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Edited Transcript of PVH earnings conference call or presentation 26-Nov-19 2:00pm GMT

Q3 2019 PVH Corp Earnings Call

NEW YORK Dec 8, 2019 (Thomson StreetEvents) -- Edited Transcript of PVH Corp earnings conference call or presentation Tuesday, November 26, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dana M. Perlman

PVH Corp. - Senior VP of Business Development & IR and Treasurer

* Emanuel Chirico

PVH Corp. - Chairman & CEO

* Michael A. Shaffer

PVH Corp. - Executive VP and Chief Operating & Financial Officer

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Conference Call Participants

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* Dana Lauren Telsey

Telsey Advisory Group LLC - CEO & Chief Research Officer

* Erinn Elisabeth Murphy

Piper Jaffray Companies, Research Division - MD & Senior Research Analyst

* Heather Nicole Balsky

BofA Merrill Lynch, Research Division - VP

* Irwin Bernard Boruchow

Wells Fargo Securities, LLC, Research Division - MD and Senior Specialty Retail Analyst

* Jamie Susan Merriman

Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

* Jay Daniel Sole

UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Softlines & Luxury

* John David Kernan

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* Michael Charles Binetti

Crédit Suisse AG, Research Division - Research Analyst

* Robert Scott Drbul

Guggenheim Securities, LLC, Research Division - Senior MD

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Presentation

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Operator [1]

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Good day and welcome to the PVH Third Quarter 2019 Earnings Call. Today's call is being recorded.

At this time, I would like to turn the conference over to Dana Perlman. Please go ahead, ma'am.

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Dana M. Perlman, PVH Corp. - Senior VP of Business Development & IR and Treasurer [2]

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Thank you, operator. Good morning, everyone, and welcome to the PVH Corp. Third Quarter 2019 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 transmitted without PVH's written permission. Your participation in the question-and-answer session constitutes your consent to having anything you say appear on any transcript or replay of this call.

The information being made available includes forward-looking statements that reflect PVH's view as of November 25, 2019, 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 rights 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 should not undertake any obligation to update publicly any forward-looking statement, including, without limitation, any estimate regarding revenue or earnings.

Generally, the financial information and guidance provided is on a non-GAAP basis as defined under SEC rules. Reconciliations to GAAP amounts are included in PVH's third quarter 2019 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'm pleased to turn the conference over to Mr. Manny Chirico, Chairman and CEO of PVH.

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Emanuel Chirico, PVH Corp. - Chairman & CEO [3]

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Thank you, Dana. Good morning. Joining me on the call is Mike Shaffer, our Chief Operating Officer and Chief Financial Officer; Dana Perlman, our Treasurer and Senior Vice President of Business Development and Investor Relationship. Our President, Stefan Larsson, is traveling and visiting some of our international locations and will be joining us on our fourth quarter call.

I'm pleased to report that PVH posted strong third quarter results, especially in light of the challenging and volatile global backdrop. We reported earnings per share of $3.10, which exceeded the high end of our previous guidance by $0.10, despite the higher-than-planned interest and taxes of approximately $0.10 per share. This outperformance was principally driven by our European businesses and better-than-planned performance in our Asia Pacific businesses.

Revenues rose 4% on a constant currency basis, which also exceeded our previous guidance. Although we are raising our annual earnings guidance for the year, we continue to take a conservative approach to planning the fourth quarter holiday season. Our sales and earnings guidance assumes a competitive and promotional macro holiday environment, and we expect continued headwinds from uncertainties surrounding trade and tariffs.

Before I go into the specific brand details, I'd like to provide a few key themes from the quarter. First, beginning with our performance by region. Our European businesses continued to post strong results, despite the macro situation and uncertainty around Brexit. Tommy Hilfiger and Calvin Klein are outperforming their competition, demonstrating strong performance across the vast majority of markets in Europe. Both brands are resonating with consumers, and our fall holiday product is experiencing strong sell-throughs. We believe that these favorable trends should continue as we move through the fourth quarter.

Moving on to the U.S. business. As many of our peers and key customers have indicated, the U.S. market was challenging during the third quarter. During the third quarter, we saw traffic under pressure with no change to the soft international tourism trends. And we've also seen a highly promotional environment, which pressured margins. We believe the increasing focus on inventory turns and the cautious stance by our key retail partners on spring 2020 open-to-buy levels will continue in this U.S. market.

Finally, in Asia, we continued to see volatility in the Greater China region driven by ongoing protests in Hong Kong, the continued U.S.-China trade tensions and a stronger U.S. dollar. Our teams continue to be nimble and react to emerging business trends, especially in Hong Kong as the business disruption has gotten worse over the last few months.

As we turn to November, I'm pleased to report that we did have a strong 11/11 Singles' Day in China, and we are seeing improved sales trend across Mainland China. We have great confidence in the underlying power of Calvin Klein and Tommy Hilfiger and believe we are positioning our businesses to succeed in this ever-changing consumer landscape.

Looking at the business today and where we believe the company's opportunities continue to be, PVH is well positioned to capitalize upon our targeted purposeful investments. We are dedicated to ensuring our brands remain authentic to their core DNA with a clear purpose to connect with consumers, as consumers are increasingly focused on purchasing brands that connect with their core values. We continue to progress on our consumer data journey to learn and connect more with our consumers and leveraging these insights to power our marketing and product decisions. We believe this will allow us to better deliver unique consumer shopping experiences with the goal of improving our sales and margins and providing a more seamless consumer experience.

