PVH Corp (PVH) 2016 Q3 法說會逐字稿

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

third-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 November 30, 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 its strategies, objectives, expectations and intentions, and its need to use significant cash flow to service its debt applications.

Therefore, the Company's future results of operations could differ materially from historical results or current expectations.

PVH does not undertake any obligation to update publicly any forward-looking statement, including without limitation, any estimate regarding revenue or earnings.

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

Reconciliations to GAAP amounts are included in PVH's third-quarter 2016 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.

Thank you, Matt.

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

Joining me on the call is Mike Shaffer, our Chief Financial Officer; Dana Perlman, our Treasurer and Head of Investor Relations; and Ken Duane, who runs our North America wholesale business.

Overall, our performance year to date and through the third quarter continues to exceed our expectations, and demonstrates our ability to deliver against the 2016 plan, despite the ongoing macro environment.

Overall, we had a terrific quarter with revenues increasing 5% on a constant currency basis, while EPS grew approximately 15% on a constant currency basis.

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

Our Europe and China businesses continue to be our healthiest markets, along with our North America wholesale business.

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

Speaking of digital, for Q3, we continued to generate revenue growth in excess of 20%, and this channel continues to be our fastest growing distribution channel.

The one challenging part of our business continues to be our US retail businesses in the third quarter.

We did not see an improvement in comp-store sales trends from first-half trends.

Specifically, international tourist traffic and spending continued to weigh on our US retail business.

However, as we moved into the last two weeks of November, we have seen a significant improvement in comp-store sales across all of our US retail businesses.

Let me move on to our brands.

Speaking about the Tommy Hilfiger brand, we have previously discussed with you Gigi Hadid is our global ambassador for Tommy Hilfiger women's, representing apparel, footwear, accessories and fragrance, and the reaction and brand awareness that she has helped to bring to our brand over the last few months has been terrific.

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

We believe that we have a significant growth opportunity in women's, and we are encouraged by the improvements and positive momentum we are seeing globally in this fall holiday season.

Financially speaking, overall revenues for Tommy increased 6% on a constant currency basis, and EBIT was up about 12% on a constant currency basis.

Our revenues were driven by the outstanding performance of our international business, which generate 18% constant currency sales growth in the quarter.

The Tommy Europe business performance was incredible, and it continues to highlight the strength of the brand in our largest region, and highlights the market share gains the brand continues to achieve.

We continue to see very healthy performance in all major European markets in the third quarter, demonstrated by a 10% comp-store sales increase in Europe for our retail business.

This strong performance has continued into November, along with very strong margins.

Again, we are pleased with the strong wholesale performance that we are seeing, as our fall holiday season to date is up about 6%.

Looking out to spring 2017 season, which starts to ship in the fourth quarter, our spring order book is running up 8% versus the prior year, which is ahead of our previous guidance of about 7%.

Moving to Asia.

Our Tommy Asia business continues to perform well, led by our recently-acquired China business, as that business will be on track to be accretive to this year's earnings, despite the increased marketing dollars we have put into the China market to support the long-term growth of the brand going forward.

Moving to our North America business, Tommy North America continues to see a really strong men's wholesale business, which has continued to outperform our competitors.

Not only in the third quarter, but throughout the entire year.

We have now handed off the women's business to G-III, and expect to see strong growth going forward from them as our licensee.

Shifting to retail.

As I mentioned, in the third quarter, we continued to see challenging sales trends, with our comps down 11% in our US stores.

This trend continued into the first two weeks of November, however we did see a significant improvement in comps in the last two weeks of November, with overall fourth-quarter comps to date down mid-single digits.

This strong selling, which is being driven by higher AURs, coupled with our healthy inventory position, has the potential to generate higher-than-planned gross margins in the fourth quarter.

Moving to Calvin Klein.

Overall, we continue to see great momentum within the Calvin Klein brand and our business more broadly.

The brand continues to drive relevancy, with strong digital advertising campaigns, and by enhancing and diversifying our distribution of the brand to a number of key specialty stores in the US and Europe.

Over the last quarter, we continued to see our awareness levels and willingness to purchase metrics continue to improve in all major markets.

As an update on some product initiatives, generally speaking, our sculpted jean launch for fall has been well received across all markets, where we have seen strong sell-throughs, higher AURs, and better overall margins.

