PVH
#Sure.
Well I guess I would say a couple of things, <UNK>.
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.
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.
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.
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 <UNK> 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.
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.
On a reported basis that would be correct.
So, <UNK>, 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.
Yes, I think, <UNK>, 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.
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.
<UNK>, I just want to make sure I understand the question.
To take businesses that are operating in house and potentially license them outside.
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.
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.
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.
So I think, <UNK>, 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.
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.
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.
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.
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.
Well, <UNK>, 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).
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.
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.
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.
