PVH Corp (PVH) 2017 Q4 法說會逐字稿

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

Fourth Quarter and Full Year 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 transcript or a replay of this call.

The information being made available includes forward-looking statements that reflect PVH's view as of March 28, 2018, of future events and financial performance.

These statements are subject to risks and uncertainties indicated in the company's SEC filings and the safe harbor statement included in the press release that is the subject of this call.

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

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

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

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

Reconciliation to GAAP amounts are included in PVH's fourth quarter and full year 2017 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, Ashley.

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 Relationship and Strategy and Development; and Ken Duane, our CEO of PVH Heritage businesses.

Overall, our fourth quarter and annual 2017 performance exceeded our expectations and demonstrated our ability to over-deliver against our strategic and financial plans.

We grew 2017 non-GAAP EPS above our long-term targets and grew at 17%, even with the additional marketing investments we made during the year.

Overall, we grew fourth quarter and full year revenues 19% and 9%, respectively.

Throughout the year, our outperformance was driven by the momentum across our Tommy Hilfiger, the Calvin Klein businesses, with our Heritage businesses achieving its financial plans.

In particular, our international businesses continue to be the highlight of our performance.

Europe, China and Japan continue to be our healthiest markets.

And today, our international businesses represent over 50% of our revenues and over 60% of our EBIT.

Throughout 2017, despite the bankruptcies and store closures in the North American market, we saw a relatively strong performance in our wholesale businesses, as we executed well and gained market share.

We also experienced an improving trend in our retail business in the second half of the year, as international tourist traffic stabilized and the domestic consumer shopped.

Broad-based strength was seen across all distribution channels, wholesale, retail and digital.

Digital continues to be our fastest-growing channel.

We saw outsized growth across our owned and operated and third-party digital e-commerce's businesses, with revenues up over 20% for 2017.

Our diversification of revenue and earnings streams will be further highlighted in 2018, as our international mix grows and we expand across all channels of distribution.

Now moving to our brands.

Let me begin with Tommy Hilfiger.

Speaking about the brand, the Hilfiger brand's health and relevancy only further strengthened in 2017.

The brand continues to experience significant demand, especially from new and younger consumers, with both brand awareness and interest to purchase up on a year-over-year basis.

Additionally, we are seeing broad-based strength across all businesses, and I'm very pleased with the strong growth in our women's business in particular.

Consumer engagement continue to be a critical part of our strategy this year.

Our recent TommyNow Spring 2018 Show in Milan continue to highlight the incredible consumer engagement and excitement around the brand.

We have seen a double-digit increases across all key metrics from owned-engagements to earned-engagements, and most importantly, we have seen e-commerce traffic and sales increase.

In 2017, we leveraged our brand ambassadors and key influencers from Gigi Hadid as our women brand ambassador to the Chainsmokers, our ambassadors for all Tommy Hilfiger men's categories and Shawn Yue as our local ambassador for Greater China.

We believe that investing in the Tommy Hilfiger brand via these brand ambassadors have and will continue to drive performance in our global growth categories.

For spring 2018, we announced 2 new exciting partnerships.

First, Tommy announced a multiyear strategic partnership with 4-time Formula 1 World Champions, Mercedes-AMG Petronas Motorsports.

Starting with the 2018 season, Tommy Hilfiger will be the official apparel sponsor of the Mercedes-AMG Motorsport, building on the sports sponsorship heritage that Tommy has embraced since the first founding of his brand.

Second, we announced our newest brand ambassador, Formula 1 World Champion Lewis Hamilton.

Lewis will represent the world of Tommy Hilfiger men's.

These partnerships underscore Tommy Hilfiger's vision to continuously elevate and expand the brand in key markets and further drive the global growth of its men's business, bringing the next generation of fans to the brand.

From a business perspective, driven by these initiatives, Tommy increased sales 22% in quarter and 11% for the year, with earnings up close to 50% for the fourth quarter and 28% for the year, a truly outstanding performance.

We continue to be extremely pleased with the response from consumers and are benefiting from market share gains in all regional markets.

Our international revenues increased 37% in the fourth quarter and 19% for the year.

Retail comps stores were up 6% for the fourth quarter and 8% for the year.

Our Tommy Europe outperformance continued, as we saw incredibly strong business across all markets with strong sell-throughs at retail with lower year-over-year promotions.

As I've previously mentioned, our spring-summer 2018 order book is up over 10%.

We're now providing our full 2018 order book outlook, and I'm quite happy to report that fall orders are again running up over 10%.

We continue to be impressed by the continued strength of the brand and the reception from customers across all of our product divisions and across all of our markets.

Moving to Tommy Asia.

We -- the performance continues to be very strong there, as we've continued to build upon the continued momentum in the -- in China, benefiting from the integration and investments in the Tommy Hilfiger China business.

Additionally, our Tommy Hilfiger Japan business had a terrific end to the year.