Our fall launch in tailored bras was Seductive Comfort with lace, where we took our best-selling Seductive Comfort silhouette and added lace, and have seen a great reception to date around the globe.

We have also expanded our size scale offering in the US to include extended sizes up to size 40DDD.

These additional size bands of 36 to 40 have the potential to represent 25% to 30% of our total US bra business.

This represents a significant market share opportunity for us going forward.

For men, we introduced our Liquid Stretch product, which provided the utmost comfort in a great new innovative stretch fabric, and takes advantage of the active trend that is happening in the market.

From a financial perspective, revenues for Calvin increased 10% on a constant currency basis, and EBIT was up 9% on a constant currency basis.

Our revenues were driven by strong top-line growth out of Europe, China and North America wholesale across all classifications, with continued strong gross margin performance.

Calvin Klein Europe's performance continued to show incredible improvement year over year, and I'm quite pleased with the progress of the business, and where we are headed.

The wholesale business continued its strong performance with fall holiday 2016 sales up high teens.

This momentum is accelerating as we move into 2017, as our spring order book now is running up over 20%.

Our European retail business continues to gain momentum, with third-quarter comps running up mid-teens, and this sales trend has continued into the fourth quarter.

The strength of the European 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 also seen strong growth in some of our new product categories, particularly accessories.

Our Calvin Klein Asia business also continues to perform well, with China outperforming all other markets.

We continue to see strength across jeans, underwear, accessories, and our newer performance athleisure business within Asia.

Moving to North America, our Calvin Klein North America business continues to see healthy growth across our wholesale channels in line with our plans, which reflected lower open-to-buy dollars from retailers versus the previous year.

I'm pleased to report that we continue to see strength across all categories from our dress shirt business to sportswear, jeans, and certainly our underwear business, led by continued momentum in our women's intimates business.

Shifting to retail, as I commented on our Tommy Hilfiger North America retail results, we did not experience any improvement across our US retail business at Calvin, with overall comps down about 5% for the third quarter.

This trend continued into the first two weeks of November, however we have seen a significant improvement in comp-store sales during the last two weeks of the month, with fourth-quarter comps to date flat for last year.

Finally, our Heritage business revenues were down 8%, driven by the ongoing impact of our rationalization initiatives announced in 2015, including the exit of the IZOD retail business, and the discontinuation of several licensed products within dress furnishings.

Our Heritage businesses continue to track positively against our full-year 2016 financial plan, with operating margins improving 90 basis points for the quarter, driven by improved wholesale performance and continued strength in our Van Heusen retail business with third-quarter comps up 6%.

Specifically, we continue to see solid performance across all of our Heritage businesses, with the exception of our neckwear business, which has been soft for the entire year.

Looking at our outlook for the year, we are increasing our earnings guidance for the year, while taking into account the impact that the strengthening US dollar will have on our reported results.

We are being prudent in planning the fourth-quarter holiday season, which we expect will remain highly competitive.

We also believe the geopolitical uncertainty has intensified post the US elections, which will drive macroeconomic volatility.

Given this backdrop, we believe it is prudent to be conservative with our financial projections for the fourth quarter as we move out.

And with that, I am going to turn it over to Mike to quantify our third-quarter earnings and our outlook.

Thanks, Manny.

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

Third-quarter revenues were up 4% versus our guidance of up 3%.

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

Calvin Klein revenues were up 10% on a constant currency basis, ahead of guidance and driven by all regions.

Calvin Klein international comps were particularly strong, with a comp-store increase of 7%.

Tommy Hilfiger revenues were up 6% on a constant currency basis for the quarter, driven by strong performance in Europe, as our Europe comp-store sales were up 10%, and the addition of our China business as well.

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 remained under pressure due to continued declines in our stores located in international tourist destinations.

Heritage revenues were down 8%, 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 $0.20.

The beat was driven by our strong Calvin Klein and Tommy Hilfiger performance, as well as favorable taxes and interest for approximately $0.15, and the timing shift in marketing spend into the fourth quarter from the third quarter of $0.05.

Our inventories for the quarter were very clean, at the end of the quarter, and were down 6% versus prior year.

We have increased our EPS guidance by $0.15 at the top end of our previous range, and $0.20 at the low end of our previous range, before a $0.05 negative impact from FX.

For the full-year 2016, we are increasing our non-GAAP earnings per share estimate to $6.70 to $6.75.

