PVH Corp (PVH) 2017 Q2 法說會逐字稿

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

Second Quarter 2017 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 transcripts or replay of this call.

The information being made available includes forward-looking statements to reflect PVH's view as of August 23, 2017, 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 subject of this call.

These risks and uncertainties include PVH's right to change its strategies, objectives, expectations and intentions and its need to use significant cash flow to service its debt obligations.

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

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

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

Reconciliations to GAAP amounts are included in PVH's second quarter 2017 earnings release, which can be found on www.pvh.com and in the company's current report on Form 8K 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, PVH.

Please go ahead, sir

Thank you, Gwen.

Good morning, everyone.

Thank you for joining us on the call.

Joining me on the call is, as usual, Mike Shaffer, our Chief Financial Officer; and Dana Perlman, our Treasurer and Head of Investor Relations.

Also, I have 2 guests that hopefully can answer some specific questions you may have.

Daniel Grieder, who runs our Tommy Hilfiger business globally as well as oversees all the operations of our European business, is here; and Ken Duane, our CEO of PVH Heritage businesses and our North America wholesale businesses, is also here.

So going through the results.

I'm pleased to report that our strong second quarter performance exceeded our expectations and demonstrated our continued ability to deliver against our strategic and financial plans despite the challenging global macro environment.

Tremendous strength continued across all of our businesses, with our international businesses demonstrating outside -- outsized performance, particularly China, Europe and Japan, which are our healthiest markets.

Meanwhile, our North America business performed in line with our plans, but the U.S. market continues to be highly competitive and promotional.

Overall, in the second quarter, we grew revenue 7% and our EPS came in at plus 15%.

Importantly, in our second quarter results, we had a planned $25 million increase in brand marketing investments versus last year related to both Calvin Klein and Tommy Hilfiger, which we believe will continue to drive market share gains and allow us to capitalize on each brand's growth opportunities into the second half of this year and over the next few years.

When we look at our performance across channels, we generally saw strength across all channels, be it wholesale, retail or our digital channels.

We continue to focus on diversifying our distribution through our focused efforts around digital and full-price specialty partners.

Digital continues to be by far our fastest-growing distribution channel, and we are continuing to invest there both digitally and we also are focusing on initiatives to drive both our own e-commerce sites as well as our third-party partners' businesses.

Moving to our brands, let me start with Tommy Hilfiger.

The brand just continues to experience significant demand, and we are seeing broad-based strength across all businesses.

I'm excited to report that the Tommy Hilfiger brand relevance continues to improve, from Gigi Hadid as our women's brand ambassador to our newly announced ambassadors, The Chainsmokers, who will appear as the global brand ambassadors for all Tommy Hilfiger men's categories beginning in fall 2017.

The partnership reflects our strategic commitment to continuing the strong global growth of all of our men's businesses and attempting to bring newer, younger fans to the brand.

We believe that these brand ambassadors will help us drive performance in our global growth categories, with specific emphasis on women's apparel, accessories and men's tailored.

Moving to the business.

We continue to be extremely pleased with the response from consumers and are benefiting from market share gains in each of our major markets.

Overall, revenues for Tommy increased 4% in the quarter and earnings were up over 8% in the quarter.

This growth was driven by outstanding performance in our international businesses.

International revenues increased 9%, fueled by the continued strong performance in Europe and Asia.

International retail comp sales increased 6% in the quarter, with very strong retail performance in China and Japan.

Our Tommy Europe results were outstanding, and they continued to be a standout for us.

All major European markets continued to demonstrate outstanding performance.

Based on the strength of our spring/summer season sell-throughs, we also saw healthy gross margin improvement during the quarter.

As I mentioned last quarter, our fall 2017 order book finalized at a 10% increase versus the prior year.

And we are pleased to report that our spring 2018 season is projected to increase over 10% as well.

The spring order book results continue to exceed our expectation, and we are quite pleased with the broad-based strength across all product divisions and across just about all retail -- European markets.

Tommy Hilfiger Asia, led by China, continues to perform well as we continue to execute the strategic priorities we set in place when we fully acquired this business last year.

We see significant long-term growth opportunities for the Tommy brand in this critically important market.

Additionally, our Japan business continues to see positive momentum and excellent results as the brand repositioning in this market is paying huge dividends for us.

Moving to North America.

Tommy saw another solid quarter, with strong results with our men's and women's department store business in a challenging retail environment.

We are pleased that our outperformance relative to our competitors continues through the second quarter and into the third.