That business has found solid footing, and we've demonstrated our ability to successfully elevate the brand position in the highly competitive Japanese market, and we see future growth for the brand as we move forward.

Moving to North America.

I'm pleased to say that we feel strongly, we have seen a clear inflection point in this business.

We started to see a turn in our retail business in the beginning of the summer, and the momentum has accelerated in this business as we've moved through the second half.

For the fourth quarter, we saw our business up 5% in revenues with an outstanding 10% comp in our retail business for the quarter along with solid gross margin improvement.

Importantly, we not only saw an improvement in our retail business but also saw a continued strength at wholesale.

Our Macy's business in particular have been outstanding with strong sell-throughs at higher overall margins.

Moving to Calvin Klein.

Creatively, the Calvin Klein brand had a tremendous year.

We believe the one singular brand vision articulated by the design team can be felt throughout the product category, from the runway in our 205 campaigns on down to our jeans and underwear marketing and product.

In particular, although the last few months, the momentum around that CKM (sic) [CK] brand has intensified, which has cultural relevancy resonating and consumer interests and conversion to purchase seeing nice improvements.

We believe we continue to reach a new consumer, and we're expanding our distribution reach across all channels, from premium luxury doors to new specialty retail accounts.

Our Family hashtagged by Calvin's marketing campaign continues to perform very well for us across the globe.

I'm happy that I can finally talk about the Kardashian and Jenner Sisters as well as the entire brand family from Solange and ASP Rocky (sic) [A$AP Rocky] to the Gerber siblings, Millie Bobby Brown and Paris Jackson, all of which are driving engagement with the brand.

The impressions and engagements we have seen as we rolled out this campaign has been amazing.

We're seeing strong engagement and most importantly, strong spring selling as we move into the first quarter.

Specifically, we believe these marketing initiatives underline our commitment to our consumer-centric approach and engaging the consumer to live the Calvin Klein brand.

While we discussed our Calvin Klein Amazon Fashion partnership for the holiday retail season last quarter, I'm pleased to report that it really helped to drive awareness to all our channels of distribution and continues to show that Calvin Klein is thinking first about the consumer and is thinking digital first as well.

From a product perspective, 2017 also delivered strong performance across all major product categories with an incredible improvement in selling across our jeans and accessory business around the world.

We feel really good about the direction of the brand from a creative and fashion relevancy perspective but most importantly, about the traction we are getting in our core existing categories as well as our newer faster growing businesses in Europe and Asia.

From a business perspective, revenues increased 23% for the fourth quarter and 10% for all of 2017, reflecting strong global trends, with a 30% increase coming from our international business in the fourth quarter and revenues up over 20% in 2017.

As we discussed previously and planned for, the fourth quarter was the first quarter we lacked our investments from 2016, and we saw a 5% increase in overall earnings despite the planned $15 million increase in brand marketing investments.

We continue to see strong top line growth out of Europe and China, with North America experiencing improved sales trends across all channels.

North America and international retail comp sales both increased 4% in the quarter.

From an international perspective, our Calvin Klein Europe business continues to deliver terrific results with market share gains across the region and strong sell-throughs across all channels.

As we previously mentioned, the Calvin Klein spring 2018 order book is up over 25%.

And based on the strong selling we experienced during fall 2017 and spring to date, our fourth -- fall 2018 order book is projected to be up again over 25%.

We are quite pleased with the broad-based strength across the business, with Calvin Klein Jeans showing tremendous strength and outsized growth above our average order book growth.

Clearly, the elevated jeans product we have been focused on and rolling out is paying huge dividends for us.

In Asia, Calvin Klein continues to perform well with improving trends across the region.

China, which represents over half the business, continues to outperform other markets across all product categories.

During the quarter and throughout the year, we're pleased to report that we have continued to see strong performance and momentum across our Greater China business and Southeast Asia.

Calvin Klein North America saw an acceleration of growth across all channels of business in the fourth quarter.

Importantly, we saw a tremendous growth in our digital businesses, in part driven by our Calvin Klein Amazon initiative, and our Calvin Klein North America retail business saw an improvement in comp store trends versus the first 9 months of the year, with comps up 4% for the fourth quarter.

Finally, in our Heritage business, revenues for the quarter and the year were flat, in line with our plans, and earnings were up 2% over the prior year.

Retail comps were up 1% in the fourth quarter and 2% for the year.

Given the challenging overall North American dynamics, we are quite pleased with the financial performance of our Heritage businesses.

Looking out to 2018, overall, I believe our 2017 performance demonstrates our strong execution and our continued commitment to execute against our strategic priorities.

In 2017, we purposely invested in areas most impacted by the changing dynamics in the industry, the growing problem in it is of digital, the importance of having a nimble and responsive supply chain and our ever-present commitment to driving consumer engagement.

In 2018, we continue to build upon the investments made in 2017 around talent, our global operating platforms and systems, our consumer experience and most importantly, our brands.