If we exclude the negative impact of FX of $1.65, we have earnings per share growth of 18% to 19% over the prior year.

As I mentioned, for the full-year 2016 we are anticipating based on current exchange rates that will be impacting negatively by about $1.65 of earnings per share for foreign exchange, which is $0.05 worse than previous guidance.

The $1.65 impact is approximately 80% driven by transaction and 20% driven by translation.

Our guidance continues to reflect a prudent view of our business for the fourth quarter, as a result of global consumer spending remaining volatile, and the US retail market continuing to be promotional.

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

Overall operating margins are expected to increase approximately 75 basis on a constant currency basis, and to decrease approximately 80 basis points on an as-reported basis.

Our Calvin Klein business is projecting revenues to grow 8% on a currency basis, with operating margins to increase about 50 basis points, excluding a negative impact of 160 basis points of FX.

Tommy Hilfiger revenues are planned to increase 5% on a constant currency basis, with operating margins planned to increase about 110 basis points, excluding a negative impact of approximately 220 basis points of FX.

Our Heritage businesses plan to have a revenue decrease of 9%, due mostly to our exiting of the IZOD retail business and several licensed product lines in our dress shirt business.

Operating margins on our Heritage business are planned to decrease about 30 basis points.

Fourth-quarter non-GAAP earnings per share is planned at $1.13 to $1.18, and includes $0.23 of estimated negative impact from foreign exchange.

The fourth quarter will include an increase of $25 million versus the prior year in brand marketing, as well as investments associated with the recent Calvin Klein creative leadership changes.

The $25 million increase includes a shift of $5 million of marketing from the third quarter into the fourth quarter versus our previous guidance.

Our full-year marketing spend remains flat to the previous guidance.

Revenue in the fourth quarter is projected to increase 1% on a constant currency basis.

Negatively impacting revenue in the fourth quarter is a 2% reduction resulting from our transaction to form a joint venture in Mexico, which primarily impacts our Calvin Klein business, and licensing our Tommy Hilfiger North American wholesale business to G-III.

Calvin Klein revenues are planned at 3% constant currency decrease.

Tommy Hilfiger revenues are planned at a 5% constant currency increase, while Heritage revenues are planned to decrease 3%.

And with that, we will open it up for questions.

(Operator Instructions)

Bob Drbul, Guggenheim.

The first question I have, Manny, is on the expectations for Calvin Klein North America, when you look at the expectations for the fourth-quarter comparisons that you're facing, can you elaborate on that a bit, as well as we look to 2017, the expectations for the sustainability of the strong performance you've seen so far this year?

From the beginning of the year, we've really focused on in the US, that the fourth quarter in 2015 had a significant amount of fixture fill, associated particularly with the expansion of our underwear and our jeans business and our women's intimate business.

As we really, in that fourth quarter, we were getting such substantial growth throughout 2015, we really weren't positioned now to fill the fixtures in, as we came out of holiday season into that January period.

So there was -- from a regular price point of view, there was a significant amount of department store fill, and there was also, in the off-price channel, a significant amount of fixture fill going on there to service that channel, as well as the demand for the product continuing to improve.

That happened once, and now, unfortunately, we're up against that as we move forward.

So that's the biggest issue we're dealing with.

That's been factored in from the beginning of the year.

I guess now as we move into the fourth quarter, it gets more highlighted.

I don't think it in any way, it puts any limit on us as we go forward into 2017.

I think our growth internationally will continue to be very strong, and I think there will be some carryover of that into the first quarter of 2017, but I don't believe it will have any significant impact on our overall annual results for Calvin.

There's just too much momentum going on with the brand, and too much push forward of goods, that I just feel that we'll just overcome that.

Got it.

Can you also talk about how you're planning for the business in Russia?

Actually, in Russia, again it's all relative.

Things have actually gotten better than they were over the last 12 months prior, so we're actually seeing that business stabilize, and it's actually growing in the spring 2017 order book, probably mid to high single digits.

So it's a very profitable business for us, the way we operate it, and it seems to be on track.

Obviously, there is currency issues there, and it's a volatile market, but right now, it was much more of a challenge first half of 2016 than it is now.

Okay, one last question.

Manny, can you talk about what you've learned with your Amazon relationship on a global basis with the businesses that you're partnering with them?

What we've learned, two things that we've learned.

One is that Amazon does a great job of selling core product.