Shifting to North America retail.

We saw flat comparable store sales for the quarter in North America as we saw an improvement in traffic trends, including a stabilization in international tourist traffic during the quarter.

Moving to Calvin Klein.

Speaking about the brand, Calvin Klein continues to capture compelling brand and cultural relevancy through its focus on digital consumer engagement, elevated brand imagery and strong advertising campaigns.

From a brand and marketing perspective, we announced the launch of our Fall 2017 CALVIN KLEIN 205 West 39th Street global advertising campaign and have recently reopened our Madison Avenue flagship store featuring our floor-to-ceiling installation by the world-renowned artist, Sterling Ruby.

The reopening marked the arrival of Chief Creative Officer Raf Simons' debut of the Fall 2017 Calvin Klein 205 West 39th collection in the store.

This new collection product is also being delivered to key retail partners in over 30 points of sale around the world.

As a reminder, some accounts include Barneys, Saks, Galeries Lafayette, Dover Street, Isetan and Lane Crawford.

Early initial sell-throughs have been positive, and we'll have more results to talk to you here as we go forward in the future.

In the fragrance area, we have 2 new launches.

Obsessed just recently launched, and it leverages archived photos and film of Kate Moss and Mario Sorrenti from the original Obsession campaign, which aired over 15 years ago.

Additionally, in the fourth quarter, we will be launching a new campaign for our Eternity fragrance, which will be showcasing new celebrity talent.

I am pleased to note that we're starting to see our fragrance business begin to rebound around the world.

We are also excited to report that we have 2 international Calvin Klein flagship store openings in the third quarter, 1 in Shanghai and 1 and Düsseldorf.

These stores will be offering a wide assortment of products, including jeans, sportswear, underwear, tailored clothing and performance product.

As we move further into fall and to holiday, we will continue to roll out our jeans and underwear marketing initiatives with an enhanced direct-to-consumer focus to drive our business as we enter the all-important holiday selling season.

From a business perspective, revenues at Calvin increased 8% in the second quarter, reflecting the strong global trends, with 20% increases coming from our international business.

In particular, we continue to see strong top line growth out of Europe and China, with North America performing in line with our plans.

International retail comp store sales increased 6% in the quarter.

EBIT declined about $10 million for the quarter as a result of a planned $20 million increase in marketing and creative leadership expenses, as we've discussed with you in the past.

As a reminder, we should be lapping these expenses as we move through the second half of the year, particularly in the fourth quarter.

Our international business has been strong.

Calvin Klein Europe has been an outperformer.

I could not be more pleased with the direction of the business as results continue to demonstrate outstanding performance both from a top line and bottom line perspective.

We saw strong sell-throughs across wholesale and retail and continue to experience healthy comparable store sales growth on top of multiple years of double-digit comp sales increases.

As we discussed on last quarter's call, our fall 2017 order book was finalized at north of 25%.

I am pleased to report that the momentum continues with our spring 2018 order book, which is projected to be up again over 25%.

The strength in the business continues to be seen across all distribution channels from all major markets and across all product categories: jeans, underwear and accessories for both men's and women's.

Moving to Asia.

Calvin Klein Asia continues to perform well, with China outperforming other markets across all product categories.

We continue to invest in the business here and see continued momentum in our Calvin Klein Jeans business as new and improved product is driving strong sales increases.

We have also seen performance from our underwear, performance and accessory business continue to improve across all markets.

Overall, the region continues to see strong growth.

The one region of underperformance is Korea, which clearly is being pressured by the negative geopolitical news out of North Korea, which has had a negative impact on the overall Korean business.

Calvin in North America continues to see healthy growth across our wholesale business, in line with our plans despite significantly reduced overall department store open-to-buy plan.

Our Calvin Klein North America business experienced a 2% negative comp store sales, which is in line with our plan and slightly ahead of our first quarter sales performance.

Finally, in our Heritage business, we had a strong quarter.

Let me remind you that while Heritage revenues increased 13%, it was principally a result of a planned shift in the timing of shipments from the first quarter to second quarter, as well as some sales moving from the third quarter into the second quarter compared to last year's sales trends.

So for the year, we expect flat overall revenues from our Heritage business, which is in line with our initial plans.

Comparable store sales were up 1% in the Heritage business in the second quarter.

EBIT increased significantly in the quarter due to the planned shift in shipments and from a general improvement in gross margin experienced both at the retail and wholesale businesses.