From a regional perspective -- business perspective, in North America, in the first quarter, the environment continues to improve.

Despite door closures and the recently announced Bon-Ton bankruptcy, our own North American stores continue to see improving traffic trends and -- with comps up mid-single digits for Calvin Klein and high single digits in the Tommy Hilfiger business.

Our Heritage business is also seeing low-single digit comp store increases.

Our international business continues to see great momentum quarter-to-date, with Tommy Hilfiger international business up mid-single digits and Calvin Klein International comps running up high single digits.

Asia is also benefiting from a strong Chinese New Year selling season.

We believe that the incredible brand power behind Calvin Klein and Tommy Hilfiger position us well in the marketplace against our competition and will drive continued momentum with earnings growth projected this year of between 13% and 15%.

This earnings growth outlook reflects the macroeconomic and geopolitical volatility around the world and the uncertain global retail landscape.

Given that backdrop, we are conservatively planning the second half of 2018.

If this global landscape continues to stabilize, and if our business trends continue at these current level, we are in excellent position to outperform our 2018 financial guidance.

And with that, I'm going to turn it over to Mike to quantify the fourth quarter and full year results.

Thanks, Manny.

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

I'm going to briefly touch on 2017 and then move on to 2018.

Overall, our fourth quarter benefited from the 53rd-week in 2017.

Comparable store sales percentages that I mentioned exclude the extra week of sales.

Our reported revenues for the fourth quarter were up 19%, which exceeded our guidance and was inclusive of a 6% benefit from FX.

Tommy Hilfiger revenues were very strong, up 22% inclusive of the 7% benefit from FX.

The Tommy Hilfiger revenue increase was driven by exceptional international performance of 37%, inclusive of a 13% benefit from FX.

Outstanding performance in all geographies and channels drove the increase.

Our Tommy Hilfiger international revenues included a comp store sales increase of 6%.

Tommy Hilfiger North American revenues were up 5%, inclusive of a 1% of benefit from FX.

North America was driven by strength in retail with 10% comps, offset in part by a planned decline in off-price sales.

Our Calvin Klein revenues were up 23% inclusive of a 5% benefit from FX in the fourth quarter.

Calvin Klein international revenues were very strong, increasing 33% inclusive of a 10% FX benefit, driven by outstanding performance in Europe and Asia.

Our international comp store sales were up 4%.

Calvin Klein North America revenues increased 13%.

Strong wholesale performance across all categories and retail comps of 4% drove the increase.

Our Heritage revenues were flat to the prior year with our retail business running comp store sales of plus 1% comp.

Our non-GAAP earnings per share of $1.58 was $0.28 higher than the previous year and $0.14 better than the top end of our previous guidance.

The EPS beat versus the prior year -- versus the previous guidance was driven by strong business for approximately $0.10, favorable FX of $0.02 and favorable taxes net of interest for approximately $0.02.

We ended the full year 2017 with record revenue of $8.9 billion, an increase of 9% over the prior year inclusive of a 2% benefit from FX, and non-GAAP earnings per share was $7.94, which was 17% higher than the prior year.

Moving on to 2018.

For the full year 2018, we're projecting non-GAAP earnings per share to be $9 to $9.10, 13% to 15% growth over the prior year.

Included in our earnings per share is the positive impact of foreign currency translation of $0.35.

Overall, we're projecting revenues to grow by about 7%, including the positive impact of 3% related to foreign currency.

Overall, operating margins are expected to increase approximately 20 basis points for the company.

Tommy Hilfiger revenues are planned to increase 8%, inclusive of a positive impact of 4% related to foreign currency.

Tommy Hilfiger operating margins are planned to increase about 50 basis points.

We project Calvin Klein revenues to grow 9%, inclusive of the 2% related to foreign currency.

We're planning Calvin Klein operating margins to be down 20 basis points due to our highest operating margin business, the licensing business, will be down as a result of the impact of the Bon-Ton bankruptcy.

In spite of the headwinds created by the Bon-Ton bankruptcy, we're still planning Calvin Klein earnings to -- growth to be in the high single digits.

Our Heritage business is planned to have relatively flat revenues and flat operating margins and is also negatively impacted by the effects of the Bon-Ton bankruptcy.

Interest expense for the year is planned to be about $120 million compared to the prior year of $122 million.

This decrease is primarily the result of the lower-interest EUR 600 million euro bonds, which were issued in December of 2017, partially offset by higher interest rates on some of our variable debt.

In 2018, we're planning to pay down at least $250 million of our debt.

Stock repurchases in 2018 are planned to be between $200 million and $250 million.

Our tax rate for the year is estimated at 14.5% to 15.5%.

As IRS regulations are expected to be issues later in 2018.

Related to the recent Tax Reform Act, our current estimates could be subject to change if the regulations differ from our current interpretation.

Capital expenditures for the year are planned at $450 million and reflect the $50 million shift from 2017 into 2018.