So replenishment core products, which we have a fair amount of in our product categories, that works exceedingly well for us, and continues to be a big growth opportunity for us with them.

The second piece is that in North America, there's a whole learning process that's going on with their business, in how we market it, how fashion gets to be sold, they are learning, and we are learning what works well with their customers.

It's a nicely profitable channel of distribution for us.

I don't like to speak about Amazon specific, but our dot-com business, be it our direct dot-com business or our brick-and-mortar dot-com business is by far our fastest growing business.

Great.

Thanks very much.

Good luck, Manny.

David Glick, Buckingham Research Group.

If I could maybe build on Bob's question about the revenue growth.

There's a lot of puts and takes this year in the heritage business.

You've got the Mexico joint venture, et cetera.

Do you see the Tommy and Calvin business growing in that mid to high single digit range in constant currency?

And do you feel like you've rationalized the heritage business to the point where you could see overall mid-single-digit overall revenue growth going forward?

I think on a constant currency basis, when you take the noise out of -- the licensing.

Next year, we're going to have the licensing of the Tommy Hilfiger North America women's business to G-III, which we think overall is a big opportunity for us, both at our presence at retail, but also from even a profitability point of view, given the confidence that they seem to have in the business, and our retail partners have in the business.

We think that's a big opportunity for 2017, and more importantly for 2018.

I think taking those ins and outs, there's no reason that we shouldn't be growing Calvin and Tommy in that mid-single-digit range overall to high single digits, on a constant currency basis.

And our heritage businesses, like always, we manage those businesses from a profitability and cash flow point of view.

Those will be flattish to low single digit growth, will move with North America retail.

We've talked about 4% to 6% mid-single-digit growth overall for PVH on a constant currency basis.

We see no reason why that should change.

And that leads to my next question.

You mentioned constant currency.

Obviously, you talked about the volatility you're seeing in a lot of different aspects of the market, including currency.

Kind of given where rates are today, what headwind do you see to your revenue and earnings growth, given where rates are at the moment going forward?

Thanks.

We're not going do guidance today for 2017, but I think you can use as a basket of currencies, which I think is pretty representative, the US dollar year-over-year post-election, it's up somewhere in that 6% to 7% range on overall currencies.

Depending where they move, and they been unbelievably volatile the last month and a half, that will have an impact, and our international business represents 55% of our overall profit, so that's something that we're watching very closely as we move forward.

But I think when you really get down and look at the fundamentals of the business and the profitability levels, and what's happening with our two major brands, is our international growth has just never been better than it is right now in the performance there.

I'm pretty optimistic about the future, but again we're going to have to deal where all this is all heading.

And as I said in my comments, it's just a very volatile situation with a lot of uncertainty.

Not only around the US elections, but we've got a number of European elections coming up in the next six months, that could also have impact.

It's just an area we've been managing for the last three years, and will continue to manage.

Thanks very much.

Good luck in the fourth quarter.

Erinn Murphy, Piper Jaffray.

Could you talk about how the non-tourist versus the tourist stores performed in North America during the third quarter?

And then I guess, as you have seen the North American trends improve over the last couple of weeks, what has been driving that improvement?

And then have you seen a gap between the non-tourist and tourist stores narrow?

I think the short answer is yes, we've seen the gap narrow.

There's so many factors, and I don't want to play weatherman in the end of the third quarter into the early fourth quarter, but it was, as much, at that point in time, it was just even more mild than it was the year before, and I think that impacted business to a degree.

And it was part of the rationale that we said, let's hold some of our marketing dollars in the third quarter, and use them when we think the consumer will actually be shopping.

We'd move that into November and December, that $5 million.

And clearly that's had a positive impact on trends as well in North America.

The biggest beneficiary has been our domestic stores, but also we've seen an improvement in our international tourist stores.

And if you think about where the trends had been for the first two weeks in November for Calvin now to be flat, we had a very strong pre-Black Friday, post-Black Friday business, both in Calvin and Tommy, compared to trends.

And the best part is, I think we've been really good at managing inventories, and how we have really focused on that area.

And we're really saying it flow through on the gross margin line, even more so than on the sales line.

I think we're really well-positioned in the fourth quarter.

I'm really optimistic about our businesses.

That's helpful.

Just in Europe, it seems that the momentum in Calvin Klein is really broad based across denim, underwear, accessories.

At one point can you start to push the envelope with the category opportunities, such as sportswear?