We feel our Heritage business is very well positioned as we move into the second half of the year.

Speaking about the full year guidance, we have raised the full year earnings guidance outlook and believe that our brands will continue to drive our second half performance despite the ongoing volatility in the macroeconomic and geopolitical environment.

Specifically as a result of the momentum in the business, we continue to make investments in our Calvin Klein and Tommy Hilfiger businesses, and we have added $10 million of marketing into the second half of the year relative to the previous guidance to help fuel the opportunities we see ahead of us in these businesses.

I'd like to just touch on -- a little bit on third quarter trends.

Our international business continues to see nice momentum quarter to date, with Tommy and Calvin international comps running up mid-single digits, with strong performance continuing to be seen out of China, Japan and Europe.

The environment in North America continues to be challenging, with traffic trends and the department store landscape under pressure, which we believe will continue throughout 2017.

As such, we're planning the North America business prudently based on the landscape.

Clearly, it seems to us, based on recent earnings reports, that a number of our major competitors are experiencing significant sales declines, particularly with North America department stores.

Contrary to that trend, both Tommy Hilfiger and Calvin Klein are growing with these accounts.

As we move into the second half of the year, we will be expanding our square footage and growing our sales with this very important channel of distribution, which we believe will help the momentum of the business into the second half.

In our own retail businesses, we are seeing some improvement in sales trend as we headed into late July and into August of 2017.

Comps for Calvin Klein North America are trending now flattish, and Tommy Hilfiger North America is trending positively up mid-single digits quarter to date.

We feel quite strongly that we are well positioned for the balance of the year and believe that given the underlying brand momentum and the strength we see in our international businesses, that we can continue to overdeliver against our financial plans.

And with that, I'd like to turn it over to Mike Shaffer, who will quantify some of our results.

Thanks, Manny.

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

Our revenues for the second quarter were up 7% from the prior year and exceeded our guidance.

Tommy Hilfiger revenues were ahead of guidance and up 4%, and Tommy Hilfiger revenue increase was driven by strong international performance, including a 6% comp store increase, partially offset by a decrease of approximately $20 million due to the transfer of the North American women's wholesale business to G-III in the fourth quarter of last year.

Our Calvin Klein revenues were ahead of guidance and up 8% from the prior year and included the negative impact of the deconsolidation of our Mexico business, which was worth approximately $15 million.

Calvin Klein international revenues increased 20%, with strong performance in Europe and China.

Heritage revenues for the second quarter were up 13%, driven by a shift in the timing of shipments from the first and third quarters to the second quarter.

Our non-GAAP earnings per share of $1.69 represents growth of 15% over the prior year and included a planned increase of approximately $25 million of marketing compared to the prior year related to Calvin Klein and Tommy Hilfiger.

The $1.69 was $0.06 better than the top end of our previous guidance, and the beat was driven by a $0.07 business beat and a favorable FX of $0.02.

Partially offsetting that was the timing of tax expenses, which was unfavorable for $0.03 in the quarter.

For the full year, we are currently anticipating that we will be negatively impacted by $0.20 per share due to foreign exchange, an improvement of $0.15 when compared to our previous guidance.

For the full year, we're projecting non-GAAP earnings per share to be $7.60 to $7.70 or 12% to 13% over the prior year, which is $0.20 higher than our previous guidance and reflects a $0.15 increase due to favorable FX, a $0.15 increase due to stronger business, partially offset by an increase in marketing for Tommy and Calvin Klein of approximately $10 million.

Overall, we're projecting revenue to grow approximately 6%.

2017 revenues will be negatively impacted by approximately $70 million related to our Mexico deconsolidation and approximately $80 million related to the transfer of the Tommy Hilfiger North America wholesale women's business.

2017 revenues will also be positively impacted by a net amount of approximately $50 million related to 2017 being a 53-week year, offset in part by the negative impact of the timing of Chinese New Year.

Overall, operating margins are expected to increase approximately 10 to 20 basis points on an as-reported basis and to increase approximately 30 to 40 basis points on a constant currency basis.

We project Calvin Klein revenues to grow 8%, with operating margins down about 50 to 60 basis points on an as-reported basis and to decrease about 10 to 20 basis points on a constant currency basis.

Our Calvin Klein earnings were negatively impacted in 2017 by the continuation of the investments made in the latter part of 2016 related to brand investments in advertising and the creative leadership changes.