First quarter non-GAAP earnings per share is planned at $2.20 to $2.25 and includes approximately $0.20 of estimated positive impact for foreign currency translation.

Revenue in the first quarter is projected to increase 15%, including the positive impact of 6% from foreign exchange.

Tommy Hilfiger revenues are planned at a 19% increase, including 9% related to foreign exchange, Calvin Klein revenues are planned to increase 17%, including the positive impact of 5% related to foreign currency.

Heritage Brands are projected to increase 2%.

Interest expense is projected to be $29 million for the first quarter and taxes to be about 16% to 17% in the first quarter.

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

(Operator Instructions) We will open our questions with Bob Drbul from Guggenheim.

Manny, the -- I was surprised, Mike didn't correct it, but it's A$AP Rocky versus ASP Rocky.

ASP Rocky, but that's -- we're going to give you a pass on that one.

But speaking of that, when you look at the marketing initiatives underway at both of your big brands now, the Tommy brand and now the Calvin business, where do you think we are in terms of like the dollar expenditure or the rate?

Do you think that, are you at a good level in dollars or at rate?

Can you just talk us through like how you think about the business investments that are going on around your 2 big brands there?

Okay, Bob.

We -- I guess as -- I would say as a percentage of sales, I think we're at an appropriate level today to continue to drive the business and to drive the growth going forward.

We've taken advantage over the last couple of years, our outperformance to do, what I think, are some interesting and brand-moving initiatives and to really build upon that.

So I guess I would say is I think we're more than covered from a marketing point as we go forward.

As we hopefully continue to outperform our financial results, I think we might -- we would like to take some of that incremental profitability and put it back into the brands in events or initiatives that really, I think, could -- are game changers, like the Kardashians, like some other things that we've done with Amazon, and I think it's really trying to connect with that younger consumer that next-generation is coming into the both brands, making those kind of emotional connections with them.

So yes, we're clearly are at a very strong level today from where we were 3 years ago, and we'll look to continue to do it opportunistically as we go forward.

Okay.

And I guess just my second question is on, origin to North American market in the first quarter or even throughout Europe?

Is the weather impacting your business at all?

Do you think it's hindering it or -- can you just maybe address that a little bit for us, please?

Well, I would say, in the first quarter here in North America, our business trends are very strong.

I -- we're living through a bunch of snowstorms that clearly didn't help business and trends, and it doesn't seem like we can get out of this, especially in the Northeast and Midwest.

We can't seem to get out of this dreary winter weather and move to spring early, so but we're really not seeing it in our business trends in North America, so I'm very happy with our trends, but from what I hear from other people, it is having an impact.

In Europe, it's just very cold, it's very dreary, and it is having some negative impact on traffic and the conversion at those stores.

So as we are so clean with goods, we're very well set up for spring.

We're ready to really rock and roll the spring.

And I think just working our way through till we get some normal weather, I think, business will really pop again in Europe.

And our next question is from Erinn Murphy from Piper Jaffray.

I guess just expounding on Bob's question on North America in Q1.

Broadly, you do sound pleased with the environment.

Could you talk a little bit more just about how you feel about the inventory in the channel, the promotional environment?

And then if you think about the summer and fall business, how are retailers effectively positioning the forward business there?

Okay.

So I think inventories are really clean, came out of January in very strong position.

Not just our businesses, which given the sales trends, we were chasing product constantly into the fourth quarter.

But I think when I walk through stores, I was in Macy's, I was in a number of retailers, I just see a very clean inventory position.

I don't see the aggressive clearance sales that we saw this time last year.

So I think it's really benefiting in North America everyone's profitability as we move forward.

And I think as -- if -- I think the top line will be fine, but I really think most retailers are going to be benefiting on a gross margin basis, as we move forward to the spring-summer.

Okay.

And then maybe just talk a little bit more about the denim category you referenced some positive traction there.

I believe you're relaunching Calvin denim globally.

Can you just talk about how you're expecting to -- how you're expecting that launch to, kind of, unfold as we get throughout the back half of the year?

And how big is denim overall both for Calvin and Tommy and just any other context for that category which seems to be picking up?

Look, globally, we're very happy with our trends across both Calvin and Tommy on the denim side of the business.

We're really benefiting from -- there seems to be a bit of 1990s fashion cycle back into the brands.

Our brands from -- particularly Tommy, from the logo point of view continues to be a big deliverer, T-shirts that whole jeans area and even our performance business is benefiting both in Calvin and Tommy from that trend in the market.

So I think we're very well positioned as we go forward for that.

We're launching in fall.

It's more of an internal matter.

For the last few years, we've been developing our jeans product both in North America and in Europe, and the 2 teams have worked very closely together, but we've transitioned that now to 1 denim center of excellence in Europe.

The full product has been previewed with the retailers is that product.

I think it just has made the brand presentation globally more cohesive and consistent.

