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Edited Transcript of PVH earnings conference call or presentation 23-Mar-17 1:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 PVH Corp Earnings Call

NEW YORK Mar 23, 2017 (Thomson StreetEvents) -- Edited Transcript of PVH Corp earnings conference call or presentation Thursday, March 23, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Manny Chirico

PVH Corp. - Chairman & CEO

* Mike Shaffer

PVH Corp. - EVP, COO & CFO

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Conference Call Participants

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* Bob Drbul

Guggenheim Securities - Analyst

* David Glick

Buckingham Research - Analyst

* Erinn Murphy

Piper Jaffray - Analyst

* Michael Binetti

UBS - Analyst

* John Kernan

Cowen and Company - Analyst

* Ike Boruchow

Wells Fargo Securities - Analyst

* Kate McShane

Citigroup - Analyst

* Jay Sole

Morgan Stanley - Analyst

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Presentation

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Operator [1]

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Good morning, everyone, and welcome to the PVH Corp. fourth-quarter 2016 earnings conference call. This webcast and conference call is being recorded on behalf of PVH and consists of copyrighted material. It may not be recorded, rebroadcast or otherwise used without PVH's written permission. Your participation in the question-and-answer session constitutes your consent to having anything you say appear on any transcript or replay of this call.

The information being made available includes forward-looking statements that reflect PVH's view as of March 22, 2017 of future events and financial performance. These statements are subject to risks and uncertainties indicated in the Company's SEC filings and the Safe Harbor statement included in the press release that is subject of this call.

These risks and uncertainties include PVH's right to change its strategies, objectives, expectations and intentions and its need to use significant cash flow to service its debt obligations. Therefore, the Company's future results of operations could differ materially from historical results or current expectations. PVH does not undertake any obligation to update publicity (sic) any forward-looking statements including, without limitation, any estimate regarding revenue or earnings.

Generally, the financial information and guidance provided is on the non-GAAP basis as defined under SEC rules. Reconciliations to GAAP amounts are included in PVH's fourth-quarter 2016 earnings release, which can be found on www.pvh.com, and in the Company's current report on Form 8-K furnished to the SEC in connection with the release.

At this time I am pleased to turn the conference over to Mr. Manny Chirico, Chairman and CEO of PVH.

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Manny Chirico, PVH Corp. - Chairman & CEO [2]

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Thank you, Karina. Good morning, everyone. Joining me on the call is Mike Shaffer, our Chief Financial Officer and Chief Operating Officer; Dana Perlman, our Head of Treasuries and Investor Relations; and Ken Duane who runs our North American wholesale businesses.

Overall our strong performance in the fourth quarter exceeded our expectation and our full-year 2016 performance demonstrated our ability to over-deliver against our initial 2016 plans, despite the ongoing challenging macro environment and the highly promotional retail market in the United States. We grew 2016 earnings per share 20% on a constant currency basis, above our long-term growth targets.

Throughout the year our performance was driven by the momentum across our Calvin Klein and Tommy Hilfiger businesses, with our international businesses truly the highlight. Our European and China businesses continue to be our healthiest markets. And we have seen relatively strong performance in our North American wholesale businesses. Strength has been across all distribution channels, wholesale, retail and our digital channels.

Speaking of digital, outsized growth continues across our digital e-commerce businesses. For both the fourth quarter and the year we continued to generate revenue growth in excess of 20% and this channel continues to be our fastest-growing distribution channel.

During the quarter we started to see an improvement in trend in our US outlet stores located in international tourist destination locations as traffic began to stabilize a bit. As important as our domestic business has been historically, our international business continues to outpace our domestic growth, which is further diversifying our revenue and earnings streams. We believe this trend will only continue to accelerate in 2017.

Before I get into our individual branch performance I'd like to comment on our recently announced acquisition of True&Co. True is a direct-to-consumer intimate apparel e-commerce retailer. This acquisition will enable us to further participate in this fast-growing, online channel and provides a platform to increase innovation, data-driven decisions and speed in the way we serve our consumers. We believe that over time we will also be able to leverage the mindset and expertise of this model across our other apparel processes.

Moving to our brands let me begin with Tommy Hilfiger. The Hilfiger brands health and relevance remained exceptionally strong globally during 2016. The brand has seen a positive reception from consumers with both brand awareness and interest to purchase up on a year-over-year basis.

One of the brand's highest profile initiatives was the successful re-launch of its global women's business in the second half of the year with Gigi Hadid as our brand ambassador. The partnership has enabled the brand to reach a new women's consumer by capitalizing on Gigi's impressive social media following, which includes over 30 million Instagram followers and the reaction has been terrific.

The Gigi partnership has created a halo effect across all women's categories and has generated double-digit sales growth in our women's business across all global regions.

Moving into the financials, overall revenues for Tommy increased 5% on a constant currency basis for both the fourth quarter and fiscal year 2016. And earnings are up over 18% on a constant currency basis both for the fourth quarter and the year. Our revenues were driven by the outstanding performance of our international business which generated over 14% constant currency sales growth in the quarter and for the year.

Tommy -- our Tommy Europe performance continues to be a stand out for us. Both fourth quarter and the year highlighted the strength of the brand in our largest region. It is clear that the brand is very healthy across all of the European markets and channels and we have achieved nice market share gains throughout Europe. All major European markets are performing demonstrated by a 7% comp store increase in the fourth quarter and a 9% increase for the year.