Tommy Hilfiger revenues are planned to increase 6% with operating margins planned to increase about 90 basis points on an as-reported basis and about 110 basis points on a constant currency basis.

Our Heritage business is planned to have relatively flat revenues versus the prior year, with operation margins planned to increase about 10 to 20 basis points.

Our corporate segment expenses are planned to increase about 15%.

This increase reflects low single-digit growth in our overheads as well as start-up losses associated with new businesses.

Interest expense for the year is planned to be about $120 million compared to the prior year amount of $115 million.

This increase is primarily the result of the $300 million Eurobond issued in June of 2016.

In 2017, we are planning to pay down at least $250 million of our debt and have stock repurchases of about $250 million.

Our tax rate for the year is planned at about 17% to 17.5%.

Third quarter non-GAAP earnings per share is planned at $2.88 to $2.92 or 11% to 12% over the prior year, and includes $0.06 of estimated negative impact for foreign currency.

Revenue in the third quarter is projected to increase 4% and will be negatively impacted by the deconsolidation and transfer of the Tommy Hilfiger North America wholesale women's business.

Calvin Klein revenues are planned at a 5% increase, Tommy Hilfiger revenues at an 8% increase and Heritage brand revenue is projected to decrease 8%.

As a reminder, this was due to the timing of shipments, which moved from the third quarter to the second quarter.

Interest expense is planned to be about $31 million, and tax is about 12% in the quarter.

And with that, we'll open it up for questions.

(Operator Instructions) And we'll take our first question from Erinn Murphy with Piper Jaffray.

I guess, Manny, for you.

I was hoping you could address a little bit more about the improving trends that you've seen in back-to-school.

I guess your tone was still fairly cautious on the environment overall in North America.

So what are the drivers that have really led to that quarter-to-date improvement in both Calvin and Tommy out here in North America?

Okay.

As -- I guess we we're see -- directly we're seeing it in our own retail stores, first and foremost.

We've seen a significant improvement in the trend in the Tommy Hilfiger business, which went from a flattish comp in the second quarter to a mid-single-digit increase.

We see traffic improve as well, as I think the consumer is really there.

We've also seen the Calvin business positive comp store trend as we move forward.

Also, from talking to some of our department store partners and what some of them have said on their conference calls, I think both Macy's and Kohl's particularly spoke about back-to-school getting off to a strong start.

So based on our performance also in that channel of distribution, I'm starting to feel a little bit better about it.

Now it's still very early.

It's August 23 today -- 24 today.

So I think we got to get through Labor Day.

We've got to see the September trend, which really picks up.

But I think from an inventory positioning point of view, from the gains we're making in square footage at department stores, I guess the best example of that is if you go to Herald Square and you see the improvement in space that both Calvin and Tommy are getting, particularly the new Calvin Klein Jeans shop, which is almost double their footprint in that store, I think you get a sense of the momentum we're seeing in our own business despite everything you hear about the environment in some of the reported results.

Okay, that's helpful.

I mean, clearly you're seeing momentum across the board.

Obviously, internationally as well.

So I guess if the outperformance...

Well, I guess I'd just say -- and I didn't mean to cut you off, Erinn.

Yes, that's okay.

What we're seeing internationally is the trends continuing.

I mean, the trends have been pretty spectacular through the second quarter, both at Calvin and Tommy, and we're not seeing any slowdown at all on those trends.

And I talked about the order book.

We're actually seeing an acceleration in the order book as we go to spring.

Got it.

So yes, I guess if you sit here now, I mean, there's clearly momentum.

So if the trends were just to continue, whether it's organic or even strengthen from here, or even you're going to be benefiting from currency now, you've spent a lot of time talking about the reinvestment you've made in the business, both in the second quarter and you've obviously planned more in the third, or the back half as well.

I guess from here, if the business strengthens, how do you think about that incremental investment?

Do you plan to further invest?

Or would you allow any potential upside to flow through?

Just trying to understand how you're thinking about what's still needed as an ongoing engine.

Sure.

I think we will do what we've consistently done in the past and what we've done through the first half of the year, is as the business continues to outperform, we'll continue to invest in the brands.

But also, at the same time, we will be looking to raise our financial projections and our goals in balance.

We want to continue to fuel the growth, particularly as we look out to 2018 and beyond.

And I think where other people dealing with this tough environment are pulling back and taking their foot off the gas from a marketing perspective, we think this is the time now to have a louder voice, greater -- gain a greater share of voice in the market.

So I think we'll balance it, as we always have done, with the real goal to drive momentum.