Additionally, our investments in digital from our e-commerce sites to mobile platform and incorporating digital elements into our stores remain a priority. Today, digital sales continue to track at over 10% of our total revenues, and we continue to see robust online growth with sales growth exceeding 20% in our owned and operated businesses during the quarter. Looking ahead, we remain committed to seeking and achieving efficiencies across the business from our supply chain, including our design and go-to-market processes, from warehousing and distribution to optimizing our global retail footprint and our operating models around the world.

In summary, we are focused on executing against our strategic priorities, which, over the long term, will drive stronger brand loyalty, capture the hearts of consumer and deliver sustainable sales and profitability.

Let me now move on to the brand results, and I'll begin with Tommy Hilfiger. We continue to be extremely pleased with how strong our Tommy business brand is performing. In particular, the brand is experiencing outstanding traction globally as we deepen our connections with our core Tommy consumer, while, at the same time, converting the next generation of consumers. The offering of both our Tommy Hilfiger and our Tommy jeans lifestyles really allow us to capture and target the full spectrum of consumers out there and make them a part of the brand. We see strong growth across our sportswear categories as well as through our global growth categories such as jeans, footwear and accessories.

During the quarter, we continued to embrace our global and local ambassadors, with exciting consumer activations to drive brand heat. Our collaborative collection with Lewis Hamilton for fall 2019 has proven to be the most successful commercial collaboration to date, debuting at a one night experiential event in Milan, which has generated strong sell-throughs and earned media value versus spring 2019.

The successful launch of the fall 2019 Tommy Hilfiger collection in China with brand ambassador Shawn Yue has -- which was amplified on China Tmall single day sale, has outperformed all our sales plan. As we look into holiday and spring 2020, we are excited about the activations ahead of us, which will leverage local ambassadors and influencers in key marketers -- markets to further create more unique engagement and differentiated Tommy experiences for consumers.

Moving to business. Tommy's revenues increased 10% in the quarter and 12% on a constant currency basis with earnings flattish or up 3% on a constant currency basis driven by -- primarily by outperformance in Europe.

Internationally, revenues rose 20% on a constant currency basis with retail comp sales rising 8%. International revenue growth was primarily driven by outperformance experienced in Europe as well as the addition of revenues resulting from the acquisitions of our Australia and Central and Southern Asia Tommy businesses.

We continue to be extremely pleased with Tommy Europe business, which was the driver of double-digit international revenue growth. Significant growth continues across all channels of distribution in key markets, highlighting the market share gains we have been able to deliver.

Fall 2019 sell-throughs continue to be very healthy, and we have seen retailers continue to pull orders forward, which we believe bodes well for our fall 2020 order books, where early indications are quite positive. As a reminder, spring/summer 2020 order books are up 12% over the prior year.

In Asia, our Tommy Japan and Australia businesses continue to experience strong performance amidst a favorable consumer backdrop, while pressure in the Greater China region persists as a result of the protests in Hong Kong and the U.S.-China trade tensions.

Moving on to North America. Revenues were flat, and margins were also under pressure, down 590 basis points. While our wholesale trends continue to be strong, despite the tough North America department store landscape, we experienced continued softness in our retail stores as comparable store sales declined 5%. As many retailers have commented over the last few weeks, there were weak traffic trends across retail during the quarter, which was largely driven by lower levels of international tourists coming to the U.S. These factors, in fact, led to high promotional activities -- higher promotional activities than we planned, which pressured margins. We are planning for these pressures to continue throughout the fourth quarter.

Ending with licensing, this continues to be a very positive story for us across the majority of our businesses, demonstrating that Tommy Hilfiger brand is extremely healthy. In particular, we continue to be very pleased with the performance of our North America women sportswear business under G-III, which is experiencing strong growth and excellent sell-throughs.

Moving to Calvin Klein. During the quarter, I'm pleased to report that we saw an uptick in the Calvin Klein brand engagement and awareness as it remains in the top 10 to earn media value against its competitive set, demonstrating the health of the brand. As important as consumer engagement is to the health of the brand, I'm pleased to see that we are experiencing healthy sell-throughs for our fall -- in our core go-forward denim, our core men's underwear and women's intimate franchises as well as in accessories.

In October, Calvin Klein celebrated 50 years of self-expression with the CK50 Collection, a special capsule of iconic styles featuring Justin Bieber back in his Calvins, this time along his -- alongside his wife, Hailey Bieber, which marked the couple's first marketing campaign together. The collection was celebrated globally with events in Brazil, Mexico and Peru and activations across Asia and Europe, and we saw a strong success as the product capsuling and campaign resonated with our consumer base, delivering stronger engagement and earned media value results.

Overall, our teams are delivering targeted consumer experience, not only delivered better engagement, but also to drive sales conversion. One recent example was our event in Berlin, which focused on amplifying the brand engagement in our largest European market and support Hero product stories for fall, with campaign star, Hailey Bieber, which generated celebrity, influencer and product content across Europe.

Additionally, we are very excited about the opening of our new multi-brand lifestyle store in Paris, which will have a soft opening in December.

Finally, as we look to catering more unique product and consumer experiences in our Asia region, we continue to work with Lay Zhang as our brand ambassador and are launching our capsule collection, celebrating Chinese New Year in the fourth quarter, which will offer product from Calvin Klein underwear, Calvin Klein Jeans and Calvin Klein Performance.