As strong as our retail business has been, our wholesale performance in 2016 was quite impressive. But I am extremely pleased with our forward order book. As I told you last quarter, our spring 2007 order book was up close to 8% and our fall 2017 order book has now come in at nearly a 10% increase versus the prior year.

Let me move to Asia. Our Tommy Asia business, led by China, continues to perform well and we believe the investments in marketing and the positive changes we are making to the business model through the integration with the Calvin Klein China business will support the long-term growth of the brand going forward. Our strong performance in China continues into the first quarter of the year and I believe, given this momentum, we are well positioned to outperform our 2017 financial plans.

Tommy Hilfiger North America saw strong men's wholesale business both in the fourth quarter and really all year. We are pleased with our outperformance relative to our competitors at wholesale this year. As a reminder, we successfully transitioned the women's wholesale business to G-III beginning in the fourth quarter, and we look forward to seeing that performance as we move into 2017.

Shifting to retail, during the quarter we saw some stabilization in international tourist traffic in our outlet stores. However, it was not enough to materially change the pressure on that business which we have been -- experienced all year, including the highly promotional US market as comparable store sales were down 7% for the quarter and 9% for the year.

Moving to Calvin Klein; speaking about the brand creatively, Calvin Klein had a tremendous year as the brand captured compelling brand and cultural relevancy. With a focus on our digital consumer engagement, the brand continues to drive strong digital advertising campaigns which have created impactful interactions with consumers.

Additionally, from a branding perspective, we continue to diversify our distribution through key specialty [change] in stores for both our Halo Collection product as well as our Calvin Klein jeans and underwear lines.

Since we spoke last I am pleased to say that Raf Simons first run ratio for men's and women's in February received overwhelmingly strong reviews and we believe continues -- and the brand continues to bring fashion credibility and a PR buzz around the collection.

From a product perspective 2016 Calvin Klein also delivered strong performance across its major project categories. Calvin Klein underwear continued to expand strong global momentum, particularly in women's, and we believe that significant whitespace still remains.

Calvin Klein jeans continued its growth trajectory as the brand remains very strong in Asia and Latin America and we have made significant progress in Europe and North America. Notably the launch of Calvin Klein jean's sculpted jean resonated with consumers across all regions. These two categories achieved significant market share gains during 2016 demonstrating the power of the brand.

From a financial perspective, revenues were flat for the quarter in large part due to the loss of approximately $25 million in sales from Mexico as we formed a Mexico joint venture. Revenues for the year, however, were up 9% on a constant currency basis reflecting strong global trends. Our revenues were driven by strong top-line growth out of Europe, China and North America wholesale across all classifications with all posting strong gross margin improvement.

While EBITDA on a constant currency was down for the quarter due to a $30 million planned marketing expense increase, as well as the creative leadership changes we have made -- that we have previously discussed with you, EBIT for the year was up 11% on a constant currency basis.

Moving to Europe, Calvin Klein Europe results continues to demonstrate the incredible performance that we have seen all year both from a top-line and a bottom-line basis and I cannot be more pleased with the direction of the business. We experienced strong performance with Fall holiday 2016 wholesale and our fourth-quarter retail business saw strong comps up mid- to high-single-digits across all regions. And very healthy gross margins across both businesses as we experienced lower than planned markdown as a result of strong sell-throughs.

As we have previously discussed with you, our spring 2017 wholesale order book is up about 20% and I'm very pleased to report that our fall 2017 order book is up north of 25%. The strength of the business across all distribution channels is coming from all major markets across all product categories with an acceleration in both jeans and the underwear categories. And we have also seen significant growth in our newer product categories of accessories and men's apparel.

Moving to our Asia business, Calvin Klein Asia continues to perform well with China outperforming other markets and that performance is across all product categories. During the quarter we did see a continued improvement in our Hong Kong and Korea businesses relative to the first nine months of the year. Our international comp sales increased 6% for the quarter.

In North America Calvin Klein continues to see healthy growth across our wholesale channels in line with our plans which reflected lower open to buy dollars from retailers versus the prior year. As a reminder, in the fourth quarter of 2015 we saw large [fixture] fill programs in particular in underwear that we were up against in the fourth quarter.

Despite this and the highly promotional US environment during the quarter, I am very pleased to report that we continue to see strength across all categories in our wholesale business from our dress shirts to sportswear, jeans and certainly our underwear business led by the continued momentum in women's intimates.

Shifting to retail, our Calvin Klein North America business saw a similar stabilization in international tourist traffic and spend, and an improvement relative to the first nine months as overall comp store sales were down only 2% for the quarter versus 4% for the year.

Moving to Heritage; finally in our Heritage business, the Heritage revenues declined 5% for the quarter and 10% for the year driven by our ongoing program of [ratcheting] utilization in some of our brands and businesses, which began in 2015, including the exit of the IZOD retail business and the discontinuation of several licensed brands within its dress furnishing group.

Our Heritage business has trended positively against our full-year 2016 financial [plan] with improving gross margin and operating margins. As a result of the performance through the first nine months of the year, we decided to invest approximately $5 million in additional marketing to help drive the business as we move into 2017.

Specifically we have seen generally steady consistent performance across all of our businesses, including Heritage retail, which comped up 7% for the year. The only business that has experienced pressure has been our neckwear business which has faced soft trends all year.