And I think you'll see, particularly in North America, an elevation of product, as we go into the fall season.

And the reception at retail from our partners has been very, very strong.

I think from a consumer perspective, I think, you'll see a much sharper presentation of our varied fits that are there.

I think at times, we weren't as clear to the consumer about our fits as we could've been, and I think that's been adjusted.

And I think it gets further adjusted in very crisp concise, clear messaging to the consumer, and I think that's what they want to see to understand the Calvin product.

And now all of that again will be supported with the marketing that will continue.

The Kardashian, Jenner partnership continues into the fall season, runs through all of 2018.

That's been a real lift combined with great product.

I think we're feeling really strongly about that business, and we're seeing tremendous growth in the order books throughout Europe and Asia in that business.

And that's like our first clear indication and sell-throughs at retail have dramatically improved over the last 4 months in the whole jeans category.

So I think we're really in excellent position to capture all of that.

We'll take our next question from Michael Binetti from Crédit Suisse.

Let me just pick up -- pick on the guidance for a second.

I want to think about after the first quarter, Manny, you did mentioned that the momentum today could drive upside through the year based on what you're seeing in the business today but certainly understandable with the bankruptcy and the channel last months, why you do want to be conservative.

The implied revenue momentum slows down a lot in the back half.

But things, like pretty sticky order books, Europe that you pointed to, you've got great trends in first quarter that's even with weather in both continents.

Can you just talk about where you have confidence that if we don't have any, kind of, macro shocks?

Where you see the most opportunities in the global model to deliver upside in the back half if things continue at today's pace?

So I'd say the biggest opportunity right now I guess it's -- I think there's 2 big opportunities for us.

It's North America particularly in our retail businesses, which really seem to have momentum right now.

And I think it's been driven by a couple of things.

I think is -- I think there's a strong consumer sentiment, there's general sense that the consumer environment is fairly strong and some positive momentum around that consumer, as we move forward, coupled with foreign currencies moving in our -- where the dollar has weakened somewhat from where it was a year ago, we're seeing more and more international tourist traffic throughout the United States.

And for our 2 big brands, Calvin and Tommy, that really plays very strongly, so we've seen a real uplift in North America on international traffic that usually drives a higher consumer spend on average at higher average unit retails given the global brand perception -- position of both brands elevated throughout Europe and Asia compared to North America, the value equation is even -- is that great.

The other area, where I think against our guidance, we clearly should really outperform is Europe.

The order books are really running ahead of our guidance.

We've been surprised by that.

I think as we look -- as we get through the first quarter, we'll start to get even more visibility, we'll start to adjust the second half sales.

But given the kind of growth that we've really been able to come out with and just our past practices of trying to be conservative in the guidance in moving it along with the trends and not wanting to disappoint, I think we have a real opportunity to outperform those 2 sales plans in particular, and that would clearly drive profitability in the second half of the year.

Can I just ask a follow-up?

I think you've given us enough bread crumbs in how you think 2018 plays.

Maybe we could talk a little bit about noncore opportunities like licenses and M&A.

I guess does U.S. Tax Reform change your ability to access cash to make some strategic moves.

Do you see any licenses that make sense to bring into the business based on opportunities in front of you this year?

And then thoughts on a third big brand.

Obviously, your playbook is working for more than one brand at this point.

How actively are you looking at new ideas, and if so, what are some of the more interesting areas that you might hunt in?

Sure.

I think -- let me take that in pieces.

One is, I think the tax changes really don't impact our ability or access to cash in order to make investments.

Just demonstrated by the last year, we've made a number of license buybacks.

We've made a number of investments.

We've -- we -- it's not slowing us down at all.

Thankfully, we're not capital constraint, and our capital allocation and our capital structure has just dramatically improved over the last 2 years.

That gives us a lot of access to cash at these levels which, I think, are relatively attractive interest rates.

So we're not constrained at all from growth from cash and capital.

We'll continue to look at license buybacks I think the most interesting opportunities continue to be international with both Asia, particularly Greater China, there for the Tommy Hilfiger brand, the Hong Kong, Macau, Central Southeast Asia market, which is with a licensed partner today.

That's an area that we'd look to aggressively move in.

Brazil is another area that we think is on the uptick.

I think that's probably a little further out, but that's an area where we'll also like to take back our Tommy Hilfiger license over time and grow that business as aggressively as we have.

We feel that, that geographic region over the next 12 to 18 months is going to start to see some significant improvement against where they've been.

So we're looking at that opportunistically as well.

And there was some product categories opportunities.

They're not large, but are they're -- there are opportunities that we're looking at as well.

As far as the third brand, it's clearly an area that we're spending time on.

We're trying to be aggressive and at the same time prudent.

We're looking at different opportunities.

I think we're not going to go very far field from where we've been.

So I don't think the market has to worry about us going all the way to skewing one way or another into categories that we don't have expertise in.