And then how big do you see that opportunity over time?

Calvin today in Europe is about a $550 million, almost $600 million business.

But to compare that to Tommy, which is about $1.7 billion in sales.

I think there is the opportunity long-term to match Tommy, or pretty close to it.

Europe is the only region where Tommy is larger than Calvin.

I also think that in the next three years, we don't see any problem getting to $1 billion in sales in the European market.

I think sportswear, men's is a huge opportunity for us, and I think again, that would be really healthy margins as we go forward.

And the women's opportunity, given the Calvin DNA is significantly larger for us in Europe, as we go forward.

And listen, it's early, with Raf Simons joining us by, but Raf has been really an amazing women's designer.

I think he's going to have a significant influence on Calvin overall, and I think that just bodes well for our women's businesses as we go forward.

It's just an influence that I don't think we've had in the Company, and clearly our expertise is a Company is stronger in men's than women's.

I think bringing him and his entire team on board will really enhance that opportunity for Calvin.

Got it.

Just lastly, from macro perspective, you already referenced some of the uncertainty with some of the European elections coming forward into next year.

There's been a lot of chatter with Italy recently, just with the upcoming referendum vote on December 4. Can you just level set a conversation, and remind us how much exposure you have to Italy?

Thanks.

Italy represents about, on a consolidated basis, 2.5% of our sales.

It's a strong market for us, particularly Calvin, which has a long heritage there.

And I think our business there right now is doing very well.

It's something we're watching.

That election, I think that's the first election we will see, and how that might play itself out, and what the impact of that might be.

The market is smaller than the UK, which is a little bit over 3%, but 2.5% of our consolidated sales.

Great.

Thank you, and best of luck in the holiday season.

Michael Binetti, UBS.

Great quarter.

Let me ask two quick modeling questions, and then I have a follow-up.

We get a lot of great color on the parts of the business to look forward to a bit here, but the one big blind spot we have right now is North America wholesale out over the next few quarters.

I know North America order books are prone to change, but any color you can give us on the forward look you have there would really help with the model over the near term.

The second modeling question was just as we look at the gross margin into 2017, it seems like that should exit the year with pretty strong momentum, given what it must have taken out of project margin basis, to get to what you delivered in third quarter and when you're guiding to in fourth quarter.

Knowing that FX rolls off here, it should get stronger.

That should really enter 2017 from a fairly strong position, as well.

Am I right there?

Mike, I would agree with you.

I'm not going to get into specificity, but if you think about whatever you decide to project next year sales growth, I think second-half sales growth will be stronger than first-half sales growth, mainly in the Calvin Klein North America business, because there's a lot of the fixture fill and new programs that went into effect this year, that our anniversarying, but that big pop in, particularly on those EDI core base programs are significant and are big moneymakers for us as we go forward.

I think in the first half of the year, the opportunity is greater from a gross margin point of view, for the reasons that you've pointed out.

Not only us, but I think everyone will come out of the fourth-quarter in a much cleaner inventory position, just given the fact that we were going into the fourth quarter with 6% less inventories, and projecting overall sales growth for the business.

I think that will bode well for margins as we go forward, and some of the coursing benefits that we're seeing in the first half of the year.

I think margin will continue to improve, and I think that will be more of a first half story, where I think sales will be more a little bit more of a second-half story next year, when you're thinking about modeling.

Okay, let me get a follow-up.

We have two different stories going on as we look through the model here on the top line, and I'm trying to reconcile if there's significant momentum under the businesses you are focusing on with Calvin and Tommy, but then you have the reported revenues that are lower than you would think on that momentum in those instances.

You have done a great job staying on the balls of your feet, with the portfolio, with the transactions this year.

Are there some areas that come under the microscope as you start doing your midrange planning here?

Specifically how do you look at the US store fleet?

It's been a while now that they have been under pressure.

Looks like the drivers that caused that pressure a few years ago are starting to flare up again.

I know you derisked the inventory position there to protect the P&L this year, but do those stores still have the long-term economic return opportunity versus the hurdle rates that you target for your business today?

With the two big brands, Calvin and Tommy, we have no stores that are money losers in the fleet, that are not marketing vehicles like our flagship stores in New York or Miami.

Absent those stores, which are critical for the brand perception, our retail businesses continue to be one of our most profitable businesses.