Overall I believe our consolidated 2016 results demonstrated our strong execution and continued commitment to execute against our growth strategies which include: first, driving consumer engagement by investing in product, marketing and in-store and online experiences; second, expanding Calvin Klein and Tommy Hilfiger's worldwide reach by assuming more direct control over various licensed businesses around the world; and third, investing in our global operating platforms and digital platforms to support our growth initiatives while making positive impacts in the communities where we live and work.

In 2017 we plan to build on the investments made in 2016 around talent, our global operating platforms and systems, our consumer experience and most importantly our brands. We continue to take a prudent approach to plan our 2017 business in light of the global macro environments and the geopolitical volatility around the world. The uncertain global retail landscape as well as the strengthening US dollar have caused us to be very conservative in our estimates. We are looking for reported earnings growth of 7% to 9% and, on a constant currency earnings basis, growth of 13% to 15%.

When you look at the business regionally from a planning point of view, in North America the environment continues to be difficult with the recently announced department store closures and the challenging traffic trends which continue and we plan on -- and we are projecting those to continue throughout 2017. Our North American retail stores continue to see traffic pressure. However, I can confirm that the stabilizing international traffic trends we experienced in the fourth quarter continue into the first quarter.

Comps for Calvin Klein North America and Tommy North America are both trending down mid-single-digits quarter to date with the Easter shift on the come in April. Our international businesses continue to seek great momentum quarter to date with Tommy and Calvin international comps running up mid- to high-single-digits with outperformance continuing to come out of Europe and China.

And with that I will turn it over to Mike Shaffer who will quantify our results for the quarter and the year.

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Mike Shaffer, PVH Corp. - EVP, COO & CFO [3]

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Thanks, Manny. The comments I am about to make are based on non-GAAP results and are reconciled in our press release. I'm going to briefly touch on the fourth quarter of 2016 and then move on to 2017.

Our reported revenues for the fourth quarter were flat to the prior year and exceeded our guidance. On a constant currency basis fourth-quarter revenues increased 1%. Tommy Hilfiger revenues were on plan and up 5% on a constant currency basis inclusive of the move of the women's North America wholesale business to G-III in the fourth quarter.

The Tommy Hilfiger revenue increase was driven by strong international performance including a 7% comp store increase in Europe. Our Calvin Klein revenues were flat to the prior year on a constant currency basis and exceeded guidance.

Negatively impacting revenues versus prior year was the deconsolidation of our Mexico business which was worth approximately $25 million as well as a significant one time fixture fill in the prior year due to the expansion of the wholesale North America underwear business.

Calvin Klein international revenues increased 14% on a constant currency basis with a 6% comp store increase as well as strong wholesale performance. Heritage revenues were down 5%, slightly below plan, due primarily to the discontinuation of several licensed product lines in the dress furnishings business.

Our non-GAAP earnings per share was $0.05 better than the top end of our previous guidance. The EPS beat was driven by our overall revenue performance for approximately $0.03 and favorable interest and taxes for approximately $0.02. Our inventory ended the year very clean and flat to the prior year.

Moving on to 2017. In 2017 we are currently anticipating that we will be negatively impacted by $0.40 per share due to foreign currency. The $0.40 impact is approximately 60% driven by translation and 40% driven by transaction.

For the full year 2017 we are projecting non-GAAP earnings per share to be $7.30 to $7.40. If we exclude the negative impact of FX of $0.40 we have constant currency earnings per share growth of 13% to 15% over the prior year. Overall we are projecting constant currency revenues to grow approximately 4% excluding the negative impact of 2% related to foreign currency.

2017 revenues will be negatively impacted by approximately $70 million related to our Mexico deconsolidation, approximately $80 million related to the transfer of the Tommy Hilfiger North America wholesale business to G-III. 2017 revenues will be positively impacted by a net amount of approximately $30 million related to 2017 being a 53-week year partially offset by the negative impact of the timing of Chinese New Year.

Overall operating margins are expected to increase approximately 30 to 40 basis points on a constant currency basis and to increase approximately 10 to 20 basis points on an as reported basis. We project Calvin Klein revenues to grow 7% on a constant currency basis excluding the impact of a negative 2% related to foreign currency and including the negative impact of the Mexico deconsolidation. We are planning Calvin Klein operating margins to be relatively flat on a constant currency basis and to decrease 30 to 40 points on an as reported basis.

Our Calvin Klein earnings will be negatively impacted in 2017, mostly in the first half of the year, by the continuation of the investments made in the latter part of 2016 related to brand investments in advertising and creative leadership. Tommy Hilfiger revenues are planned to increase 4% on a constant currency basis excluding a negative impact of 3% related to foreign currency and including the negative impact of the transfer of the North American wholesale women's business.

Tommy Hilfiger operating margins are planned to increase about 100 basis points on a constant currency basis and to increase about 75 basis points on an as reported basis. Our Heritage businesses plan to have a revenue decrease of 1%. Operating margins in our Heritage business are planned to increase about 20 to 30 basis points. The impact of foreign currency on our Heritage business is relatively immaterial.

Our corporate segment expenses are planned to increase about 15%. The increase reflects low-single-digit growth in our overheads as well as startup losses associated with new businesses. Interest expense for the year is planned to be about $120 million compared to the prior year amount of $115 million, the increase is primarily the result of the [EUR350 million bonds] issued in June 2016.

In 2017 we are planning to pay down at least $250 million of our debt and stock repurchases are planned to be between $200 million and $250 million. Our tax rate for the year is planned at about 18%.