So I think we're looking, we're aggressive, and we would hope that some opportunity would come across, that makes sense.

And our next question comes from Matthew Boss from JPMorgan.

So larger picture.

Manny, do you see anything structurally constraining your ability to reach the 12% multiyear margin target?

And then just as we think across the brand portfolio, where do see the most opportunity or low hanging fruit remaining from here?

I don't see it up.

I don't see any problem over time next 3 years getting to 12% operating margin.

I think probably, our financial projections aren't anywhere near that.

But I think structurally, there's nothing that should stop us.

The biggest -- in that light, the biggest issue that we've had to deal with has been currencies in the past.

And again, I think if currencies like the euro were closer to $1.30 to $1.35, we'd already be at 12%.

Those -- that transactional hedge and transactional hit that we've had to take has really -- puts pressure on our profitability, and you saw that in '15 and '16.

So we're starting to recover from that, and we'll start to see improvements in '18 and '19.

So -- and if currencies stay where they are, there's clearly opportunity there.

I think the biggest opportunity from a product and a brand point of view or region point of view, it continues to be Calvin Klein Europe.

That's totally driven by the fact that it's -- the business today, Calvin Klein, is about 40% or 45% the size of the Tommy Hilfiger business.

And we use that as a benchmark because we think from the sportswear and most categories we're in, Tommy Hilfiger is the leader in market share throughout Europe, and we believe on the more modern contemporary side will flow away from the traditional more U.S. preppy type of product that Tommy has, we think Calvin can have a similar size business in Europe, which would basically translate into a doubling in size over the next 5 years.

So that continues to be, I think, our biggest opportunity.

I think after that, both Calvin and Tommy have a unlimited runway in Asia, driven by the growth that can come from China and our positioned with China in that region and the Greater China market.

That continues to be a growth area for us, and I think given our development in those 2 areas, our operating platforms in Europe and Asia, we're in a excellent position to take advantage of those opportunities, as we move forward and as we've done for the last 3 years.

Great.

And then just say a follow-up question.

So you've -- the 20% growth in digital to me was a clear call out.

I guess what's your sales penetration of digital today?

Do you think this kind of growth is sustainable?

And what's the best way to think about your digital margins versus your store margin today and the best way to think about it going forward?

Okay.

Our -- I would say, our digital penetration today on a retail sales basis not as big, as a lot of our transactions are on a wholesale basis selling through our retail pure play and retail department store customers.

I think our penetration, round numbers is around 10%.

And I think we would target over the next 5 years that it should be 20%.

The profitability in that channel overall is very similar to our profitability across our other channels.

I think the wholesale business there is very nicely profitable.

And as we scale our direct-to-consumer e-commerce business -- that's clearly today under -- is not as profitable as our other channels of distribution, but we believe that's really scale-driven, and as that scale grows, there's no reason why that scale shouldn't be double-digit kind of operating margin moving forward in the 10% to 12% kind of range in our direct-to-consumer e-commerce platform, very similar to our retail model.

So I think that's where we're headed, and I think it feels like those numbers are very attainable, as we start to drive the business forward.

Your next question comes from Kate McShane from Citi.

Manny, I was wondering if you could remind us with your Amazon business.

Do you have a percentage or a general percentage of mix of what is pure fashion versus more of what's replenishment?

And I'm just asking, because I want to know how this mix might change over the upcoming year?

And any insights into how people are buying fashion versus more of the commoditized replenishment product?

At this point in time, given our mix of product and their propensity to sell core much better than fashion at this point in their revolution, I think, we're between 70% and 80% core replenishment, core or basic kind of product.

And I think that will -- that mix will change over time, but I think it's -- right now, again, depends whose crystal ball you look into.

Right now at this point in time, I think, that's a slow evolution as the consumer really gets more and more comfortable about buying fashion online, and how well, not only Amazon, but a lot of the pure plays present fashion.

I think their algorithms and how it drives the business are very much built on a replenishment, continue to keep the consumer happy in key core categories.

The maturity level at Amazon, in particular when it comes to fashion, needs to be further developed.

It's just not where it needs to be right now.

And I think clearly they're on it, and there's opportunity there, but they don't have the metrics at this point, and they don't have the presentation or product at this point that would really drive it.

Okay, that's helpful.

And Mike, I just wanted to ask a question about the gross margin.

I wondered what was being contemplated for some of the higher commodity costs here, like cotton, or will there be any planned price increases.

And any thoughts around the potential for carats, and how that might be managed?

Okay.

So I guess overall product cost, we're looking at a low single-digit kind of growth, very low single digits.

We’ve seen to manage to offset and move around get the price benefits we needed to offset some of the cotton increases.

We have been feeling some pressure on silk.

And a lot of talk about freight, but freight costs have not impacted us.

The nature of our contracts are a little longer term I think than most, so we've managed to not see any freight increases.

On duties and tariffs, we do business -- we do bring product in from China.