The challenge we're facing is, as you rightly point out, is the business that was so strong in 2013 and 2014 has been under pressure, but that pressure is still double-digit EBIT margins on a fully allocated basis for our two big brands, as we go forward.

Very enhancing from a profitability point of view.

I think you also rightly point out that we are starting to really lack a lot of the pressures that we saw from the US dollar strengthening, where particularly the Euro and Brazilian real and the Canadian dollar being down anywhere from 15% to 30%, and really having to deal with that in 2014 and 2015.

That was really putting -- we are expecting that to subside as we go into the fourth quarter, and I think that's part of some of the improvement we're seeing in late November, early December.

I'd like some more time to see that, to see where we're going.

And the dollar pressure so far that we've seen happening in the business is not nearly to the levels we saw before.

So that needs to all work itself out, and to be honest, Mike, some of this is just so recent.

When I was on the fourth-quarter call, the Euro was $1.13 and today it's $1.06, so down 6%, 7%.

It's all of a month old, a month and a half old, so we've really got to get our arms around it a little bit more, and understand what the impact of that might be, as we move forward.

Best of luck for the holiday.

Thanks.

Ike Boruchow, Wells Fargo.

Just on the gross margin line, so very strong in Q3.

It sounds like that should continue into Q4.

First, just wondering if you could maybe give us what the negative impact to gross margin was in Q3 due to FX.

And then just more broadly, just curious how we should think about the gross margin improvement you are seeing in regards to geographic mix versus maybe sell-improvement and pricing?

I will let Mike answer it.

In the third quarter, we were about 370 basis points of impact due to FX.

As you think about the fourth quarter and what's going to happen to the year, the fourth quarter's going to be the strongest.

All of our business will have gross margin improvement in the fourth quarter, and it will be the strongest quarter year-over-year growth in terms of gross margin.

The second part was?

Sell-through improvement versus pricing.

Geographic sell-through.

Europe is just on fire.

Sell-throughs have just been spectacular.

Nothing compares to what's going on in Europe, particularly in Calvin, but also in the Tommy business.

How much of that is the global environment?

I think a piece of that is also Europeans are staying home, staying in the European market to shop.

Everyone is concerned about Brexit, rightfully so, but our UK business post-Brexit has never been stronger, and I think that's a reflection of the fact that the Euro strengthened against the British pound.

Obviously the dollar strengthened as well, and I think people are just viewing that this a great place to shop and really get value for their dollars, or their Euros, and that business has just been off the charts strong.

So I think As much as we see a negative impact in the US in our own retail stores, the flip side is that is, we have really benefited in our European stores overall.

I would just add that when you think about the growth, as Manny just described, it's faster growing internationally, that comes with higher gross margins.

It does have higher expense, but also higher operating margin.

The gross margin is really feeling it, both performance-wise and benefiting from the mix as well.

Got it.

And as a really quick follow-up, so Manny, it's good to hear about the quarter to date improvement in the retail business, as you've seen.

I'm not sure if I missed this, but can you comment on what's baked into your Q4 guidance on the domestic comp performance?

Are you assuming that it was a continuation of first half trends weak, are you assuming that it does improve and hold that improvement?

We were -- I'll be very specific.

We were planning Calvin Klein at low single-digit negative comps.

They are flat.

And Tommy, we were planning at high mid-single-digit negative comps, and they have improved to mid-single-digit comps.

The trends have gotten better in both businesses.

Got it.

Thanks so much.

Congrats.

(Operator Instructions)

John Kernan, Cowen and Company.

Congrats on a nice quarter.

Can you just talk about the outlook for SG&A spending?

Obviously, third quarter saw a big investment in marketing and SG&A dollars for double-digit year over year.

You are guiding them up pretty significantly for the fourth quarter.

Do you expect this to continue into next year, and does this affect your ability to expand your operating margin next year?

Which I think consensus is assuming will happen.

I think there's two things going on, John, that you really have to think about.

One is, we are stepping up our marketing spend overall.

In the second half of the year, it was $40 million, so that's the number.

We'll anniversary that again next year, and in the first half there will be some additional spend on top of that, as we anniversary this spend.

And we also have a full year impact of the creative direction that's going on, the change in creative direction that's going on in Calvin Klein.

But I really think a bigger part of the SG&A movement is mix of business.

Our European and our China and all of our international businesses come with higher overall SG&A expenses.