First-quarter non-GAAP earnings per share is planned at $1.58 to $1.60 and includes $0.10 of estimated negative impact for foreign currency. Excluding a negative impact we are expecting earnings per share to increase 12% to 13% for the first quarter. Revenue in the first quarter is projected to increase 4% on a constant currency basis excluding the negative impact of 2% related to foreign currency.

Negatively impacting revenue in the first quarter of 2017 is a Mexico deconsolidation and transfer to Tommy Hilfiger North America wholesale women's business, partially offset by a full quarter of revenue for Tommy Hilfiger China business which we acquired in the first quarter of 2016.

Calvin Klein revenues are planned at a 5% constant currency increase excluding the negative impact of 2% related to foreign currency. Tommy Hilfiger revenues are planned at 8% constant currency increase excluding a negative impact of 4% related to foreign currency. And lastly, Heritage Brand revenues are projected to decrease 3%. Interest expense is projected to be about $29 million and taxes to be about 20% in the first quarter.

And with that we will open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions). Bob Drbul, Guggenheim.

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Bob Drbul, Guggenheim Securities - Analyst [2]

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I guess, Manny, the first question is around e-commerce; with this acquisition that you recently have completed, can you just talk a little bit about how your relationship with Amazon has developed and how this would change or alter that? And sort of how big is e-commerce for you today?

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

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Well, we don't disclose e-commerce overall from a reporting point of view. But on a retail sales basis overall we do about $1 billion in sales with all of our brands. The True acquisition -- it's a relatively small business today. What it provides us is with a platform and expertise, particularly from a data mining point of view, with the consumer. And we are really going to use it as a laboratory to understand that business better.

We believe we can grow the True brand globally effectively given our intimate expertise both from a logistics and sourcing point of view. I think they were lacking in those capabilities but clearly had great capabilities from a digital point of view. So we are going to have to see how it all plays out. It is a relatively small acquisition for us, but it could be a very exciting acquisition as we go forward.

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Bob Drbul, Guggenheim Securities - Analyst [4]

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Got it. Since I sort a got you on that one, Manny, I'm going to ask Mike a question. On the marketing expenses, can you talk a little bit about the plan for 2017, like, given the increases in 2016, how you are thinking about that as an expense for 2017 and how you approach it?

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Mike Shaffer, PVH Corp. - EVP, COO & CFO [5]

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Yes, Bob, the marketing expenses as we look forward to 2017 were pretty much flat as a percent of sales with the dollars growing obviously because the revenues are growing. The timing -- it is pretty much going to be -- last year was heavily weighted to the fourth quarter, it will be a little bit spread out definitely, but for the most part flat as a percent of sales.

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Bob Drbul, Guggenheim Securities - Analyst [6]

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Great. Thank you very much.

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Operator [7]

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(Operator Instructions). David Glick, Buckingham Research Group.

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David Glick, Buckingham Research - Analyst [8]

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Manny, there is a perception out there that may be holding back the valuation of your stock that you have high exposure to the US department store sector. With growth in your international business, and even within the US and specialty retail, your department store exposure has come down over the years.

Can you walk us through kind of where it has been, where it is and where you see it going just so we can get some clarity just given the challenges that that sector is seeing? Thank you.

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Manny Chirico, PVH Corp. - Chairman & CEO [9]

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Sure. Well I guess I would say a couple of things, David. The department store sector in North America, in the United States in particular, it is very important to us and it is a highly profitable channel and those retailers are great strategic partners as we work together. But I think it is pretty clear that over the last seven years we have done a lot to significantly diversify our business model.

Today 50% of our revenues are outside the United States. I think that is larger than just about every other major US apparel maker. I think it is critical as we go forward to continue to fuel that growth and we are seeing that growth in Europe and Asia really accelerating as we have made the investments over the last two years to really grow that business. And those businesses are by far our highest operating margin businesses.

So, from that point of view it is critical. We have done a lot over the last four years to grow our digital sales base as well in North America but also around the world. So I think when I look at us competitively against our major -- the major players in the US market, I think we are significantly more diversified both from a sales and an earnings point of view geographically with 50% of our sales occurring outside the US and more than 50%, probably close to 60% of our profits outside the US.

So, I would just say that I have heard this sense as well that because -- I think because we have such strong partnerships with (multiple speakers) retailers here in the United States that I think that there is a sense that we're overly dependent on that channel. It is critical and it is important to us, but I really feel strongly that we have done a tremendous amount to diversify our business model with our own retail, our digital platform and the international investments that we have been making as we go forward.

There is no single retailer that represents close to 10% of our sales from that perspective. And I think overall when I look at the valuations as the CEO I do get frustrated. When I consider where we are trading as a price to earnings ratio against some of the competitive set, I tend to agree with you, I think it is just a misalignment at this point.

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David Glick, Buckingham Research - Analyst [10]

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Is it fair to say the department store penetration is at or below 20%? I mean when you factor in off-price in your own retail and Amazon in the US, is that a fair characterization?

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Manny Chirico, PVH Corp. - Chairman & CEO [11]

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Okay, but we don't get into all of that. But you are pretty close [game]; I don't think the number is that far off. So I think that is a reasonable perspective when you look at it.

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David Glick, Buckingham Research - Analyst [12]

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Thank you. I just have one additional follow up. The Tommy and Calvin brands have been very strong the last couple years; there is a lot of fashion momentum, brand momentum. The other push back we get at times is well, how can this continue given the department store conversation we just had and that you've really developed a lot of the category and geographic opportunities?

