that right around Labor Day.

I guess from a guidance and projection point of view it just seemed prudent to -- whatever risk might be in the business, the idea was to try to de-risk any of the guidance as we went forward.

Given the momentum that we are seeing in other parts of the business we felt comfortable taking that sales trend down.

I think just to say it, if we were to see somewhat of a leveling off in that environment we are well-positioned with inventory there to take advantage of it both from a top-line point of view and even more importantly I think from a margin point of view as we go forward.

So, opportunity exists if that channel were to bounce back somewhat in the third and fourth quarter.

I think the real opportunity, to sum it up, is really the fourth quarter given the weather issues that we faced last year and the pressure that was put on margins last year to liquidate goods.

Okay, thanks.

A follow-up on denim, that was a big conversation at MAGIC.

A number of retailers have talked about a lot happening, a lot of newness in denim.

Clearly the underwear and intimates is driving your Calvin growth and I am really more focused on the Calvin Klein jean business.

Can you talk about where you are in terms of some of these trends whether it is stretch or ripped, destructed, narrower leg openings, etc.?

Like how you are positioning the line on the women's side?

And do you feel like you are where you want to be to really start to take advantage of what appears to be a fashion trend moving in your direction?

Well, I think there is a couple of stories and some of it is geographic and some of it is men's versus women's.

I think geographically outside the United States I think the brand -- the Calvin Klein brand in jeans is very well-positioned.

A lot of innovation, and we are seeing very strong momentum in the business both men's and women's.

A lot of the fashion issues that you touched on in what is moving forward ,be it skinny, flair, stretch, whatever the case, we are really on all of those issues and really doing very well with it.

I would be remiss if I didn't mention that the Tommy Hilfiger -- our Hilfiger denim line continues to really post very strong results as well.

That business internationally -- well, in Europe is larger than the Calvin Klein jeans business there.

And we are seeing real strong growth in that denim category with Tommy Hilfiger in that area.

Moving to the United States, the men's business, as I have mentioned a couple of times, is ahead of the women's business both from a fashion point of view and from a performance point of view at departments -- in our performance at department stores.

I think from a fashion point of view our fall line really moves us forward on the women's side of the equation and we will be well-positioned for the back-to-school season and hopefully to capture significant amount of growth in that area.

Our retail partners really feel strongly about how the line is positioned.

And we are starting to see it in our order book as we look beyond 2016 into 2017 where our retail partners are gaining more confidence in the line and placing stronger orders as we go forward.

So I feel positive about the moves that are being made on the Calvin Klein jeans side of the business.

Men's, first and foremost, really performing very well in the US and then women's really seems to be coming on.

And we will be able to report better to you as we get into third quarter.

Great, thanks.

Last question if I could.

You talk about how you are kind of balancing the decrease in footprint in department stores.

How this 100 door closure may affect you from -- obviously it will affect you from a sales perspective, but your thoughts on a possible EBIT impact.

And then how you are kind of repositioning the organization from a staffing standpoint to grow the Amazon business, which is obviously not the easiest thing to do.

But if you can talk through that dynamic, I'd appreciate it.

Thanks.

So, I think what is critical -- I guess first, let's start with the Macy's 100 door closure.

Macy's spoke to it as a net impact of about $1 billion.

I think it will be relatively immaterial to our top line as we move forward as that happens over a period of time.

I think it may put a little bit of pressure on top line, but from a profitability point of view these obviously weren't Macy's most profitable stores and they weren't our most profitable margin stores.

So I think the opportunity is to have a healthier presentation at healthier profitability in the brick-and-mortar side of the business.

From a positioning point of view, for the last 24 to 36 months we've been really trying to drive our digital growth both our own sites but also our partner sites, Macy's.com, our key players there.

And also a number of the pure plays globally be it Amazon, Zalando, Alibaba, Tmall.

So those are clearly areas for us and we have tried to segment our product, make sure that we are well-positioned in those areas.

Significantly investing -- I mentioned in my comments the investments we are making from a digital presentation point of view.

Clearly our marketing campaigns have shifted their spend to where well over 50% of our marketing spend now is digital both for Calvin and Tommy.