Probably to the tune of 1000 basis points, but also come with higher gross margins for those businesses.

And then overall when you blend it together, probably 100 basis points higher operating margins put together.

As our international businesses, Calvin, Tommy are growing substantially faster than our North American domestic business, that makes an SG&A growth that's going to continue.

I think you just have to keep your eye on a constant currency basis on operating margins overall.

That's a significant piece of what's happening.

Okay.

That's helpful.

You are obviously seeing good returns on those investments.

Going back to the North American wholesale channel one more time.

Can you just help us understand what a sustainable growth rate from Tommy and Calvin looks like over the next two to three years?

There is obviously some high profile department store door closures over the next year, and could be more in the future.

John, we don't get -- if you start getting into slicing and dicing -- we don't get into talking about department store growth.

We give a substantial amount of information.

North America and international and where we are.

I think it's also, what's going on at brick-and-mortar, as that continues to shrink as a base, the real growth has to be market share gains.

But at the same time, the digital space continues to grow.

That all has to be balanced together.

So I think we're really looking at it from an omnichannel point of view.

Overall, I think when you look at North America, North America is not going to grow as fast as our international businesses will, given the dynamics.

I think you just have to factor that into your models.

Best of luck.

Lindsay Drucker Mann, Goldman Sachs.

My question was on, with some of the dynamic shifts we're seeing in department stores, whether it's an evolution to how they're thinking about their inventory buys or maybe their own footprints.

I was curious as to the way you're doing business with them, or they are trying to do business with you is also changing?

I think everybody's speed is becoming more and more critical, and our ability to service that department store base and react quicker to it, it's not only the department store base, but it's also our own retail stores.

And our size and scale gives us that flexibility.

And clearly we have been making significant investments in supply chain, logistics, systems.

So it's really -- that's where the pressure points are coming in.

The companies that can't address that, are the ones that are going to struggle.

Changing calendars, trying to make decisions later in the cycle, trying to have more -- build more flexibility into the cycle.

That's all critical as we go forward, and that's an ongoing process.

It costs dollars to do that, but the payback on that is significant.

Great.

On Calvin, you talked about some of the potential opportunities for Raf, I know it's early.

If there's any way you could give us some thoughts on how your assortment might evolve, and maybe specifically on the women's business, how the interplay between your women's business and G-III might evolve?

Okay.

I think, look, Raf Simons coming to Calvin Klein is a game-changer.

It has opened doors, and has expanded the brand's reach at the highest channels of distribution.

That has to be good for every business, as we move forward.

Bringing that credibility to the brand in the collection area, and the expertise that come with the team that Raf has brought in to enhance, particularly the women's business, and the opportunity there is significant.

Now, he's been here, I guess now it's three months.

His first show is February 10.

We're all excited about it.

The buzz has been amazing.

The retailers' commitments from Barneys and Saks and Neiman's to the line, and the ability for them to obtain the line has been great.

And I think that halo effect has to be significant.

Coupled with that is, he's developed more innovative product, the ability to take that, diffuse that line down to our bridge and the inspiration that I'll give to our bridge businesses, as well as our white label businesses in North America and in Europe, I think also can be a significant opportunity.

But we have to deliver against all that.

So right now, it's great words.

The momentum feels fantastic.

But in fairness, Raf hasn't shown anything yet to the market, and I think as he has said to me, people talk too much before they deliver against what they've committed to.

And let me deliver and then we can talk about what it will mean.

So we're enthusiastic, optimistic and committed to that business, and we think it really will pay dividends for us, and now we have to deliver against that.

Great.

Thanks so much.

Dave Weiner, Deutsche Bank.

I just had two quick questions.

The first, I was wondering if you could give a little color about what you're seeing in your accessories business.

I think you mentioned a little bit, but maybe just a little bit about how that is trending, and maybe where you see that business going, especially on the Calvin side.

And then also on China, if you could give a little bit more of an update on what you're seeing there?

We've heard some mixed trends depending on what type of Company has reported, but it would be interesting just to get a little more color about what you're seeing in China.

Appreciate it.

Let me speak with China first.

I think China, depending on where you sit in the market, is a mid-story.

If you're a luxury brand, I think you're feeling pressure in the market.

And I think China, that Hong Kong market, surrounding areas has been under more pressure.

Both for Calvin and Tommy, we tend to fit in that premium space.

And we're benefiting from that.