From a business perspective, Calvin Klein increased revenues 3% on a constant currency basis in the quarter and reported earnings increased 7% to $129 million driven by strong margins in North America, partially offset by continuing weakness in the Greater China business.

By region, Calvin Klein International revenues increased 7%, and international store comps declined 3%. Calvin Klein Europe saw an improved momentum in the business during the third quarter. A strong year-over-year growth was demonstrated across all channels and across the majority of product offerings. Specifically, as new fall products hit store -- hit the stores, we experienced better sell-throughs in our key categories, including in jeans, accessories and underwear. As a reminder, our spring 2020 order books are up 12%, and we are getting early indications for fall 2020, which are quite positive, demonstrating the health of the brand in the market. So as the Calvin Klein lifestyle is increasingly resonating with the European consumer, it reinforces our confidence in the long-term growth opportunity for the brand throughout Europe.

Moving on to Asia. We continue to experience weakness in traffic trends in our brick-and-mortar stores in the Greater China region, as the business disruptions caused by the ongoing protests in Hong Kong, and the U.S.-China trade tensions continue to impact business. These declines were partially offset by favorable results across our digital businesses and the other major markets throughout Asia. As a reminder, Calvin Klein has a significantly larger business presence in Hong Kong than most of our competitors.

Moving to North America. Revenues declined 5% as planned largely driven by our decision to license the women's jeans business to G-III. Despite the challenging North American environment, our Calvin Klein North America business posted a healthy increase in earnings driven by significantly higher gross margin than last year.

At wholesale, we continue to see positive results from the digital business. In our retail business, comps were down 4% as we continued to experience the weakness in traffic and consumer spending trends, especially in our international tourist locations. We saw a significant margin improvement compared to last year driven by lower clearance markdowns. We continue to be in focus on enhancing our store productivity as well as our merchandising efforts, which, we believe, will pay dividends as we move forward.

Finally, our Heritage businesses had a difficult quarter. Revenues for the quarter were down 13% with comparable store sales down 2%. EBIT margins remained under pressure, down 180 basis points as the wholesale and retail businesses experienced gross margin pressure attributable to the weakness in the overall North America retail landscape.

Our mass and pure-play businesses continued to outperform our department store and mid-tier accounts, in line with industry trends. As we look to 2020, we continue to seek ways to optimize and streamline the Heritage Brands business to generate enhanced returns.

In our wholesale business, we are looking at which brand serves the business best and are reevaluating the license plan in our dress furnishings and sportswear businesses.

In retail, we continue to be keenly focused how we can further rationalize our store portfolio as we move into 2020.

Finally, as we look to the fourth quarter, and as we are reporting before the Thanksgiving holiday, I can only comment on trends for the first 2 weeks of November, which have started off somewhat ahead of plans. But given the calendar shift, business is difficult to read. Although I am cautiously optimistic about the holiday season, we have taken a conservative approach to projecting our fourth quarter results. And I believe we are well positioned for the fourth quarter to outperform our sales and earnings guidance, despite the overall uncertainty of the retail landscape.

Now I'll turn it over to Mike to provide more color around our third quarter and our fourth quarter outlook.

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Michael A. Shaffer, PVH Corp. - Executive VP and Chief Operating & Financial Officer [4]

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

Our non-GAAP earnings per share for the quarter was $3.10 and was $0.10 better than the top end of our previous guidance. The beat was driven by strong Tommy Hilfiger performance in Europe and Asia Pacific. The actual beat from the business was about $0.20 with interest also better than guide by $0.02, partially offset by tax expense, which was higher than guided for $0.12 as a result of timing.

Part of the business beat was due to the acceleration of $20 million of Tommy Hilfiger international shipments and a shift in the timing of marketing expenses, which both benefited Tommy Hilfiger in the third quarter. These shifts will negatively impact the fourth quarter earnings projections by about $10 million.

Moving on to guidance. We are still planning revenue and earnings conservatively for the fourth quarter. Pressure continues in the channels we operate in North America as we look at the balance of the year. We continue to see heavier industry-wide inventories in the channel than last year, along with the decrease in traffic. Our international consumers who shop in our tourist outlet stores are not in the U.S.A. at the same levels as last year. In Asia, our businesses continue to be impacted by Hong Kong protests, along with overall weaker traffic trends across China. In our European businesses, we see Tommy Hilfiger outperforming plans and Calvin Klein slightly better to plan.

With significant amounts of business to be done in the upcoming holiday period and with our earnings release earlier than prior years, we've not reflected our current trends and instead have reflected trends more in line with third quarter into the fourth quarter. Our current trends are somewhat better than our plans. We are also not planning to change the level of promotions in our business. We have anticipated a highly promotional macro retail environment as elevated industry-wide inventory levels in all channels will result in higher markdowns and, in turn, lower gross margins.

For the full year 2019, we're projecting non-GAAP earnings per share to be $9.43 to $9.45. This is a much tighter range than our previous guidance, with an improvement of $0.13 on the low end of the range and $0.05 on the high end of the range.

Our total FX headwind on the year continues to be estimated at $0.35 of translation, no change to our previous guidance. Our guidance continues to include a negative $0.20 impact from tariffs.