So, I think we are making all of the right moves.

And we need to be where the consumer is; they went our brands and we are positioned there.

And over the next 12 months we are trying to position ourselves that we are agnostic about where we make the sale whether it is in our own retail stores, department stores through their brick-and-mortar or their own e-commerce sites.

So that is the way we are positioned.

I think we are as well-positioned as anyone with our two key brands to take advantage of that.

Great, thank you very much for the color.

Good luck.

Erinn Murphy, Piper Jaffray.

Great, thanks, good morning.

And let me add my congratulations.

I guess, Manny, first question for you is on Calvin Klein.

With Raf Simons coming in can you just talk a little bit more about (technical difficulty) product [team], how they will look under him?

And then I guess with the message more towards unification, does that change how you are thinking about your existing Calvin Klein licenses under Raf?

Thank you.

I think for the first time since we have owned the business and we are going to have one clear strategic direction for the brand.

And I think you can underestimate what that will mean to us from a brand point of view moving forward.

I think -- we haven't had that since 2003 when Calvin Klein ran the business.

So, to have a cohesive view of the brand and the product and being able to really take advantage of the collection business to diffuse it down to our white label and bridge lines I think will be a huge benefit for us as we go forward.

As far as how that will impact our marketing campaigns and as we move forward I think, look, that is a work in process.

I think what you will probably see is the last two years, appropriately so given the size of the business, a disproportionate amount of our marketing spend has gone to Calvin Klein jeans and underwear.

And I think as we move into 2017 and beyond you will see more lifestyle marketing of the brand that will capture and take advantage of the other product category areas where we think there is significant growth.

So I view this as all very positive.

From a licensing point of view, and I don't think it changes any of our direction.

I think we continue to look to take control of a more geographic component of our brand where it makes sense, particularly where we have strong operating platforms like we did with the Tommy Hilfiger business in China, we could see that happening both with Tommy and Calvin going forward.

And that there is always the opportunity as we move forward to potentially bring in some significant product categories in house.

Those opportunities exist.

If anything I think Raf's presence only gives us more confidence to take it on as we move forward.

Got it, that is helpful.

And then if I could just follow up on Glick's question on the digital growth.

You mentioned in your prepared remarks there was a number of strategies towards (technical difficulty) more profitable growth in that channel.

Can you just help us (technical difficulty) where does that channel fit from a profitability perspective relative to the balance of your business?

And then Amazon business, obviously that is a wholesale business for you, but where is profitability on that sector (technical difficulty) for you?

So look, I'm not going to speak to a specific customer, but I will just say that our e-commerce wholesale business where we are selling to our pure plays and all of -- what we're selling to our pure plays and to our department store partners is a very profitable business consistent with all of our other businesses.

The only business that is a challenge for us from a profitability point of view is our own e-commerce businesses, which we are truly running as flagship sites.

We don't over promote on those sites, it is very event driven.

We don't do flash sites and flash selling on our own sites.

We don't drive excess product through our sites.

We really view that as flagship sites where the consumer comes to our sites, be it Tommy or Calvin, they investigate the brand, better understand the brand.

They can buy on our sites or we will drive them to our retail partners' sites.

Or they will use that investigation to shop in department stores as we move forward.

So we see it as a very cohesive strategy that works together.

And I think from a pure profitability point of view the only issue we are dealing with on our own e-commerce sites is scale.

As that business continues to grow -- we have talked about the kind of growth rates we are seeing -- we are 12 months away from going from a loss position on those businesses to a profit position on those businesses.

And each incremental sale that we make on line is as profitable as an incremental sale in wholesale on our own retail stores.

So from that perspective we truly are becoming agnostic about where the customer shops.

Got it, that is helpful.

(Technical difficulty) one clarification on the guidance for Mike.

From a sales perspective in Q3 I think it was much better than a lot of us were looking for (technical difficulty) --.

Erinn, we lost you.

We lost you on the much better than.

Can you hear me?

Yes, now we can.

Sorry about that.

So just (technical difficulty) and I think a lot of us looked at it up 3%.

It would basically imply your fourth-quarter sales guidance is effectively (technical difficulty) that your 2% sales guide for the year.