Tommy is at an earlier stage of development than Calvin, has been in China for longer period of time.

So Tommy, we believe, has significant opportunity.

It's today, it's much more of a men's sportswear business, and we believe that there's a significant women's and denim opportunity in China for the Tommy brand.

So I think we're going to continue to just see growth with the existing businesses that are in China.

For Calvin, the brand is arguably one of the strongest brands in China, with amazing consumer recognition and ability.

And we're really taking the brand to places where it hasn't been before.

It's really been a jeans, underwear play, accessories now becoming more and more meaningful.

Sportswear as a future opportunity will become more and more meaningful as we go forward.

And I think the women's opportunity there continues to be significant opportunity for us.

Lastly, we seem to be getting some real momentum in our performance athleisure business, that we're running directly throughout Asia and in China in particular, and the trends that we've seen here in the States with that category has been, I'll say it's clearly maturing here, but in China, it's probably three or four years behind that trend, and that is just starting to get more and more explosive as a category.

And I think we're well positioned to capture that significant portion in that market, as it happens as a fashion brand that really plays well there.

So we're excited about what that might mean.

I hope that gives you enough color on China.

Accessories overall.

I've always talked about it, Calvin is a lifestyle brand.

It's not Kate Spade, and it's not Coach or Michael Kors.

It's really an accessory-driven business.

So relatively speaking, we have a small accessory business, but it's growing very fast.

And as you know, the accessory business carries a much higher gross margin and operating margin when it's done right, so the opportunity is there for the Calvin Klein brand.

I don't think it's -- we're not going to become this huge accessory play globally, but we think it can continue to be a significant growth vehicle for us, given that on a relative basis, it's still a very small business.

Understood.

If I could, just one quick follow-up, back on China, regarding margins.

I think yesterday on Cramer you mentioned a higher operating margin or higher margins in the China geography.

Were you talking about gross margins or operating margins or both?

And how significantly higher are those in China?

I was talking about both, and just specific on operating margins, it's at least 100 basis points higher.

Great.

Thanks a lot.

Appreciate it.

Matthew Boss, JPMorgan.

On the margin side, excluding FX, your guidance this year implies almost 12% EBIT margins.

So Manny, what's the best way to think about the long-term target?

Is it still 13%?

And just if you ranked the brands, where do you see the biggest opportunity from here?

I think at these currency levels, I think 13% is a good place to really think about where we can go, and one step at a time.

Given the pressure, that since the apparel product around the world is bought in US dollars, there is pressure that's being put internationally on gross margins.

We've been able to pass along some of that impact, but not all of it.

So I think that's the difference, let's say where we potentially could have been two years ago, where I would've said the number was more like 15% overall for the Company.

So I think 13% is a good place to be.

Obviously both Calvin and Tommy have the greatest opportunity.

I think Calvin will be slightly higher than Tommy, given just the mix of business and where it comes from.

So hopefully that gives you enough color.

Yes, that's really helpful.

Just a follow up on the Tommy side.

Can you talk about any underlying improvement, potentially in North America, maybe beneath the surface?

Just how to think about maybe any potential halo impact that you're seeing from the new marketing campaign?

Look, I think we're clearly seeing it.

Now it's a question of how this is sustainable, where we are, the overall market, all of those good things.

But as I said on Cramer last night, I'm comfortable quoting him, because he said it on public TV, Terry London said the Tommy Hilfiger business at Macy's is on fire.

It's our biggest customer, it's an exclusive relationship with a number of product categories, so I think that just speaks for itself, the momentum we're seeing.

And it's momentum that's really being driven by more unit selling but higher AURs across-the-board.

Just as you think about, from a pure profitability point of view, the opportunity for G-III which they have called out as long-term $1 billion women's business, but let's just say it's $500 million opportunity over the next three years or so, they're taking over a business that did a little bit over $100 million.

So that's a huge opportunity at 100% gross margin rates as a royalty business, healthy royalty rates.

And we're planning that business at sales minimums, so if they outperform, which they expect to, that's the upside for us in second half of 2017 moving into 2018.

Great.

Best of luck.

With that, we will call it a call.

I appreciate everybody's time.

I'd like to wish everybody a happy, healthy, Merry Christmas, Happy Hanukkah, and a really healthy prosperous New Year.

And we look forward to speaking to you in the first quarter of 2017.

Thank you very much.

Have a great day.