We'll go next to Bob Drbul with Guggenheim.

The -- on the Calvin Klein, on the 25% order book as you look at it, what's really happening there?

It was by market?

Is it just taking massive amounts of share in various markets?

Can you sort of peel that back a little bit more for us?

I can do a reasonably good job with it.

But since Daniel's here, I'm going to just ask Daniel to speak about some specificity.

But don't get too specific, Dan.

Okay.

There are several issues happening.

First of all, I think it starts with the product we have.

And we have redone over the past few years the product in all the divisions.

We have improved.

We took a lot of insights, consumer insights, into the product.

And also, the second part is in the distribution.

We have cleaned up the distribution.

We were repositioning the brand in all the department stores.

We gained really square foot in the department stores.

And if you add those combination together, we are just outperforming our competitors and are gaining market share.

And in some of the key markets, if you'll just touch on where you're really seeing big growth?

Yes.

I have to say that all the markets are growing, even those which we do -- did expect less.

If you talk about Russia and even Turkey, even these markets are growing.

But I would say the main markets seeing the growth is Germany, is the U.K., is France and Holland.

And I think, again, all the markets are strong and not one market is down.

The only thing I will add is I think if we would have been talking about this, the business momentum the last couple of years in Calvin in Europe in particular, to a great extent, has been driven by apparel.

But really, our underwear business has been off the charts in those markets.

I mean, that business continues to be very healthy and grow.

But what's really satisfying to us is we're really seeing the influence of our Raf Simons and Pieter Mulier in the jeans business as we go into spring, and the reception in the markets.

So the growth in jeans has just really started to outstrip the growth in underwear.

And that, I think, is just great for the brand as that has -- opens up broader categories of product and should help our sportswear businesses as we move forward as well.

And we'll go next to John Kernan with Cowen and Company.

Manny, can you talk to just the structural differences right now between the apparel markets in North America and Europe?

Just big differences, obviously, in sell-through, sell-in and margin profile.

So just can you help us understand how much healthier these markets are for your brands than North America, where you're obviously outperforming many of your peers in North America.

But just the growth in Europe was obviously very impressive.

Sure.

So Europe -- so Asia is virgin territory.

And principally Asia with probably the exception of the Korea market.

But even there, the -- Asia is basically a retail direct-to-consumer market.

And even where there is major department stores in Asia, it's principally a concession model there.

So that is -- that, in and of itself, makes it a retail play within a department store environment.

So -- and there, obviously, there's just growth happening across the board.

China has got tremendous growth prospects for the future.

When you move to -- the difference -- the 2 big fundamental differences between North America and Europe, one is we're clearly over-stored in the United States on every level.

And look, you guys are the analysts.

You know the statistics and you know this.

On a per capita basis, depending on the category, there's anywhere from 3 to 7x more square footage in the United States per consumer than you see in -- throughout Europe.

In addition, the department store market is much more fragmented when you consider the European market broadly.

In the United States, there's a couple of major players that dominate the market.

While in Europe, there it's much more fragmented, and there you have opportunities to have different strategies with each of those retailers.

Fundamentally, from a financial point of view, the big structural difference is given the consolidation in the U.S., it is a more efficient model from an expense point of view.

The European market is a much higher gross margin market with higher margins.

In reality, the Europe market is about 1,000 basis points higher gross margin, with 1,000 basis points higher expense structure.

And the U.S. market is 1,000% lower margins with 1,000% more efficient -- 1,000 basis points more efficiency on the SG&A line.

From a profitability point of view, I'd say Europe is slightly more profitable than the North America market overall, maybe 100 basis points.

But that gives you some of the dynamic.

I hope I answered your question.

No, that's very helpful.

Fundamentally, there's pressure coming from the digital channel in both places.

I would say fundamentally, it's being managed in both places.

But the European market is there just more fragmented as well than what we see in the United States.

Okay.

And then just a quick follow-up question.

Mike, you've got a lot of cash flow.

You talked about capital allocation between share buyback and debt pay-down.

But I'm just wondering how you're viewing some of the international licenses that you have not brought back in-house yet.

Which ones should we -- which ones are you most focused on at this point?

So look, I guess, you said the international licenses are profitable for us.

We've talked about them as an opportunity for growth.

We continue to look at Asia.

We continue to look at Brazil.

We continue to look at our JVs that we operate today and look to potentially take some -- to take positions there as well.

But we are generating cash, and we are always considering these opportunities.