Overall, for the year, we're projecting revenues conservatively and to grow approximately 1% as reported and approximately 4% on a constant currency basis. Tommy Hilfiger revenues are planned to increase 6% as reported and 9% on a constant currency basis. We project Calvin Klein revenues to be down 2% as reported and flat to last year on a constant currency basis. Our Heritage business is planned to be down 3% to last year.

Overall, our operating margins are planned down 60 basis points for the year. Tommy Hilfiger operating margins are planned down about 120 basis points versus the prior year. Fourth quarter Tommy Hilfiger operating margins will be down almost 400 basis points. The majority of this operating margin decline is in North America, but it's also negatively impacted by the timing in Tommy International I mentioned earlier.

Calvin Klein operating margins are planned up 50 basis points for the year, and our Heritage business operating margins are planned down 150 basis points for the year. Although we are holding our overall operating margins to our previous guidance, we aggressively cleared inventory in the third quarter, resulting in gross margins lower than we had planned. We plan to continue to aggressively clear inventory through the fourth quarter and end the year with inventories flat versus the prior year.

Lastly, we continue to plan share repurchases for $300 million on the year and our long-term debt repayments are planned at $50 million.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we will take our first question from Bob Drbul with Guggenheim.

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Robert Scott Drbul, Guggenheim Securities, LLC, Research Division - Senior MD [2]

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Manny and Mike, when you guys talk about the promotional levels in the third quarter and your expectations around promotions in the fourth quarter, can you just talk through a little bit the assumptions around markdown support, the assumptions around just the absolute risk that you have in the environment versus just how conservative you're planning the fourth quarter, especially around gross margins?

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Emanuel Chirico, PVH Corp. - Chairman & CEO [3]

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Sure. Look, I think, we -- I mean, you've seen the results, especially some of our key accounts, department store sector, the off-mall sector. It's -- the third quarter has been somewhat disappointing when you look at the comp trends and margins. And we're expecting that, that -- and when -- from a projection point of view, we're projecting that trend to continue. I really believe there's very little risk in our guidance and projections for the fourth quarter. I think we've built in conservative estimates when it comes to margin support and what would be necessary as well as our own gross margin markdown activity.

If you see some help in the environment, I think we're in very good position to capture that as we go forward. So I think we'll react to how the consumer and how the holiday trends are coming. It's -- given the calendar shift, the shorter time between Thanksgiving and Christmas, it's just a hard season to project at this point and really have your arms on it. But given our systems, we're able to see things on a daily basis and react very quickly. So we'll stay on top of it, but I feel good about our guidance and projections for the fourth quarter and feel that we're in really good shape to outperform against that guidance.

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Robert Scott Drbul, Guggenheim Securities, LLC, Research Division - Senior MD [4]

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Got it. And maybe, I was wondering if you could spend a little bit more time on China and Hong Kong. And I guess my questions are, are you seeing the impact from the China-U. S. trade relations impacting sort of the brands of Tommy Hilfiger, Calvin Klein and when you think about the results there? And can you just talk generally around the total exposure that you have at this point on Hong Kong?

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Emanuel Chirico, PVH Corp. - Chairman & CEO [5]

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Sure. Let me take the last part first. I guess Hong Kong is just -- is about -- just a little bit over 1% of our business, $100 million in volume for that market. And when you look at that specifically, it's a big -- relatively speaking, as our competitive set, it's a big business for us and highly profitable. So that's putting pressure on the region. I think we've done -- during the third quarter, we did some brand work in China around the issue you just talked about. I mean we did not see -- from talking to consumers, panels, and talking to the consumers leaving our stores and probably over 1,000 consumers, we didn't see any deterioration in the strength of our brand or the receptivity to buy both the Calvin Klein and Tommy Hilfiger brands.

So we haven't seen -- I note some people are concerned about this, a potential mega reaction to American brands. We haven't seen that in any significant way in China. What we have seen is -- and putting it into context, we -- Calvin, in particular, was the first mover into the China market. We have a large and probably larger than most of our competitive position in China with the business. And we're seeing pressure on the brick-and-mortar stores in the third quarter. And I think that's really just a -- and we're well positioned as a premium brand -- not a luxury brand, but a premium brand. I think that particular segment of the market is feeling the pressure that the consumer is feeling in purchasing, and we are seeing negative comp store trends in our brick and mortar.

And despite really strong growth on the digital platform, given the size of our brick-and-mortar business, it's not enough to offset that negative trend. Some of our other competitors have relatively small store base and are growing similar to us online, but they don't have the pressure that we have in our stores.

I think as we turned into the fourth quarter, we've seen a bit of a sales improvement. I mentioned it in my comments. It's 3 weeks old. We'll see if that continues, but with -- that gives us some [ray] as we move into the important fourth quarter in China. So we'll see how that all progresses as we move forward.

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Operator [6]

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Your next question comes from Erinn Murphy with Piper Jaffray.

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Erinn Elisabeth Murphy, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [7]

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Manny, I was hoping you could talk a little bit more about your view on the current logo cycle, particularly as it relates to the Tommy Hilfiger brand. It seems like some of your peers, you're starting to see pockets of slowdown in that trend. So just curious how you feel the Tommy brand is positioned as we go into 2020 and just your views on overall -- kind of where we sit with the logo cycle.