So I guess it seems that could be fairly conservative given (technical difficulty).

Are the offsets, the JV in (technical difficulty)?

I think we got it, Erinn, we understand your questions.

It is more about fourth-quarter sales and how conservative are they.

So, look, I guess a couple things.

As Manny said in his comments and I did as well, we are looking at the fourth quarter prudently.

We are planning our trends from the first half in our outlet business to continue through the second half.

We are taking a prudent view of the wholesale business in North America as well.

And then lastly I would just point out that there were some very strong fixture fills and launches in the fourth quarter of last year.

I believe the comp -- the Calvin Klein revenue increase was in excess of 20% in the fourth quarter of last year.

So overall I would say it is a prudent view of the fourth quarter.

I think -- if I could just add, I think the real -- look, there could be sales opportunity for us as we move forward for the second half, particularly the fourth quarter.

But the real key, I think, go forward is overall profitability from a gross margin point of view.

Really I think our department store partners, and again this is a focus on north America.

They have really tightened open to buy dollars which is a positive.

And I think they are going to be well-positioned if we get any kind of reasonable weather in the third into the fourth quarter last year.

So, I think some years are top-line growth years or some seasons, and some seasons are margin seasons.

I think this is really a margin season where the opportunity really exists to show dramatic improvement over last year's fourth quarter on the margin line.

If we can continue to keep the channel clean from an inventory point of view and if we just get some reasonable weather.

So I think it is laying out really well for us.

I'm pleasantly surprised about how well positioned our department store partners' inventories seem to be.

They really got under the sales trend.

And so I feel positive about that as well.

So, I think we are all well positioned to capture a strong back-to-school season and a strong Christmas holiday season.

Great, thank you very much.

Next question.

Michael Binetti, UBS.

Congrats on a great quarter.

Let me try to ask a little extension of Erinn's question there.

I guess if you could help us isolate how much of the -- I guess the implied revenue done for Calvin 6%.

Can you just help us isolate how much of that in your mind is nonrecurring items that are holding back that growth rate in the fourth quarter and the [OpEx] that you spoke to so we can start to think about whether 2017 is still a mid- to high-single-digit growth year for Calvin again, just to help us filter through some of the noise?

Yes, look, the Calvin business is strong, so there is nothing that's changed in our outlook as we look forward.

In the third and fourth quarter we are going to have -- in the third quarter we will execute our Mexico agreement, that is predominantly a Calvin Klein transaction.

That will move this business from an operating business today to a joint venture.

We will have about a $40 million revenue hit in the second half of the year and that is three quarters or more weighted to the fourth quarter.

I guess I would also just say on the -- if we are focusing just on Calvin Klein I don't think we can anticipate 15% constant currency growth for 2017 as we go forward.

I mean I would love it to happen but we will see how it plays out.

And when you go quarter by quarter, like any business, there is somewhat ups and downs.

We have had such a strong first half of the year.

I think there are some timing shifts that we have had to deal with on shipping and accelerating shipment with the strength of the Calvin business.

I would not read anything into the fourth-quarter sales trends that would in any way indicate that either the Tommy Hilfiger business or the Calvin Klein business are seeing any type of slowdown against what we are seeing going forward.

So, I just think it is a quarter, maybe we are being a little bit conservative, but there is nothing -- there is no fundamental changes in the business, no fundamental changes in the sales trends that we see.

And I think if you talk with most of our North America department store partners they will tell you how strong that business is despite what is going on around everywhere else.

Okay, that helps.

And then since you are focused on the profitability opportunity in the back half as well, could we get a little bit of color on how you are thinking about grosses for the balance of the year.

I think you previously spoke to about 53% with grosses up in each quarter.

But the inventories were flat including an acquisition, so maybe down excluding the acquisition.

And grosses were really healthy in the second quarter.

Sales momentum, to your point, is strong.

Can we assume that directionally grosses should be up by more on a year-over-year basis in the third quarter than what we saw in the first half?

So look, our gross margin view for the year has remained unchanged at 53%.

As we move through the third and fourth quarter we have got a little bit more opportunity in the fourth quarter because comp -- comparisons last year were just -- it was a very promotional quarter.