Can you quickly walk us through the biggest, most significant Tommy and Calvin geographic and category opportunity still in front of you that could drive, say, high-single-digit constant currency growth going forward? Thanks.

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

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Sure. I guess I would just take a step back. More from a more micro and maybe more focusing on the short-term is, as you would expect, as we are looking out at the US retail landscape, the US market continues to be our most challenged market. And because of that we are planning that business conservatively and based on current trends that we're seeing in the market today.

So, we are not looking for huge improvements in the second half of the year. We would hope that as things stabilize that we will actually see those. But from a planning point of view and a projecting point of view to the Street, we have really taken that third and fourth quarter and we have assumed that the trends we are seeing right now will just continue as we work through some of the malaise we see in North America.

The growth for us, and I tried to cover it in my opening comments is really happening internationally. The big opportunity for us, and we have touched on in Europe, is the Calvin Klein brand. Just basically given the fact that it is about 30% the size of the Tommy Hilfiger business in Europe, that gives us the opportunity in Europe to really go after that business. We are seeing it materialize both in our retail comps and we are also seeing it materialize in our order books that I have tried to lay out for you.

And there is really a significant amount of white space in Europe when you think about our sportswear businesses. We haven't launched women's yet in a meaningful way. Men's is in the early stages from a growth point of view. And the three categories that are really driving the growth today from just a size point of view are jeans, underwear and accessories. So clearly men's sportswear, men's tailored, the whole women's opportunity is all ahead of us there.

Then when you move to Asia, that has been a significant area of growth for us. I think that will only continue. China does not show any slowdown in performance both for the Tommy brand and the Calvin brand. And I think there an expansion of our retail footprint and an expansion of our offering by product category will continue to drive strong top-line and bottom-line growth throughout Asia.

And the last point I would make about our international business is it would be disingenuous [to] me to say I am not -- that we are not pleasantly surprised with the strength of the Tommy Hilfiger business. I mean, when you have a business as big as that is, that clearly in sportswear is the market leader throughout Europe.

To be putting up in the first and second half of the year high-single-digit, low-double-digit growth on the wholesale side of the business I just think talks about the momentum that the brand has, the strength of the brand in that market, and the opportunities for that to continue as we move forward.

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David Glick, Buckingham Research - Analyst [14]

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Great. Thank you very much for the color, good luck.

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Operator [15]

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Erinn Murphy, Piper Jaffray.

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Erinn Murphy, Piper Jaffray - Analyst [16]

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I wanted to focus, Manny, a little bit on just the North American landscape at wholesale. You guys have done a really nice job of keeping your inventories clean. Can you just talk a little bit about how inventory in the channel looks right now in North America?

And then, I guess secondly on this channel, how are retailers approaching open to buy dollars in 2017? And then just given the strength of both Calvin and Tommy, kind of where do you fit on the pecking order relative to your peers?

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Manny Chirico, PVH Corp. - Chairman & CEO [17]

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Sure. I think as -- there is always pockets, but right now I would say is I think the retailers have done a very good job, in the department store sector in particular, about keeping inventories clean. We came out at the fourth quarter; I think they reacted strongly to some of the softer sales trends both from a tightening open to buy dollars and moving inventory out in the fourth quarter.

So I think -- and the fact that I think that Easter is actually later this year, three weeks, it is a big timing shift, I think will position us well. So inventories and carryovers have really been cleaned up as we go forward.

The other pressure that is coming from that sector is significant pressure is being put on inventory turn. So inventory open to buy dollars have been constricted. Whatever they are planning, be it flat sales or slightly negative comp sales, the buy plan is even lower than that. So I think that bodes well for gross margins as we go through the first quarter into the second quarter this year. And I think even the way they are projected to buy third and fourth quarter has been very tight as well given the trends that are in the business.

I think competitively you have heard a number of our key partners talk about the strength of our business in their stores and their channel of distribution, particularly the Tommy Hilfiger business across the board, [Terry] has spoken a number of times and [Jeff] about the strength of the Tommy Hilfiger business at Macy's, that is our key account in North America.

So we are clearly gaining square footage, we are gaining market share in numerous categories as we go forward. So I think competitively our business is much healthier than most of our competitive set as we move forward. And we know about the momentum behind the Calvin Klein brand, it just continues. So that brand has just been an unbelievably strong performer.

With the buzz and the excitement around Raf Simons and what we have seen in the collection area from the orders and excitement about the placement of our collection product, I think the momentum we have seen in the Calvin Klein brand could accelerate as we go into the second half of the year. We are really excited about it.

And as Mike talked about, we are not -- the other advantage I have, given our strong performances, we are not cutting back on investments. We are continuing to spend our marketing dollars. We are not under that kind of pressure that some of our competitive sets are that are really talking about pulling back their expenses, restructuring things that maybe are not as efficient and really hitting the marketing dollars.

We have not backed off at all. We continue to spend as a percentage of sale at least as high as we did last year. And I think our voice in the marketing area, given that, as best I can tell, competitively most of the key brands have cut back, I think we are going to have a louder voice as we move forward. So I am enthusiastic and optimistic about how we will perform against our plans.

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Erinn Murphy, Piper Jaffray - Analyst [18]

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That is encouraging. And then just maybe philosophically could you just talk about how you are thinking about acquisitions going forward? I mean should we be anticipating the priorities to be more akin with the tuck-in acquisition that you did with True&Co., whether it is adding an expertise?