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Emanuel Chirico, PVH Corp. - Chairman & CEO [8]

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Look, I think it's a good call out. The logo cycle, I think there's still a key portion of the business that's done there. I think as we move into spring, in the United States region, you'll really see a shift as to backing more of our core sportswear categories, key items, core driven product, and you'll see more -- you'll see less logo product. Still appropriately, the brand has -- always has an important component in logo, but we're not counting on that as we go forward. Both in the performance area or in the denim area, logo continues to be a key part of that business. And we're seeing strong trends in the Tommy Jeans business overall.

Internationally, I think we moved even quicker to move away from the logo trends, particularly in Europe and Asia. I think we're benefiting with that shift. We're seeing strong growth, particularly in our jeans business throughout Europe and Asia. And I think that trend should continue as well. But it's clear, both for Calvin and Tommy, logo is -- continues to be an important part of the product offering, but it's just -- we've just reduced the exposure to it as we move forward.

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Erinn Elisabeth Murphy, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [9]

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Okay. That's helpful. And then, I guess, just my second question is on the Calvin Klein margins in North America. They're up nicely as you lapped last year. But just curious if you can unpack a little bit more on the drivers there and just the sustainability of recapturing that margin here in North America for the Calvin brand.

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Emanuel Chirico, PVH Corp. - Chairman & CEO [10]

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Look, I think -- look, you started to see -- you're seeing it in the third quarter. I think that you'll see gross margin improvement continue into the fourth quarter. I think when you look at operating margins, depending on the shift in marketing and whatever, I think you really need to look at the 6-month season. So I think if you look at third and fourth quarter, gross margins will be up in both quarters, and operating margins for that period of time should be up as well as we've really been focusing on that product execution moving forward.

And I think you'll -- as we go into 2020, that's a key part of the story as we're really focusing on our product offerings and the enhancements that we see coming forward. So I think that's going to be a key issue for us. We're starting to see it now. We're starting to see improved operating income performance and gross margin performance, and that trend should continue into the third quarter -- into the fourth quarter.

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Operator [11]

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Your next question comes from Michael Binetti with Credit Suisse.

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Michael Charles Binetti, Crédit Suisse AG, Research Division - Research Analyst [12]

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Manny, I know you don't want to get over your skis here, but as we look out past 2019, I know there's some fairly real and tangible puts and takes in the business next year that we can see coming with pretty good visibility this year. Remember, on this call, a year ago, you and I talked about there being some translational FX coming in 2019. But you said there was no transactional FX. It's all been translational. So far, as you reported, in the past, transactional has tacked on an impact in the following year. Is it fair to assume we should already expect that to show up next year a little bit?

And then who knows on tariffs obviously? But all else equal, the $0.20 headwind this year was largely in the second half. If there's no change, we'll probably get the other half of that in the first half of next year. Are there any other broad brush strokes, puts or takes we should think about as we think higher level about the low double digit, longer-term earnings algorithm for the business as we try to look at past 2019?

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Emanuel Chirico, PVH Corp. - Chairman & CEO [13]

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So I think you hit the 2 key headwinds that we are looking at for next year. Foreign currency transaction will be a headwind. Depending where the dollar winds up, [somebody's already locked into] since we've hedged out 9 to 12 months. And as we look at it, so past is prologue, that you'll see that piece come in. On the tariffs, it's really hard to understand what's going on because we're not sure exactly what's going to be in place, given the protests that are going on with Hong Kong. But you said it correctly, and it was worth about $0.20 this year. A bigger tranche comes into next year. Our exposure overall goes the other way as we reduced our exposure in China. But I think you said it well and you can expect that what it was this year, it'll be -- you should see a similar impact next year on top of that.

So that's how we're looking at it. Those 2 key components are what we're trying to manage there. I don't think it really -- I think when you think about our long-term earnings algorithms, I don't think it changes anything on a constant currency. I think we are comfortable that we can grow our sales in the 3% to 5% kind of range and we can grow our bottom line in double digits moving forward. So that algorithm continues, and we have to deal with the vagaries of currencies, either favorable or unfavorable. But the business model, I think the underlying strength of the brand continues to be in place, and we're confident in it.

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Michael Charles Binetti, Crédit Suisse AG, Research Division - Research Analyst [14]

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Got you. And let me ask you, I guess, a longer-term question, Manny. I have to ask you, as you think about -- you reflect back on this year and last year, I guess, as you think about the next several years in the business, how do you feel about your U.S. distribution footprint today?

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Emanuel Chirico, PVH Corp. - Chairman & CEO [15]

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I think -- look, I think our brand -- look, when you think about the Calvin and Tommy brands, we have significant strength with those brands. And we have consistently found the right channels of distribution to sell off on [the chemistry]. Department stores will continue to be a critical portion of our growth. For those 2 brands, Macy's will continue to be a key customer for us. Nordstrom will continue to be a key customer for us as we move forward. And we also have a direct-to-consumer business here in North America, and I think we can manage that business as we go forward as those customers go through it as well. I'm -- no surprise, when you talk about it, there's too much retail real estate. In the United States, I think we're going to continue to see that shift down.

For us, we've always managed the U.S. market as a slow growth market, and we'll continue to manage it that way. The online -- our online presence in North America continues to grow, both that we operate directly and through a number of our pure-play retailers as well as our key department store retailers here. So I'm confident that, that will continue to grow. But the real growth for us with those -- our 2 brands should continue to be internationally in those markets. And that's how we're looking at it as we go forward.

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Operator [16]

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Your next question comes from Jay Sole with UBS.