If there were changes, we would be impacted to some degree.

It is one of our larger countries.

However, for the U.S, it's not as significant as one might think.

So while we're about a 1/3 of our business coming from China for the company, the U.S. is only between 20% to 25%.

And I think when you look across the retail or the wholesale landscape, I think, you'll find that, that's much lower than most others in terms of how people source from China today.

So there would be an impact, but we would over time look to raise prices and/or move product out of that country over time.

And I guess, Kate, the only thing I would add -- and I'll do a commercial -- is -- we're really opposed to the idea of tariffs to solve this problem with China.

Clearly, there's a problem with China.

It's not a level playing field.

And we -- and I personally think the administration needs to be aggressive and needs some tools to bring China to the table to have a reasonable negotiation.

But it just doesn't seem appropriate for -- in the power category, that's already has -- have tariffs between 20% and 30% on our goods coming in from China today.

To think about putting another 25% on top of that, it's not logical.

It doesn't seem like that's really what's -- where the wind is blowing in Washington that apparel would be one of the targeted categories, but there's no guarantees.

But that's how it's -- what it feels like.

It feels like as a parent, if my son does something wrong, this feels like I'm punishing my daughter for his misdeeds.

So it just doesn't -- it's not logical to us that this -- that apparel tariffs should be the weapon of choice, if we're really going to deal with technology, communication, heavy industry issues with China, that seems the place where it probably would go.

So -- and sorry for the commercial.

And Kate, just overall for our guidance for 2018, we've reflected about 90 basis points of improvement in gross margin.

A portion of that is mix.

We are seeing our international businesses grow faster with higher gross margins, and a portion of that is getting higher AURs.

And our next question comes from Chethan Mallela from Barclays.

I just want to ask about the True&Co acquisition that announced around a year ago.

Can you provide an update on how that integration has gone?

And I think at the time of the announcement, it expected to see some benefits from their data mining expertise and sort of leveraging your capabilities to grow the brand.

So it'd be helpful to get just a better sense of how that manifested?

So look, it's been -- from an integration perspective, we've definitely seen the company move into PVH without a hitch.

We've managed to retain the talent.

We've managed to keep the systems up and running, and it's been a good learning experience for us.

Just to put it in perspective, it was a fairly small acquisition in the scheme of PVH.

As we look backward at the acquisition, we did talk about some of the benefits of data.

We are working with the True team, and the True team is working with the PVH team.

We have seen some benefits cross-divisionally, particularly in the underwear and the women's intimates categories, and consumer data is a focus for us, and we are moving it forward through True and with our underwear and intimates group of PVH.

And the only thing I'd add is, the learnings that we've really gotten have been on the data mining side.

We're really sharing across platforms both Calv and Tommy and True to really understand that consumer and their shopping behaviors.

And we've also learned a lot about what the most efficient way to gain eyeballs, drive sales and traffic.

We really had some real learnings.

But I think we'll benefit the -- particularly the Calvin Klein business, as we move into 2018, our online digital business, about how to be more efficient with some of our advertising.

Great.

And then just as a quick follow-up.

Can you just dimensionalize how you're thinking about the Chinese New Year shift in the context of the sales and EPS guidance for 1Q?

Yes, sure.

So Chinese -- As I think Chinese New Year was a negative for us in the fourth quarter of 2017.

It was a nice positive for us in -- first quarter of 2018.

And I think it explains part of the reason why the sales momentum and the earnings growth in the first quarter significantly exceeds our guidance for the full year besides our conservatism about the second half of the year, the first quarter is really benefiting from Chinese New Year.

And I think that does it well.

And our next question comes from Heather Balsky from Bank of America.

Can you just talk about your supply chain initiatives, and where you are in terms of speed to market and your ability to take sales?

Sure.

Mike?

Yes, look we're -- speed-to-market is a focus for us.

We're a heavy -- one of our opportunities continues to be more and more -- on the core product side, we've made great strides in terms of replenishment product and being able to do quick replenishment in 10 to 20 days in terms of getting product from factory or from order to the -- to North America and even in Europe now as well.

So we're very much up and running on the basic categories or on the core categories of our business.

And now we're moving more into the read and react and the fashion categories and trying to understand how to get quick replenishment or quick -- quickly back into goods there, so we've made some great strides on the underwear side of the business and on the dress shirt side of the business, and now are continuing to move that forward outside of those 2 categories.

And if I can just -- the last point I'd just add to that is -- particularly in the -- our international markets, which I don't think, in general, are as developed from a core replenishment point of view as our North American business is, I think, there's been a lot of progress made there.

And I think that, that has been a big part of our outperformance, if you're able -- you get great sell-throughs and great selling, if you're not able to keep that momentum going, you'll lose the momentum and you'll lose the potential sale, and the teams have done a great job of positioning product, positioning inventory and raw materials in order to really narrow that cycle and capture that growth opportunity.