Or you still thinking kind of over the next 18 to 24 months about rolling out some of the global licenses? Or could there be a transformational acquisition kind of thought process that is still kind of in your mindset? I would love to just hear how you are thinking about that.

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Manny Chirico, PVH Corp. - Chairman & CEO [19]

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As a backdrop, given the strength both in Calvin and Tommy, I think that is where the focus will continue to be. I think there continues to be some licensing buybacks that we would be excited to make, some of that always has to be done -- depends on the timing. Some of it with the timing of our licensees. But I think that is what you will in the short-term, the next six, nine months, that is what you probably see more of from us as we go forward.

The True acquisition, there are some product categories where we have market leadership. And when you think about intimates, men's underwear, the dress furnishings areas, those are areas from a classification point of view that are very profitable businesses. And if there are opportunities from a digital point of view where we can make investments, gain expertise, because it is very expensive and challenging to go out and get the talent that is necessary.

Sometimes it is easier and more efficient to buy that talent like we did with the True acquisition. I think in those areas you will also see us continuing to make those investments as we go forward, which will be strategic for the businesses, the brands and our businesses as we go forward. So I think that will be the focal point.

And then finally, with the backdrop on the tax situation, be it the deductibility of interest and a number of things. We have a very strong balance sheet, but it is hard for a management group to sit back and really try to plan for any -- a major acquisition given the uncertainty around the capital structure and what the tax position is going to be here in the United States.

So that does give us a little bit of pause. We are hoping over the next three to six months that that whole situation will become more clear. And hopefully we will be able to have more clarity in our decisions going forward.

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Erinn Murphy, Piper Jaffray - Analyst [20]

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Got it. Thank you, guys, and congratulations.

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Operator [21]

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(Operator Instructions). Michael Binetti, UBS.

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Michael Binetti, UBS - Analyst [22]

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Congrats on a great quarter. Two topics I wanted to touch on. First would be the gross margin. So can I just get a little clarity? It sounds if I add all your comments together like you're guiding grosses this year to look roughly similar to the same level of year-over-year expansion that you saw last year. Is that a fair assumption?

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Mike Shaffer, PVH Corp. - EVP, COO & CFO [23]

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On a reported basis that would be correct.

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Michael Binetti, UBS - Analyst [24]

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Okay. And as I look at that, in the fourth quarter it looks like you had a about 320 basis points and then -- about 400 excluding currency though. That is obviously a huge number. And I think most of that would come from the mix shift on the underlying business.

And if I just look at the path that you have laid out for the year, it sounds like you are planning North America very conservatively; the international order books are accelerating. And then I would assume on our currency model that FX headwinds be diminishing through the year.

So, I am trying to figure out if there is an opportunity for the gross margins to start to accelerate as we move through the year just based on some of the moving parts there.

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Mike Shaffer, PVH Corp. - EVP, COO & CFO [25]

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So, Michael, look, from our perspective there is two things going on. You are absolutely right; mix is a piece of it. Our international businesses have higher gross margins, also higher operating expense. But they are growing at a faster rate, so you are absolutely right.

But when you outperform your models and when you perform your business you do have higher gross margins, you don't take the markdowns you plan, goods move out at higher AURs. So at this point the models -- the margin guidance reflects our models. Outperformance would definitely lead to some opportunity for upside.

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Manny Chirico, PVH Corp. - Chairman & CEO [26]

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Yes, I think, Michael, when we look at the business and where we see the opportunity, look, there is always some sales opportunity. But we do see in the business models that we lay out that the opportunity really is gross margin expansion and then leveraging the SG&A on top of that.

So I think it is -- that is how we are thinking about it, particularly in North America where I think -- chasing sales by buying more inventory upfront is a fool's errand right now. I think there is this opportunity if we outperform at retail that it really will show itself on the gross margin line.

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Michael Binetti, UBS - Analyst [27]

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Okay. And then I guess the second topic would be I saw some of the comments on the new Li & Fung deal in the press release. Would you mind just giving us a little color on that, what it is, how different it is and what do you see as the benefits for you?

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

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Well, I think as -- Li & Fung has been a great partner for us. Strategically we are changing the relationship from a buying commission basis to a strategic partnership putting the businesses together. We believe they can bring to us some real value added services from a speed efficiency model. And I think they are looking at their business model as it changes.

It does a couple of things for us long-term, not in the short-term. Long-term it gives us the opportunity to reduce some of our buying commissions as we go forward as we are taking more direct control of the business jointly. And then secondarily, it is really from a speed point of view the initiative -- the ability for us to really take advantage of speed to market, quicker reaction time. From that point of view it is all very positive. So again, I think that changing relationship will be good for both companies.

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Michael Binetti, UBS - Analyst [29]

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Got it. If I could sneak one more in there, I just wanted to see if you see any other opportunities as you look across your owned businesses today where you are at maybe the crossroads of low profitability on something you operate today, but an obvious operator out there like G-III on the women's business side that could potentially be another licensing opportunity as you look through 2017. Thanks.

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Manny Chirico, PVH Corp. - Chairman & CEO [30]

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Michael, I just want to make sure I understand the question. To take businesses that are operating in house and potentially license them outside?

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Michael Binetti, UBS - Analyst [31]

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Yes.