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Jay Daniel Sole, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Softlines & Luxury [17]

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Manny, I'll just follow up on the tariff question. It seems like for this third quarter and the fourth quarter, prices were sort of locked in. And that sort of put the burden of absorbing the tariff costs more on our brands than maybe other parties. Just looking back over the last 3 months, as negotiations have gone on, do you see more of a sharing of the cost burden or an ability to pass it on? Or can you just give us any color about how that dynamic is changing about who absorbs the tariff as we look into fiscal '20?

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Emanuel Chirico, PVH Corp. - Chairman & CEO [18]

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It is -- it continues to be a volatile environment there because the uncertainty just continues and the talks go on. And you hear one source telling you, there's a Phase 1 agreement commenting that there'll be no new tariffs. And so it's very hard to plan. We are partnering with all of our key factories, and our key factories are working with us as we go into spring. It really is going to determine what happens post spring as we move forward. If -- are these long-lasting tariffs? Are these short term in nature? If they continue to be short term in nature, I think our factories are going to partner with us to work through it as we go forward. At the same time, we are reducing our exposure. We should be around 10% to 12% exposed.

The U.S. sourcing out of China will be about 10% of our overall sourcing mix. And I think that compares to 3 or 4 years ago when we were close to 35% to 40%. So I think we are moving strategically as we can. That should be somewhat of an offset. We will look at targeted price increases as we go forward. So we'll have to be also cognizant of the consumer and not going too hard too fast. They're working with our retail partners. So that's an ongoing discussion. And I think they are all leveraged to pull, and we will pull those levers as we go forward. So that -- it's a challenge and the uncertainty is what's making it more of a challenge.

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Jay Daniel Sole, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Softlines & Luxury [19]

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Got it. And then I apologize in advance for asking a short-term question, but just on the calendar this year for the 6 fewer days between Thanksgiving and Christmas. I'm sure as many retailers look at their comps over the last week, it looks significantly down year-over-year. And is the assumption that, look, over the next week, everything gets made back up, and everybody's back to square where they expect to be and then sort of just the rest of the season is the rest of the season? Or at what point -- because you said at the top of the call that it's sort of hard to kind of figure out where the business is at given the shifts.

At what point does, say, just the average retailer out there decide it, "Okay. Things aren't [turning] as planned." At what point does maybe the retail environment get concerned that those calendar shifts having a negative impact if we get through Cyber Monday and things aren't good, then there's only a handful of weeks left before Christmas. And then maybe people starts incrementally promoting maybe more than they expected. How does it play out in terms of how retailers are going to think about their decision-making process because of the shorter calendar?

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Emanuel Chirico, PVH Corp. - Chairman & CEO [20]

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Okay. That's -- it's a bit of a loaded question, but let me start with by saying our assumption in our guidance is it's going to be promotional, and that Christmas is going to come late. It's been coming later. Throughout the last 5 years, it's been coming later. In this compressed calendar, I think it's only going to put more pressure on it. That's why we're trying to be as conservative as we are about fourth quarter margins and fourth quarter sales trends. I think we're going to get a really good picture at the end of this -- as we get through Cyber Monday, into the early part of next week. And is there -- there will be a catch-up there, obviously, but how big a catch-up? And then how much of -- even if you are somewhat behind, which I would expect you'd be because you have your 6 less shopping days at that point, there's an assumption that the next 2 or 3 weeks is going to be positive comps during that period of time year-over-year because of the compression of the calendar.

And that's what everybody will be watching. I have to be honest. Our assumption is it's going to be more promotional. We feel that way because, let's be honest, the third quarter was not a strong quarter. The seasonal weather patterns weren't great for early sell in the spring. We all saw a bounce in business early November. So some really good sell in early November as the weather turned cold which was a good sign. So now we're looking to see where it all plays itself out. And it's -- nobody loves that this calendar is setting up the way it is, but this is what we're trying to deal with, and we're trying to be as prudent as we can about projecting out the fourth quarter.

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Operator [21]

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Your next question comes from Ike Boruchow with Wells Fargo.

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Irwin Bernard Boruchow, Wells Fargo Securities, LLC, Research Division - MD and Senior Specialty Retail Analyst [22]

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I guess, Manny, just a question. I wanted to focus on Tommy Hilfiger profitability. So we saw the margins in Q3 when you gave the guidance for Q4. I guess my question is, what exactly is driving the margin degradation? Is it the promotions and the deleverage in the North America retail fleet? And then the follow-up to that is, assuming that there's no improvement in tourism and the dynamics that are basically causing that, should we assume that, that continues into the first half of next year? Because you really didn't start to see that pressure build until this quarter. So I guess that's my way of kind of asking on the margin performance into next fiscal year, while I know you're not giving guidance, is it safe to assume there's probably more upside or more earnings growth in the back half of next year relative to the first half? Just kind of curious how you would answer all that stuff.

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Emanuel Chirico, PVH Corp. - Chairman & CEO [23]

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Okay. Look, we're not giving guidance for next year, but let me put some color on what you said because I think some of what you said is not -- let me just say, the -- you have to put things into context. Tommy Hilfiger, 2018 is coming off -- North America comps were up between 6% and 7% for the year. Strong trends coming in. And given that trend of business, we bought into a portion of that sales growth. We started to see in the first quarter of last year, starting in February, we started to see a real pullback in international employees and [transfer] into the U.S. and we started to see negative comps. That intensified in the second and third quarter. So we start to lap this negative comp store trends beginning in the first quarter, but really going into the second quarter of 2019. So that comparison. Also, since we bought into those sales trends 6 months out, we had clearance inventory that needed to be moved, and we moved aggressively to move through that inventory.