But Manny said it, this is more about the opportunity on gross margin than revenues this year.

So we feel there is an opportunity there but we will plan prudently at this point.

And I just would say I think just by the way things get recorded, the way things got hit, I think the opportunity is really the fourth quarter is from a financial performance point of view.

Also see a little bit less pressure from foreign currencies, which is principally transactional gross margin related year over year.

So just on -- as you look at it sequentially this year to last year, I think the fourth quarter has the opportunity to see the biggest improvement.

Okay, thanks.

I appreciate the help, guys.

Dana Telsey, Telsey Advisory Group.

Good morning and nice to see the progress, Manny and team.

Can you talk a little bit about the Tommy Hilfiger women's license, how that is progressing?

When we should begin to see things from that?

And also on China and the accretion opportunity for Tommy Hilfiger?

Thank you.

I think the G-III -- actually in G-III sales you will really start to see it in the fourth quarter.

Holiday 2016 they will start shipping; I guess there will be some deliveries beginning of November as they set up.

I will leave it to them; I don't want to start talking about the business for them.

I know they are optimistic and enthusiastic about how they see that business.

I know the dresses hit the floor -- dresses are hitting the floor and women's suits are hitting the floor earlier and they are really feeling good about that portion of the business as it relates to Tommy Hilfiger.

But I think they report in another few days.

I think let them lay it out for you.

The transition really going smoothly.

The two companies have worked together very well to make sure from an inventory point of view there is no carryover merchandise that is going to negatively impact the business.

And really worked well with Macy's in particular and our other key department store accounts to make sure that transition is seamless and I am very confident about the way that is moving.

G-III -- what we are hoping for is what they have delivered in Calvin Klein over the last five to seven years that they will deliver for Tommy Hilfiger.

And really take a business that is a couple hundred million dollars and turn it into a $500 million to $700 million business, at much higher price points and at better margins.

Thank you.

You mentioned China, again this year with the transition and some of the amortizations and some of the accounting stuff that we have to deal with it is going to be slightly accretive.

I think that business will continue to grow.

I think we are going to -- I guess we are projecting it to grow high-single-digits.

There is an opportunity to do more than that but it is a question of how fast and quickly we want to move.

Clearly if you look at the size of the business, round numbers $140 million to $150 million business.

Compared to a Calvin Klein business it's at least twice as large.

There is clearly a footprint opportunity for us to grow.

And I guess just having the two brands under one roof, under one logistics platform, one operating platform the synergies should start to come towards the second half of next year in a bigger way.

So it will be a much bigger contributor to profitability next year as we move forward.

And it will be a big contributor to our top-line growth as well.

So I feel -- I really think that will be probably, without a doubt, it will be next year for sure, our highest operating margin business in the Company for the Tommy Hilfiger brand.

Very similar to how profitable our Calvin Klein China business is.

So as we look forward we are enthusiastic and I think it will be a contributor significantly to our top and bottom line.

Thank you.

John Kernan, Cowen.

I wanted to stay on topic of licenses and potential acquisitions.

What other regions are out there?

What other licenses are out there that you could potentially bring back in-house?

Obviously the leverage ratio on the balance sheet continues to come down well north of $500 million in free cash flow this year, which is only going to grow over the next couple years.

So, how do you think about deploying cash at this point between balancing acquisitions of licenses and maybe deleveraging the balance sheet?

I think, look, we have been pretty transparent about that Asia is the region that we continue to see the biggest growth and the biggest potential opportunity to take back license businesses and to operate businesses directly.

Clearly Korea will be a big market for us.

We believe Japan could be a market for us and Central and South East Asia which would include Hong Kong, Macau, Taiwan, so some pretty substantial markets as we go forward, which should be nicely profitable as we go forward.

The key in all of that is timing of license expirations, really working hand in hand with our strategic licensing partners who have really done a great job in building the brand throughout Asia.

The other opportunity will be Brazil, Calvin Klein has a very profitable business there that, despite the economic conditions in Brazil, continues to be close to a 20% operating margin business for us.

And it is about 25% -- the Tommy Hilfiger business in Brazil is about 25% the size of the Calvin Klein business in Brazil.

