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Edited Transcript of PVH earnings conference call or presentation 30-May-19 1:00pm GMT

Q1 2019 PVH Corp Earnings Call

NEW YORK Jun 28, 2019 (Thomson StreetEvents) -- Edited Transcript of PVH Corp earnings conference call or presentation Thursday, May 30, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* 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 and Senior Research Analyst

* Irwin Bernard Boruchow

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

* Jay Daniel Sole

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

* Kate Bridget Fitzsimons

RBC Capital Markets, LLC, Research Division - Associate VP

* Kimberly Conroy Greenberger

Morgan Stanley, Research Division - MD

* Matthew Robert Boss

JP Morgan Chase & Co, Research Division - MD and Senior Analyst

* Michael Charles Binetti

Crédit Suisse AG, Research Division - Research Analyst

* Robert Scott Drbul

Guggenheim Securities, LLC, Research Division - Senior MD

* Tiffany Ann Kanaga

Deutsche Bank AG, Research Division - Research Associate

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Presentation

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Operator [1]

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Good morning, everyone, and welcome to the PVH Corp. First 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 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 May 29, 2019, of future events and financial performance. These statements are subject to risks and uncertainties indicated in the company's SEC filings and safe harbor statement included in the press release that is subject of this call.

These risks and uncertainties included PVH's right to change its strategies, objectives, expectations and intention and its need to use significant cash flow to service in -- its debt obligations. Therefore, the company's future results of operations could differ materially from historical results or current expectations. PVH does not undertake any obligation to update publicly any forward-looking statement, including, without limitation, any estimate regarding revenue or earnings.

Generally, the financial information and guidance provided on its -- is a non (sic) [non-GAAP] basis as defined under SEC rules. Reconciliations to GAAP amounts are included in PVH's first quarter 2019 earnings release, which can be found on www.pvh.com and in the company's current report on Form 8-K furnished [in] 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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Emanuel Chirico, PVH Corp. - Chairman & CEO [2]

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Thank you, Ally. Good morning. Joining me on the call this morning is Mike Shaffer, our Chief Financial Officer; and Dana Perlman, our Treasurer and Head of Investor Relationships.

We are pleased with our -- to report our first quarter earnings per share, which increased 4% to $2.46 and exceeded the high end of our guidance. Our revenues grew 2%, in line with our plans. Our performance, particularly against the challenging retail backdrop in the United States and China, truly demonstrated the power of our diversified business model and the ability of our teams to react to emerging business trends.

I'd like to highlight a few key themes from the quarter. First, our European business across both Tommy Hilfiger and Calvin Klein continued to experience great brand momentum capturing continued market share gains in a very tough environment. Our investments in digital continue to pay dividends as online again during the quarter was our fastest-growing channel with revenues growing over 20% in our owned and operated businesses. Overall, digital sales continue to track at slightly over 10% of our total revenues.

We continue to invest in our consumer data journey. And with the recent promotion of Marie Gulin-Merle to our newly created Chief Digital Officer position, we are focused on creating and driving unique consumer shopping experiences for our customers, whether online or in-store.

And lastly, we have seen some positive initial signs around the power of the Calvin Klein brand and how connecting incrementally better product and strong marketing translates into positive conversion and sales.

Despite our first quarter performance, the macro retail environment has gotten more challenging and remains under pressure as we have entered the second quarter. Notably, the U.S. market was weak driven by a number of factors: from weaker international tourist traffic to the higher tax bills for many U.S. consumers. I would be remiss not to note that while we do not like to call out weather, we certainly have had a cooler wet-weather spring this year relative to last year. Accordingly, we saw soft traffic and conversion trends across our business, particularly in the outlet retail channel.

Tariffs and trade rhetoric and threats weighed on consumers in China and in the U.S., and we did see a further softness post-Chinese New Year in our China business for both brands. While part of this impact is due to the Chinese New Year shift, which benefited fourth quarter 2018 and shifted business out of the first quarter of '19, we certainly saw consumers in China buying less. As manufacturing shifts out of China, factories are reducing their production or closing facilities, which is impacting not only the middle class, but is also having a spillover effect into the overall economy.

Europe continues to see macro pressures, including the uncertainty around Brexit. But our businesses are significantly outperforming the market and our competition. Because of the overall macro and geopolitical context, the U.S. dollar has continued to strengthen. As such, foreign currency translation will further pressure our fiscal year earnings by an incremental $0.10 per share versus our prior fiscal year guidance.

In addition, we've covered approximately $0.05 per share worth of incremental tariffs on existing product categories from the implementation of the 25% tariffs in May on the accessory and handbag categories, to which we have a relatively small overall exposure.

In light of these headwinds, we believe that it was prudent to lower our fiscal year EPS guidance to $10.20 to $10.30. Our new guidance implies year-over-year earnings per share growth of 6% to 7% on a reported basis and 10% to 11% on a constant currency basis.

We are confident that with our iconic brands and diversified business model that we are well positioned to gain market share. Our teams continue to invest in the strategic areas of the business that address the increasingly dynamic and ever-changing consumer landscape to position us for long-term success. But we also will continue to monitor emerging trends and maintain our flexibility to react accordingly and most importantly, deliver against our strategic priorities.

Lastly, I'd like to take a moment before going into the brands and the business update for the quarter to take a moment to discuss our exciting recent announcement that Stefan Larsson will be joining PVH in the newly created role of President. With his start date officially June 3, Stefan will have the responsibility for managing PVH's branded businesses and global regions with each of the 3 brand CEOs and each of the regions around the world reporting directly to him.

Stefan is a well-rounded seasoned executive who has an appreciation for the changing landscape, consumer centricity and the digital needs of the business as we see it today and what we will need to be successful in the future. His talent and operational record of accomplishments make him a strong addition to PVH, and I believe that this go-forward structure positions PVH well to further fuel our growth and capture organic and strategic M&A opportunities out there for us.