As Manny says all the time, a deal happens when a deal happens.

So it's on our list we watch and we navigate with our licensees.

Yes, the only thing I would add, I think we've -- over the last 3 years, I think we've clearly demonstrated an ability to bring those businesses in-house, integrate them very profitably, get the benefits out of it, both from a top line point of view, by having greater control and, at the same time, getting the synergies that come with the acquisitions from an expense point of view.

And we'll go next to Michael Binetti with UBS.

Just 2 items in the model to help us out maybe.

If I look at the revenue guidance for Tommy Hilfiger in the third quarter, it looks like it's a pretty big acceleration, and then I think you're implying a slowdown in the fourth quarter.

I know in general, at a high level, you've got order books in Europe that have accelerated so that I can kind of understand a bit of an acceleration.

I don't understand why it would slow, I guess, in the fourth quarter, especially with the extra week.

And then I think we see the opposite for Calvin Klein, where it started to accelerate a little bit in third quarter and slow in the fourth quarter.

Is there anything you can help us to just understand directionally what's going on there?

So look, I've give you a couple of factoids.

The -- one, on the Calvin Klein side of the business, the Mexico deconsolidation laps itself predominantly for most of the fourth quarter.

So we're not up against that as we were in the first, second, third.

The 53rd week is definitely an add-on.

So that's a good guide for us, and that's partially offset by the Chinese New Year.

Currency last year, the strongest quarter for the U.S. dollar, or to say it differently, the weakest quarter for the euro and our other currencies was the fourth quarter.

So that's a benefit for us on a reported basis.

And lastly, for Tommy in the fourth quarter, we did experience some sell-off as we handed the business off to G-III on the women's side.

So we actually are up against some that sell-off.

Yes, we sold -- the balance of the -- of what was left of the product we sold off.

But those sales were -- I don't want -- they weren't unprofitable, but they weren't profitable sales either.

So I think when you take it all in -- and I guess the only thing I'd add is, I think the fourth quarter clearly has -- could have upside sales opportunity as we get closer to it.

Okay, that actually helps a lot.

And then, I guess, I'll ask Erinn's question a little bit differently.

But you start -- as you look at the back half, the SG&A, you guys really started to make some of the big investments last year, and the compares get very easy.

Is there a point on the horizon you can tell -- talk to us about?

Maybe it's not in the back half, but where you can actually start to see some SG&A leverage?

I mean, we're talking pretty consistently about some good top line numbers at this point.

Your order books internationally are pretty consistent, so I think that you've got a lot of believability in that outlook.

But maybe if can you just can help us think about if we can feel more comfortable there.

When do you see the SG&A leverage in the business as a likely thing we'll see?

I think where you'll really see it is starting in the fourth quarter, but -- and into 2018.

I think we've talked about the China acquisition across the board, where we've really made major investments in infrastructure, in people, in order -- we're continuing to get the top line.

But in Asia, particularly on the Calvin business, we're not getting the bottom line flow-through, as we've consistently gotten, because it was a moment in time with a big acquisition like we've made that we had to make an investment in infrastructure.

We'll lapped that pretty -- starting in the fourth quarter of this year.

And as we put on the type of sales growth that we are getting in the first -- that we are getting throughout this year, that should -- that leverage on that SG&A line to continue.

The only thing where we're not going to get leverage is marketing because we are committed to consistently spending a percentage of sales -- of our sales on that marketing investment, and we don't want to take the foot off of the gas because we see the dividends that it's paying for us.

Secondarily, I'll be honest, I think what you've seen in the past, if we did run into a rough patch, we know how to manage expenses in that type of environment as well.

But this, for us, clearly is not that kind of an environment.

If you add that up -- I guess just finally, if you add all that up, that offsets that pretty meaningful mix shift of the 1,000 basis points higher SG&A in international.

You've got enough there that rolls off to offset the natural mix shift in your business on the SG&A line?

Michael, you're a smart guy.

That's what you get paid for, you run the numbers.

You figure out how it goes that way.

We'll report them.

And we'll go next with Kate McShane with Citi.

With regards to CK international and the momentum there, if you had to highlight 1 or 2 areas that might need more work, what would that be?

And how meaningful would it be to contributing to this existing business momentum?

Well, I think the biggest opportunity for Europe, which we are basically not even touching to speak of, is the men's and women's sportswear opportunity.

And included in that, you have to think about tailored clothing.

The footwear business is at its infancy.