So clear growth opportunity there that we are doing with a strategic partner where we own a little bit over 40% of a joint venture and the ability there over time to bring that in-house will play itself out.

So clear opportunities there and that is really our focus area at this point -- the focus areas at this point as far as license take backs.

Okay, then shifting gears a little bit.

Tommy Hilfiger International, the comps here have been incredibly consistent since you bought the brand.

You are lapping double-digit comps with high-single-digit comps.

Help us understand that drivers of this.

Is this AUR driven?

Is it traffic driven?

Are there new stores coming in the comp base?

How sustainable are the continued comp store sales increases?

How much more productive can your direct business get in Europe?

Look, I think that business, as you said, has been a real high performer for us, particularly over the last two years.

And then we are putting on comps on top of comps and we are comping on top of double-digit comps from last year and certainly [quarters].

As we look at it we continue to see opportunities.

The big improvement in our retail stores has been a very healthy women's business and I think that only continues.

If you think about the brand in Europe it is 65% to 70% men's versus women's.

And we all know how much larger the women's market is than men's.

So that opportunity keeps presenting itself.

The productivity in our stores continues to improve and a lot of it is being driven by the women's sales per square foot growing closer and closer to the men's productivity in those stores.

So the opportunity is there to continue this momentum and a big piece of it will be driven by the women's component getting better.

And as our men's tailored business becomes a bigger piece of the pie and we continue to get strong success there throughout Europe at a wholesale level.

As we bring that product category into the stores given the much higher price point it really does wonders for the sales productivity in the stores.

The margins are comparable to our sportswear apparel margins and footwear margins.

So clearly the opportunity there is to grow men's tailored in our stores and to grow the women's business in our stores.

And there is a lot of momentum behind those businesses.

So I don't think -- I think we will continue to see positive comps.

I can't talk about double-digit comp store increases, but I can continue to say we will continue to see momentum.

Europe seems much healthier as a market to us.

I know all of the headlines about Europe and what you see, but as far as the consumers being -- spending discretionary money, it is very healthy there.

I think the fact that the dollar has strengthened has only made our Europe -- the pressure that puts on our US business I have talked about.

The flipside of that is it really significantly helps our international businesses.

As people travel or people stay closer to home in Europe within Europe and buy when they are on vacation or on holiday, that has really been a big win for us as well.

So I think those trends will continue.

All right, thanks, and best of luck as we go into holidays.

Thank you.

Next question.

Eric Tracy, Brean Capital.

Thanks, good morning, and I will add my congrats.

I guess just a point of a clarification in terms of the spring order book, CK up 20% and I believe Tommy up 7%.

Just to make sure, that was Europe?

And if so can you provide the global order book for spring?

Okay, two things.

Yes, to confirm, that was Europe.

Second, we don't give global order book because most of our businesses tend to be retail based, not wholesale based.

It's really -- it is misleading statistic I think.

And secondarily, in the US we never give order books because we just don't believe in laying that out given the fragile nature of orders in the United States.

So, there is a lot of momentum behind the business, nothing has changed but it doesn't make sense to call those out.

And just to follow up on that in terms of Europe.

I mean you mentioned some of the dynamics at play that sort of support that European business.

But maybe just a little bit more color both for CK and Tommy in terms of the drivers.

Is it accelerating on the jeanswear side, [does it continue] (inaudible) underwear?

Just a little bit more color on that would be great.

Sure.

On the Calvin Klein side, look, it is all product categories.

I don't mean to sound cavalier about it when I say it -- is the strength is across all countries, all major countries.

All product categories we are really seeing tremendous growth in jeans and underwear because they are the two largest categories.

But our accessory business is also performing very strong there.

We have just only recently launched men's sportswear and that -- the percentage there are very, very high but the dollars there are small as it starts to roll out.

And we haven't done anything with women's sportswear and apparel outside of genes and underwear at all.

So that is really a major opportunity for us as we move forward.

If we start to just match up from where we are positioned geographically in the United States or even in Asia where Calvin women's represents about 40% of the volume, there is a huge opportunity in Europe for that to continue.