And that's the pressure you saw the selloff of spring and summer goods in the second -- in the second quarter and into third quarter this year. We're assuming it's going to continue to be promotional, so margins will be under pressure in the fourth quarter. That should ease a bit into the first quarter, and then we should really start to cycle that as we go into the second quarter of 2020. So I think that's the way you have to look at it. And keep in mind Tommy Hilfiger North America business is coming off of 3 years of significant comp store growth into this 2019 year. 2018 was a record year for the brand in the United States. So it's lapping that has been challenging for us as we've gone forward. I think it starts to level out as we get into 2020.

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Irwin Bernard Boruchow, Wells Fargo Securities, LLC, Research Division - MD and Senior Specialty Retail Analyst [24]

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That's helpful. And then just a quick follow-up. I mean we've had some consolidation in the luxury space announced this week. Just maybe your state of the union on the industry is challenged. Would you expect more M&A in the space? And then kind of how are you thinking about that as it pertains to your company?

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Emanuel Chirico, PVH Corp. - Chairman & CEO [25]

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Sure. I think, look, over the next 12 to 24 months, I think the retail sector and the retail power sector is going to have consolidation. It's -- I think it's -- and given the dynamics of the industry, to me, it's almost a given. The challenge, I think, from a pure M&A point of view, at this point, financial -- financing markets are very strong. Credit is available. We have a very strong balance sheet, which can give us the ability to do a transaction. We'll be looking -- we'll really be looking at [both] to doing that.

One of the challenges you always face as the sector has gone through a multiple compression is people are looking at the stock price or the valuation and they're comparing to where it was 12 or 15 months ago. And that leads to selling in a bit, in people's minds, to get a sense of what current valuations actually are as we move forward and deal with all this uncertainty. Well, my general feeling is there will be consolidation. M&A will be a key part of PVH's [growth], and we'll continue to look for opportunities.

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Operator [26]

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Your next question comes from Dana Telsey with Telsey Advisory Group.

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Dana Lauren Telsey, Telsey Advisory Group LLC - CEO & Chief Research Officer [27]

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Manny, just following up on the M&A acquisition. You've done small acquisitions and large acquisitions. You've done acquisitions of online and data, and then you've also done brand acquisitions. What do you think is most appealing to you that helps to move the needle in enhancing the platform of the entire business going forward?

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Emanuel Chirico, PVH Corp. - Chairman & CEO [28]

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Sure. Look, Dana, the acquisition -- principally, the acquisitions we've done have been recapturing our Calvin Klein and Tommy Hilfiger. There's international businesses around the world. Australia, the South Asia -- Southeast Asia, looking at Brazil, a number of the transactions, the China transaction a few years ago. That's been the focus the last 3 to 5 years. I think that consolidation, there's a few things still to do, but relatively speaking, nothing that dramatically moves the needle. I think where we're really [thinking] about is on the branding side. And when you think about -- looking to add another brand to the portfolio or a collection of brands depending on the acquisition. I think scale is becoming more and more important.

I think the investments that you need to make in order to be competitive, the digital journey that we're all on, the shipping, channels of distribution, moving online, more so on the investments, in order to compete there, that you need to know, I think scale becomes even more important as you go forward. I think we have a demonstrated track record of knowing how to do acquisitions, how to integrate them to get the benefits out of it, how to manage that from a portfolio company, which I think people underestimate, is we land this to keep what's critical to operate the brands and keep those separate from the design product, aesthetic point of view and being able to leverage the back-office, all of the systems, the capabilities and the strategies in order to take advantage of that and make the investments for each of the brands. I think we understand how that's done. And that's -- we are aggressively looking to move in that direction.

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Operator [29]

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We'll take our next question from Heather Balsky with Bank of America.

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Heather Nicole Balsky, BofA Merrill Lynch, Research Division - VP [30]

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Can you dig a little bit more into the Calvin business and your first -- just your thoughts on your expectations for operating margin? A couple of quarters ago, you've been talking about 200 basis points of improvement, but the environment has currently changed. Also, it sounds like the new denim product is [ripe for meeting]. Can you talk about the trends you're seeing, especially in the U.S. channel? And is there more opportunity into next year on the product side?

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Emanuel Chirico, PVH Corp. - Chairman & CEO [31]

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Okay. So I think on the Calvin business, for the year, we're looking at operating margins up about 50 basis points. I think we were looking for slightly higher than that at the beginning of the year but some of the pressures that's going on, particularly in Asia and the Hong Kong and the China businesses has put an impact on that. I think over the next 3 years, there's the opportunity to expand margins to another 200 basis points. I think if we're -- again, we're not giving guidance, but I think if we were looking at next year, we'd be looking for something between 40 and 70 basis points improvement in operating margins going forward. And hopefully, we can outperform that, but that's how we're thinking about the business.

I think the second part of your question was on denim because you broke up a little bit, so I apologize. I think we're seeing really -- we're seeing good results, specifically in the core denim products, on jeans and bottoms. Here in the United States, that's been the driver, is the bottom side of our men's business. G-III just launched the women's product here in North America. The receptivity of that product has been outstanding. We've seen really strong sell-throughs there, and they're starting -- and they've gotten strong placements. And I think if you just go to Herald Square, you'd see outstanding presentation they have there with the Calvin Klein image jeans product.