The accessory business is a nice, healthy business but, comparatively speaking, very small.

Those -- we've talked about that we think -- that when we made this acquisition, we thought that the Calvin Klein Europe is the first opportunity we'd get to get to $1 billion, but there was really no reason over time that we shouldn't be as big as the Tommy business, which is basically $2 billion.

We're talking about our reported sales.

So those -- that's the opportunity.

And look, those businesses, particularly the women's business, will require some investment.

But I -- you will not see any slowdown in the overall operating margins of that business.

But building that infrastructure out and building that to take advantage of that growth, we will continue to make investments.

And then clearly, we're investing digitally across the board.

We're investing in our supply chain.

It's -- and that's not just a Calvin issue, that is across the board.

It's -- you just -- we need to do all the things because the bar keeps getting raised from a competitive set, and we see the benefits of doing that.

And I think there'll be benefits, particularly on the gross margin line, with some of those investments.

That's helpful.

In the shorter term, I just wondered if you could make any comments about impact to gross margins when it comes to holiday and what you're anticipating from the environment with regards to promotions.

It's -- Erinn (sic) [Kate], it's going to be promotional.

It's always promotional.

I don't think it'll be worse than last year.

I think, in some respects, it should be better.

Inventory is on -- inventory is in good shape, particularly our inventory.

We've positioned ourselves, as you can imagine.

If you look at where our inventory on the balance sheet is, we're up about 6% and our sales guidance for the third quarter is 4%.

Clearly, we think we've been smart about taking that additional inventory position to try to capture the opportunities that are ahead of us.

And I think, who knows what it's -- I don't have a crystal ball, but relatively speaking, we are planning, particularly in North America, that it's going to continue to be promotional and we're going to have to be competitive in that market.

But I think you'll also see us continuing to see improvements on the gross margin line because of all the initiatives and because of the momentum of the brands.

We'll go next to Christian Buss with Crédit Suisse.

Yes, I was wondering if you could talk a little bit about the marketing strategy going forward for Calvin and for Tommy.

And also wondering, more detail how Raf Simons' successes on the collection side are being filtered through the rest of the collection.

So I'm going to talk about Calvin, and then I'm going to turn it over to Daniel to speak about Tommy because I think you should hear it from the guy who's driving the business.

On the Calvin side, look, I think the -- you can't help but be here and be involved with the brands and not see the impact that Raf Simons has had on the business.

And you see it from the press and the excitement around the brand and really getting placement.

But at the same point, his first collection is being delivered as we speak.

There's some early reaction to it that's been positive at point of sale.

But to -- the windows that you're going to see that I think is going to help second half of the business, when you go by Barneys and see Calvin Klein in those windows, when you go to Saks and see similar things like that, that halo effect is just beginning to be felt.

I think the excitement is building.

I think there is a -- clearly, that excitement is throughout the retail community with our partners and our department store accounts as we talk about it.

But how much of that has really filtered to the consumer directly and the excitement associated with that?

We'll have to see how that will go -- how that all works.

We really feel like his next -- our next show will be early September, which we think will be the second show under Raf, and I -- based on what we see coming out from last year's show, the response has been unbelievably positive.

So we feel really good about it.

We think it's going to be a major halo effect for us.

And then I'm going to turn it over to Daniel to talk about some of the initiatives at Tommy.

Thank you.

So we continue in what we have started already last year, this great momentum in Tommy now together with Gigi Hadid, as Manny mentioned already, as our ambassador.

That has materialized significantly into our business.

What we also mentioned, Manny, before is the next part.

So we're going to continue Gigi on the women's wear part, but we also integrate now The Chainsmokers in a similar way, as we have done with Gigi, for the next season.

And for next year, there is more in the pipeline that we yet not can talk about.

So in the combination of the Tommy now and with all our ambassadors we have in place, we have continue -- we continue with our strategy that has really boost the brand over the past 24 months in an incredible way, and this is our vision to continue also going forward.

And we'll go next to Ike Boruchow with Wells Fargo.

I just want to go back to Michael's question on Calvin.

I'm sure there's conservatism built into your plans.

The guide for Q3 for constant currency growth is around 4% versus the 8% you did in Q2.

Just want -- I apologize, but all else equal, where would the decel come from?

Is there something in North America?

Or timing from shipments overseas?

I just want to understand the dynamic a little bit better.

It's -- some of the -- I think as we've talked about, some of it is just retailers accelerating planned third quarter shipments into second quarter.