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Manny Chirico, PVH Corp. - Chairman & CEO [32]

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I think that the women's issue there was the big one, particularly with Tommy. G-III is a great partner with amazing operating expertise in the women's side of the business. I think that opportunity is significant for them to really take the Tommy business and grow it in a similar way in the way -- the way they've grown our Calvin Klein business. But as I look at the other categories, no, I don't see big opportunities to take businesses out and outsource them at this point in time, that was the big opportunity.

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Michael Binetti, UBS - Analyst [33]

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All right. Thanks a lot, guys.

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Operator [34]

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John Kernan, Cowen.

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John Kernan, Cowen and Company - Analyst [35]

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Congrats. Manny, you talked a lot about China. Can you help us size the Tommy Hilfiger and Calvin China businesses right now in terms of where they are from a sales standpoint and where they are from a profitability standpoint relative to the rest of your international businesses?

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Manny Chirico, PVH Corp. - Chairman & CEO [36]

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Well, I guess look, I don't want to give -- we give a lot of breakout of the businesses and the brands and I don't want to micro it down to it. I guess I would -- to give you a sense of scale, the Calvin business is three times the size of the Tommy business in China. And as we look at those businesses, we believe we can double the size of both businesses in China over the next five years.

And the China business model for us is our highest operating income business as a percentage of sales. So the more growth there net of some of the investments we have to make to scale up. But as we look at that business scaling up over the next three years, we see the profitability in that business continuing to grow.

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John Kernan, Cowen and Company - Analyst [37]

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Wow, okay. So shifting gears a bit. Mike, I think you talked about Tommy Hilfiger operating margin up 75 basis points for the year, Calvin down 30 to 40. Can you talk about what is pushing Tommy margins higher for the year? And I think it is mostly investments is bringing Calvin down. But can you just give us a little bit more detail on those two line items?

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Mike Shaffer, PVH Corp. - EVP, COO & CFO [38]

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Yes, look I think it is twofold, one is the revenue increase on the Tommy side is a driver. The gross margins is clearly the biggest component. We are seeing improvement in expansion in gross margin both businesses, but Tommy very healthy. And then lastly, as you said, the investments in Calvin Klein for the first three quarters are going to be a little bit of a drag.

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Manny Chirico, PVH Corp. - Chairman & CEO [39]

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So I think, Michael, I think you laid it out just right. I think the big driver of the Tommy expansion is the international business is significantly more profitable as a percentage of sales than the North America business. As that growth accelerates and we are planning our US business relatively flat, that will drive profitability.

The other piece I guess just to add on is obviously the royalty income from G-III where we are taking about a $100 million annual basis in women's that was marginally profitable and replacing that -- eliminating $100 million in sales and replacing that with a normal royalty rate for that business, that just also enhances the overall profitability of the segment.

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John Kernan, Cowen and Company - Analyst [40]

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And then just one more housekeeping question. The business obviously spinning off a lot of free cash flow. Can you just, Mike, give us what your CapEx number is for the year and where you expect free cash flow to shake out this year?

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Mike Shaffer, PVH Corp. - EVP, COO & CFO [41]

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So, we haven't guided towards free cash flow, but last year's free cash flow was about $700 million. And when you think about CapEx this year, I guess when you -- we have got about $400 million of CapEx, but the way to think about that is we have shifted about $65 million to $70 million from 2016 into 2017, just projects that didn't get paid and didn't get done in 2016, moved into 2017.

And then two other call outs in terms of an increase in CapEx. One is we are moving our Tommy offices in New York, new facility; there is some significant CapEx there. And two is we are making some nice investments on the digital side of the business. When you add that all up it comes out to about $400 million. Just a reminder, $250 million in debt paid down and then we talked about stock buyback between $200 million to $250 million.

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John Kernan, Cowen and Company - Analyst [42]

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Got it. Thanks, everybody.

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Operator [43]

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Ike Boruchow, Wells Fargo.

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Ike Boruchow, Wells Fargo Securities - Analyst [44]

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Congrats on a really nice quarter. I guess just to go back to David's question on Calvin international. Manny, is it possible to update us just on the current size and maybe profitability of Calvin Klein Europe today and maybe where you think the opportunity is from here?

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Manny Chirico, PVH Corp. - Chairman & CEO [45]

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Yes, look, I think everybody has got a sense that the Tommy business is a $2 billion business and I called out that Calvin was about 30% of that. That gives you a pretty -- if you could do the math that will give you a pretty good idea of how big the Calvin business is and the opportunity for growth that we see there.

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Ike Boruchow, Wells Fargo Securities - Analyst [46]

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And on the margins relative to Tommy in Europe?

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Manny Chirico, PVH Corp. - Chairman & CEO [47]

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The margins are healthy, they are close to 10% and they are probably 300 to 400 basis points lower than Tommy just given the scale of the business. And we would expect that over time that they would equate to the Tommy business.

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Ike Boruchow, Wells Fargo Securities - Analyst [48]

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Great, thanks. And then just a follow up. In the US I think you have about 200 to 250 retail stores in North America for both Calvin and Tommy. Has anything you've seen over the past 12 or 18 months led you to think about your store strategy? Just curious if there are certain locations that maybe you're no longer hitting your hurdle rates or maybe don't make sense as leases come up over the next year or so?