Internationally, I think we're probably 6 months ahead of where we are in North America. The international product, I think, is really taking an upgrade. We're seeing very strong sell-throughs of all tops and bottoms throughout Europe and in all regions, with the exception of China, given the dynamics that are going on there, we're seeing good sell-throughs of products. So I think we're seeing good receptivity with products from the consumer and from the retailers. The order books in Europe, which is our best indication, continue to be very strong for the Calvin Klein jeans product in the spring and the initial offering of products in the fall. So I think we're on the right track with that product back to the brand DNA. And I think the receptivity of our products that we've seen, particularly internationally, gives us confidence in the turnaround on that business.

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Operator [32]

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Our next question comes from Jamie Merriman with Bernstein.

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Jamie Susan Merriman, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [33]

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Just picking up on the M&A topic, do you have a view on -- with the brands that you acquire, whether you have a preference for wholesale exposure, given what you know with Calvin Klein and Tommy Hilfiger? Or would you be more interested in brands that have more of a direct-to-consumer, go-to-market strategy?

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Emanuel Chirico, PVH Corp. - Chairman & CEO [34]

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So I think it's 2 things. I think is -- if you look at our balance of wholesale to retail, we're probably -- on a dollar basis, we're 55%, 45% when you think about where we break out. And as you move internationally, we are even more direct to consumer. Particularly throughout Asia, for the most part, is probably 80% retail direct-to-consumer. And our Europe business is probably in that 55%, 45% range. I also think when you think about wholesale versus retail, the strength of the market is different than when you're in Europe and when you're -- versus the United States or when you're in South America or in Asia. So our wholesale businesses continue to be our most profitable businesses overall. Our retail businesses are highly profitable as well, but our wholesale businesses are even more profitable as we go forward. And the department store channel internationally continues to be very healthy for us.

I think we are comfortable running both a direct-to-consumer model, which we do with both Calvin and Tommy, and we're comfortable understanding how to manage that wholesale channel distribution and even more importantly how to manage both at the same time. (inaudible) always been multichannel retailers. We understand that you have to speak to the consumer where they want to buy the product, and I think we understand how to really go after both of those markets. So it would depend on the brand and where the brand is currently positioned.

Operator, this will be our last question. It's 10:00 o'clock. Thank you.

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Operator [35]

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We'll take our last question from John Kernan with Cowen.

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John David Kernan, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [36]

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Manny, can you talk about the theme of speed and the ability to flow inventory faster, control markdowns better throughout the entire retail ecosystem? It feels like there's a long-term opportunity here. I know you're using data. You've made a lot of investments in digital. CapEx has stepped up quite a bit the last several years. I was just wondering, when you think PVH and the industry in general is going to reach a point where the working capital and the lead times get improved across the entire ecosystem.

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Emanuel Chirico, PVH Corp. - Chairman & CEO [37]

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Okay. So I don't want to speak for the whole industry because I find the apparel industry to be an undisciplined industry. There always seems to be excess product. There always seems to be -- it's advertised to create more. And then, yes, [it's crazy]. So the industry, I think, is an undisciplined industry in many respects. I think we've made tremendous investments and continue to make investments in 3D design, in shortening our core replenishment business with -- businesses with reduced lead times overall, and I think you'll see that continuing. I think over the next 2 years, in particular, you'll see more and more of that in the business environment.

I think that -- look, the challenge that's going on, you have to at least be intellectually honest, is as of the fourth quarter of 2018, just to put things in perspective, the industry was coming off of a very strong fourth quarter. Everyone bought into that, and the business fell off immediately. Department store business in North America in particular and our business in China and most businesses in China is really started to feel the pressure of that business. The lead times, people bought into positive comp store sales trends. Most of the sales trends in North America, in particular, were low single digit negative, minus 2%, 3%. That got worse in the third quarter. I think when you're trying to really get ahead of that trend, cycles -- lead times have improved from 9 months to 6 months, but they're not 6 days. So those cycles are -- and buying into that trend is really what causing the challenges.

The [drop] of overall retail from private label programs in department stores and oversaturation of certain brands is putting pressure on business. The fact that we have the tariffs that everybody was dealing with, and people were accelerating shipments into the United States in order to avoid the deadlines on tariffs coming into effect and force people to take this in 30 to 45 days earlier than planned. And then the tariff date got pushed out, and then that was done again in September. Those pressures are real. And it's -- look, you have to deal with what's coming out of [business]. But that's partially the reason why you're seeing some of this heightened inventory.

I think when -- I know the way retailers are buying spring 2020, we're seeing a real tightness in [both] to buy dollars, much more conservatism being built into the sales plan. I think next year is going to be much more of a margin year as opposed to a top line growth year here in North America, and that's how you -- I think you have to plan the business and think about it. But clearly, the investments are being made across the board to really move the lead times down, reduce your lockdown exposure as you go forward. And I think it's a good call out on your part, but the industry overall has not been a leader when it's come to leadership in managing inventories and working capital. So it really needs to move forward on that.

So thank you. So with that, we want to wish everybody a happy and healthy Thanksgiving to you and your families. We also wish you a happy holiday season going forward and we look forward to speaking to you on our fourth quarter earnings call in March. Have a great holiday season and all the best. Have a good day. Thank you.

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Operator [38]

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That concludes today's presentation. Thank you for your participation. You may now disconnect.