So it's a bit of a timing issue whenever you get into the quarter, as we've seen, goods move forward and be accelerated into the second quarter, particularly in North America, as we've seen that business really start to take off.

And I think that if you do -- let's be fair, if you do the math, I think you'll see a pretty significant increase planned for fourth quarter.

So you always get into this, where does the sales sit?

I mean, does it go up?

Or does it go up the last week of October?

The first week in November?

There's a lot of that built in.

You really got to take those 2 quarters together.

I think the implied growth rate, based on what Mike said, is a double-digit increase, I don't want to get too specific, in the fourth quarter.

So there's clearly not any kind of deceleration going on.

But month-by-month, quarter-by-quarter, there's always movements going on.

There's nothing happening at the Calvin Klein brand level or business that would indicate any kind of deceleration.

And we'll go next to Heather Balsky with Bank of America.

I was wondering, can you talk about how your online-only, pure-play partners manage inventory and how that compares to how your department store partners manage inventory?

There -- is there any real difference between the 2 channels?

Okay.

Couple of things.

I think our online -- our -- the classic department store customers are experts.

They know how to run businesses, and they've been doing it for years.

So their methodologies, particularly as it centers around selling core fashion and fashion product, is much stronger than our online players.

The online players, when you think about it, they are tech companies, they -- what they do really well is they sell core product really well.

And they sell product that continues season to season.

We're working with a number of those players to try to develop their analytics, that selling apparel, especially fashion apparel, is not the same as selling dish wash soap.

And you can't just move it from one season to the next, and your bestseller in season 1, fall, which might be turtlenecks, when you go to spring, it clearly is not going to be turtlenecks again.

So that dynamic and that learning curve has a long way to go when you think about the tech players.

So besides that, the profitability that we see selling both channels is as good with both as the other.

We're agnostic to where the sales go.

But I think -- hopefully, I answered some of your questions.

We don't see any more pressure coming from department stores or from tech company or some of these tech players about holding more inventory or doing certain things.

We are pretty much experts with the -- how to run core replenishment businesses.

We understand how to really manage that inventory when the business is going well, how to take inventory position to continue the momentum, where some of our partners might not have bought enough where we're behind them to kind of try and fill that business, particularly in low-risk categories like basics, in underwear, dress shirts, core replenishment, sportswear, and to really continue to drive that business.

So I hope I put some color on that.

We'll take our last question from Eric Tracy with Buckingham.

Manny, if I could just follow up on the digital business, right.

I mean, you guys are clearly taking share in North America within the existing wholesale, but we know there are secular long-term challenges to that overall business.

So as you think about evolving be it your own digital or partnering with these online pure plays, maybe just speak to, again, a little bit more in-depth strategically as you think about that price transparency, product segmentation, where both Calvin and Tommy stand and what needs to take place.

Okay.

So I guess is, look, we are -- we've been -- we continue to be a multi-channel player.

We have our own retail stores.

We have our online direct-to-consumer business.

We've got our most important channel of distribution, which is our department store accounts and their dot-com business.

And then we have this infancy business with some -- with pure -- with a couple of pure plays, including Amazon in North America, which is the big player.

Our job is to create demand for our product.

Our job is to create desire for our product in each of those channels of distribution.

Also, our job is to manage the channel conflicts that come up with those -- with each of those channels of distribution.

And there's no cookie-cutter answer for this is what you do.

Some brands, rightfully so, and we do it with our brand portfolio, we have some exclusivity, that we really focus on exclusivity, because we think that's right for that particular brand and what's driving.

In other brands, we decide that no, we don't want to be exclusive.

The brand has got the strength and the demand to play across all channels of distribution.

The challenge you face when you're a multi -- when you're nonexclusive is there's a great responsibility on you to drive traffic, to drive sales.

And you take on a bigger burden, both from a direct-to-consumer interface but also financially.

You take on a bigger risk profile because we have a responsibility to our partners to deliver them a certain gross margin which we've always historically fund.

Those are the levers that we play and what's necessary.

And then each brand has got its own strategy, and the distribution is not a mirror image across each one by each geographic market.

And to -- and that's about all, I guess, I really want to talk about it.

Okay.

With that, I'd like to thank everyone.

I hope everyone enjoys the balance of their summer over the next couple weeks.

And we look forward to speaking to you in November with our beginning of holiday results.

Have a great day, and enjoy the rest of the summer.

Thank you.

Thank you, everyone.

That does conclude today's conference.

We thank you for your participation.