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Manny Chirico, PVH Corp. - Chairman & CEO [49]

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Sure. Look, I guess the nice thing about our retail portfolio, with the exception of a few flagship stores; it is what I would describe as a very liquid portfolio, meaning that renewals come up every -- some two years, some three to four years. In the A centers we have much longer leases and those you wouldn't be looking to get out of.

I guess a couple of the things that we are looking at is we have had what I would call some real megastores in some key centers that have been -- that are highly profitable, continue to be highly profitable, but the general square footage and the footprint as we go forward for stores we are opening in general across the globe, not just in North America -- using digital technology the stores can be smaller and more efficient from that point of view.

So, we are looking at the footprints, we are looking as open new stores and as leases come due does it make sense to downsize some of the portfolio -- the store size as it goes forward.

With the exception of some of our flagship stores which are really marketing drivers, not business drivers, we don't have stores that are four wall losses, particularly -- specifically in Calvin and Tommy. So we don't have that burden that we really need to deal with.

Our retail stores and our store contributions are very, very healthy, they've been challenge given what has happened with the strength of the dollar and some of the international tourism. But even after that these stores are wildly profitable for us. So we monitor them, we stay on top of it, we have great flexibility there. But I think if you were modeling that business moving forward, I think I wouldn't be planning it for significant growth over the next two years.

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Ike Boruchow, Wells Fargo Securities - Analyst [50]

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Thank you.

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Operator [51]

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Kate McShane, Citi.

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Kate McShane, Citigroup - Analyst [52]

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Just curious just with the strength in Europe, I know a lot is being driven by your initiatives behind both brands. But I wondered if you could maybe walk us through just the wholesale environment in Europe, particularly in some of the bigger countries that you are in, just what you are seeing from a traffic standpoint at those locations and what you see going forward?

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Manny Chirico, PVH Corp. - Chairman & CEO [53]

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Well, Kate, I think brick-and-mortar in general is under pressure. But I think in -- one of the benefits that exists in Europe, and one in Asia even to a greater extent, is the level of retail square footage on a per capita basis is just significantly lower, 50% lower than it is in the United States.

So I think some of the challenges with -- the challenges that we are facing brick-and-mortar in the United States has to do with there is too many stores. I don't believe that issue to the level that it exists in the United States exists in Europe or in Asia. So that is point 1.

Point 2 is the retail landscape, particularly on the department store side and specialty multi-brand stores; it is just much more fragmented than in the United States. The United States has gone through a tremendous consolidation in the department store sector, where Europe has had minimal consolidation.

There is no pan-European department store; it is really regional department stores, most times country specific but sometimes regionally specific. So from that perspective it is -- our top 20 retailers in Europe represent about 30% of the business. Our top 10 retailers in the United States represent 90% of the business, just to give you a frame of reference. So I think that is a dynamic that changes.

I think traffic trends are healthier obviously there. I think the currency situation, particularly in the UK, is very favorable and they are benefiting from a significant amount of European tourism into the UK as well as Asia and US tourism into the UK.

And I can say the same thing about Continental Europe where we are seeing from the credit card data that we look at every month that -- particularly Chinese stores given the euro's lack of strength, is also a place that there is a lot of tourism going on and a lot of shopping going on. So we're really benefiting from that.

I also think when you look at it we are clearly outperforming our peer set. We are gaining market share in department stores, we are gaining square footage growth in department stores. And as much as I think a number of competitors have talked about that their European businesses are healthy, I don't think anybody is putting up the kind of wholesale order book increases that Calvin and Tommy are.

Operator, we would like to take one last question so we can get back to work (laughter).

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Operator [54]

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Jay Sole, Morgan Stanley.

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Jay Sole, Morgan Stanley - Analyst [55]

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Just want to follow up on that last point you are talking about. Obviously consumers are migrating online and it is causing a shift in where people buy. But is there some aspect of the channel shift that is causing overall industry growth rates to slow? In other words, has it changed consumer behavior in some way?

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Manny Chirico, PVH Corp. - Chairman & CEO [56]

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That is a really broad question that I don't think has really been answered yet. Just trying to understand all of that -- and one thing you are concerned -- as a retailer or wholesaler the one thing that I do get concerned about is that there has always been a significant amount of impulse shopping that the consumer does when they are in store and in the hot zone where they purchase.

And if traffic is down I am not sure the impulse nature of online is as significant as it is in a brick-and-mortar store where you are able to romance the consumer more. So I think that is a challenge.

I think some of it has to do with we need to be better -- and by we I mean us and our partners, need to be better about making the online shopping experience not only efficient and effective, but we also -- we are in the fashion industry and we need to romance that consumer much more than we do today. I think some players do it well and some players don't do it at all, it is just like buying a bar of soap. So we really need to make that experience much better.

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Jay Sole, Morgan Stanley - Analyst [57]

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Got it. And if I can ask one more on CapEx. Is there a piece of the CapEx number for this year that is carved out for stores -- is it possible to give us some detail on that?

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Manny Chirico, PVH Corp. - Chairman & CEO [58]

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No, but there is no general change. I would say to the usual remodeling and rehab, nothing out of the ordinary at all this year.

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Jay Sole, Morgan Stanley - Analyst [59]

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Okay, thank you so much.

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Manny Chirico, PVH Corp. - Chairman & CEO [60]

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Well, thank you, everyone. Thank you for joining us for the call. Thank you for your support and we will speak to you in May. Take care. Bye-bye.

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Operator [61]

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Once again that does conclude today's conference. Thank you for your participation. You may now disconnect.