And I think that's one reason over the last 6 to 9 months, you've seen our inventories grow a little bit more than our sales growth, because we're really making those investments in raw materials, positioning in order them -- to have the goods in order to sell it.

And the risk on that core replenishment business from a markdown point of view is very low.

When you think about it both even in core sportswear, it's very low.

And you just have some carrying cost of inventory and given our margins globally and even in the United States on core being so high, the payback on that is tremendous.

So I think it's been a great investment for us, and I give the management teams great credit for going after it.

Right.

And as a follow-up on operating margin, would you be able to help sort of break it down a little bit more for 2018?

There're a couple of, I guess, onetime items like the Bon-Ton bankruptcy and the 53rd week, and you getting a benefit from currency.

Could you just help us piece it all together?

Yes.

Look, I guess I've been trying to lump it all together.

And when I -- the way I look at it is, we've got about $0.35 in benefit for FX.

We've got a hit of about $0.20 on the Bon-Ton, which reflects both direct business as well as hit on the licensing business.

And then the 53rd-week losing it this year offset by the benefit of Chinese New Year is worth a dime.

So and that's how I've been just pushing it all together at this point.

Yes, I think that explains the earnings really well.

And I think on the margin side, I think Mike laid it out really well the details by business category.

The Bon-Ton, particularly on the licensing side of the business is got -- it's obviously licensing is a 100% gross margin business, there's no product cost.

So when you lose a nice stream like that, that we're really planning it for 0 this year, that has a minor hit on the Calvin Klein operating margins for '18, which I think if you took out of it, you'd be seeing growth on those operating margins.

And our next question comes from John Kernan from Cowen and Company.

A follow-up question on the conservatism in the guidance of the back half.

Would you consider reinvesting into SG&A if the environment does turn out to be better than what you're planning for at this point?

You've obviously earned some fairly high returns on the top line from the marketing investments in fiscal '17, so just wondering if you'd ramp that back up in the back half should the environment turn out to be better than what you are planning.

Well, a couple of things, John, is we're maintaining -- even with the investments we've made in '17, the incremental investments, we're maintaining that marketing spend as a percentage of sales at that level, so we're not backing away from where we are.

I think there's a potential, we might potentially invest a little bit more if we outperform significantly.

And I don't have the math in front of me, because part of that outperformance would be driven by top line growth.

And if we grow the top line, we'll increase the marketing spend as a percentage of sales and might we if there's an -- something that's dramatic that we could do from a marketing point of view, like we did with Amazon or what we've done with the Kardashian or Lewis Hamilton, might we want to take advantage of that?

Yes.

But we would only do that in the context of outperforming our plans.

So I think the guidance we've given, the projections we have, have more than enough marketing SG&A investment in order to deliver the plan and beyond.

It's just a question if we start to outperform, I think, we will take some of that outperformance and put it back into the brands and the growth initiatives.

And that formula for the last 3 years has worked really well for us, as we've been able to, in a tough environment, continue the momentum keep going.

So the real focus will be marketing and digital investments.

We're making substantial, but being able to do more could drive business in the future.

I think operator we'll take our last question.

And our last question comes from Ike Boruchow from Wells Fargo.

I guess Manny, just a quick one from me.

You talked about how clean the U.S. whole channel looks right now.

You also talked about a planned pullback at Tommy in the U.S. within the -- the off-price channel.

Can you talk about how you're looking at the off-price space maybe into 2018, not just for Tommy, but also just Calvin is kind of thinking about how your -- thinking about that channel as you balance your growth domestically?

Sure.

I think is -- I think that the last sentence is really the key.

It's all about balance.

I think is that channel distribution -- look, not a channel like shop directly or that often, but it's a channel that's continues to appear pretty healthy to me.

I know there's been some blips along the way and some of those things.

But I think it's a channel that the off-price retailers continue to gain share in the overall market.

And it's a market that in the U.S., if done appropriately, is a great complement to your business and to your profitability, but it needs to really be done appropriately.

For us, we've -- what we've done over the last 4 years is as our top line has grown, we've actually lowered the percentage of our exposure into that channel.

Although, the total dollars are about flat, as a percentage of sales, it's coming -- it's come down.

I think that will be more of the strategy as we go forward.

And we want to -- especially for the 2 big brands, Calvin and Tommy, we want to -- as we are really expanding our higher-end component of that business, both the Calvin with some of our key retailers in North America and Tommy with some of those key retailers been in, what I would call, the premium distribution, Macy's up.

We want to really support that.

So we don't want to be overexposed in the off-price channel, but I think there's a balance given that the dynamics for this market and we'll continue to press those levers going forward.

And with that, we're going to close our call.

I want to wish everybody a happy Easter and a happy Passover.

And we look forward to speaking to you at the end of May and early June about our first quarter results.

Have a great day, everyone.

That concludes today's conference.

Thank you for your participation.

You may now disconnect.