Just to remind everybody, the European strategy first and foremost was to take a broken Warnaco jeans and underwear business that was in the wrong distribution at -- and still basically breaking even and, when you pulled out the bad distribution, was losing money.

Our European business today is healthy, growing.

You see the international numbers, you see the margins there.

So our European business is really contributing significantly.

If you use Tommy Hilfiger as a comparison, the Tommy Hilfiger business in Europe is three times the size of the Calvin business, it is the only region in the world where Tommy is larger than Calvin.

The profitability is 200 to 300 basis points higher and that has to do with scale.

And I think of those opportunities as the brand now has solidified -- the Calvin brand has solidified its position, has got a profitable foundation, the ability to take that forward and the enthusiasm that our wholesale partners have for the brand just gives us -- makes us just more optimistic about that this European trend can continue for the next three to four years.

And if I could switch gears I mean, Manny, when you think about the US retail business, understandably the currency, tourism challenges.

But a little bit bigger picture as you think about potentially rationalizing some of those doors, is that a fair thing or is it just -- you really believe the challenges are more cyclical in nature?

Well I guess -- here is the dynamic, it is the stores we are talking about that are feeling the biggest pain from the international tourist market are also located in areas like Miami, Orlando, New York, Los Angeles -- that they are by far our largest stores and our highest profitability stores.

So I'd use as -- a comparison is the Macy's Herald Square is the most profitable department store in the world, I believe.

And it is being impacted by international tourism, but it is still one of the most -- largest most profitable department stores in the world.

And not to put ourselves in the same category as Macy's Herald Square, but these stores are our largest most profitable stores.

And I think this tourism will balance out.

I am not going to sit here and say it is coming back.

But I do think as we get through the third and fourth quarter this year it should level off and we will continue to have very profitable stores.

If you look at our retail profitability it is as strong as our wholesale profitability.

And you see how profitable our Calvin and Tommy North America businesses are, double-digit operating margins, very profitable businesses.

So this is a just a shift in sales trends and I think our European business is benefiting from that shift and our Asia business is to an extent, and our Latin America business is.

But the US retail business is just such a big component of our sales we just feel it directly here.

Thanks a lot and best of luck.

Okay.

Operator, we will take this as our -- the next question as our last question.

Thank you.

Jay Sole, Morgan Stanley.

Just want to ask about the use wholesale business versus US retail, because you mentioned international tourist sales are one reason the US -- the retail business was weaker than the wholesale business.

But is there another factor because the difference is pretty stark?

I mean what is allowing you to it seems like grow at a such greater rate in US wholesale relative to the peers and also relative to the retail business?

Well, I think there is two things.

I think fundamentally it is the two brands.

What we are really talking about is Calvin Klein and Tommy Hilfiger when we talk about all the momentum in the wholesale department store channels in the United States.

And I mean if you talk to most of all new stores, they will tell you how healthy the Calvin Klein business is, how -- continue to fuel growth beyond the women's side of the floor or the men's side of the floor.

So I think we do have with the Calvin brand in particular a lot of momentum behind the brand.

We have been able to take advantage of some of the weakness with some of our competitors to grow square footage and to gain market share in that channel.

So I think we are outperforming.

We have positioned ourselves and I don't believe we have overextended our brands in that channel of distribution.

Where other players have talked about that they have over exposed and over -- we have been continuing to grow, but I think we have been doing it in a very healthy way.

We are in categories that department stores really are focused on growing, women's and men's, and we have been a solution in both of those areas.

With the Tommy brand with Macy's it continues to perform very well for us on the men's side of the floor.

And now with the G-III initiative Macy's has really gotten behind the brand and thinks it really can make up for some of the market share losses that they have had with other brands.

So I think we are -- I think we have been better positioned.

We know where we play in the US and understand that market positioning and it has worked for us.

Even in difficult times like last year's third and fourth quarter our two brands really outperformed the competitive set.

And I think that is what is paying off for us now as we move forward.

I hope that explains it.

And with that we are going to close our call.

I thank everybody for their attention.

We look forward to speaking to you in December about our third-quarter results.

And I wish everybody a great Labor Day.

Have a nice day.

Thank you.

This does conclude today's conference.

We thank you for your participation.