As mentioned in the release, I'm committed to PVH. I have signed a new 5-year employment agreement with PVH. We take succession planning very seriously, and I plan to work very closely with the Board and Stefan on the timing of his anticipated promotion to CEO, which is expected to occur over the next 3 to 4 years.

I will now move on to the brand results, and I'll begin with Tommy Hilfiger. Our Tommy Hilfiger posted a very strong quarter, despite the challenging global consumer backdrop. Led by our consumer-centric focus, we delivered strong product assortments, exciting new marketing campaigns and immersive brand experiences.

There are a few highlights that I'd like to call out from the brand side. The brand continues to see incredible traction in every major market around the world, and we are seeing consumer engagement and desire to purchase continue to improve.

Our TOMMYNOW fashion show in Paris, along with our TommyXZendaya capsule collection, was regarded as one of the most successful spring fashion events with 1.7 million audience engagements on our own channels in the first 3 days following the show, which was up 50% versus last year.

Our tightly curated exclusive collaborations continue to drive hype, brand heat and relevance with the consumers, from Tommy Hilfiger's Coca-Cola capsule collection in spring, which brought heat and halo to the brand with significantly strong full-price sell-throughs, to our newly launched Kith capsule, which is seeing incredible sell-throughs.

On a regional basis, we have -- we drove momentum through the -- our collaboration with Lewis Hamilton in a consumer event in Berlin, a celebrity-studded Tommy jeans store opening event in Seoul and a highly visible Tommy Hilfiger store of the future opening event in Beijing, among a number of local events.

Looking ahead, we plan to further engage consumers by continuing our brand ambassador relationships, especially leveraging our local influences in key markets around the world to drive more unique engagements as well as offering curated local activations with a differentiated Tommy experience for consumers.

Moving to the business, Tommy's revenues increased 4% in the quarter and 9% on a constant currency basis with earnings up 6% driven by outperformance in the international businesses. Internationally, revenues rose 12% on a constant currency basis with retail comparable store sales rising 9%, driven by robust performance in Europe.

The European business continues to be outstanding as we are gaining market share from our peers and delivering excitement across our products, marketing campaigns and capsule collections. As a reminder, on the wholesale side, our fall/winter order books are up close to 15%.

Asia was a mixed story for us. Our Japan businesses, which is about half of the Tommy's revenues in Asia, posted very strong results as our product positioning and consumer engagement initiatives are clearly resonating with consumers, and the consumer backdrop is relatively healthy.

However, our China business was soft during the quarter. We believe that consumer sentiment is increasingly impacted by the ongoing headlines about trade and tariff wars with consumers' uncertainty resulting in consumers buying less. Our experienced teams in the region are working diligently to cater to domestic Chinese consumers with product assortments, marketing campaigns and brand activations that are tailored specifically to the market.

Moving to North America. Revenues rose 3%. Performance was led by wholesale where we saw continued strong response to our sportswear, denim and accessory assortments. However, our retail businesses experienced a 4% comp store sales decline. This was largely driven by lower traffic, which was driven, in large part, by weaker traffic from international tourism, which we attributed to a much stronger U.S. dollar, weakening foreign currency purchasing and the impact around trade disputes with China's and others.

On the licensing side of the business, we continue to be extremely pleased with the performance of our women's business under G-III, which is experiencing strong growth and excellent sell-throughs.

Moving to the Calvin Klein business, we continue to be focused on executing the brand's strategic priorities to capture the brand's long-term growth potential. There are many exciting brand moments during the quarter, which I'd like to bring you up-to-date on, including: the brand heat has continued to improve over the past few months and the brand awareness remains strong with an increasing desire to purchase the brand.

Calvin Klein launched 2 campaigns during this quarter, both of which prioritized video and complemented digital investments with social amplification that encompassed more impactful storytelling and product conversations. Both campaigns produced record-breaking results for the brand. The cast of talent included Shawn Mendes, Noah Centineo and Kendall Jenner, among others.

I Speak My Truth in my #MyCalvins is the latest iteration of our successful campaign of #MyCalvins, that includes a cast of a diverse group of actors, musicians and models, including Shawn Mendes; Korean actor, Yoo Ah-In; and musician, Billie Eilish; and model, Kendall Jenner, among others. To date, the campaign has resulted in $22 million of earned media value and an increase, 86%, in weekly traffic to our calvinklein.com site.

We also have a strong presence at Coachella as their official apparel sponsor. Calvin Klein dominated the Coachella competitive set, earning the highest total of reach of 60.2 million engagements, up more than 145% from the average competitor engagements. The influencer marketing strategy alone resulted in over 22,000 click-throughs to the product-focused festival edit landing page on calvinklein.com. The entire activation generated an earned media value of over $18 million.

From a product perspective, let me give you a bit of an update. We continue to be focused on improving product as we reposition the jeans assortment. As a reminder, spring 2019 was an improvement from our fall of 2018 assortment as our denim assortments are in much better positions. We have made notable improvements to the balance of basics versus fashion, and our core programs are showing a positive response.

We expect to see further progress as we move into the fall holiday season as our fashion assortment slowly improves to complement the basic core assortments. Additionally, we believe that our 360° approach to consumer marketing with improved product, not only in jeans, will help drive the overall Calvin Klein brand experience.

From a business perspective, revenues were flat at $890 million, up 4% on a constant currency basis for the first quarter, while earnings rose 9% to nearly $120 million and operating margins improved 110 basis points. Calvin Klein's International revenues increased 5% on a constant currency basis.

By region, Calvin Klein Europe continues to build on its fourth quarter performance. We are seeing an improving response to our category offerings, particularly in jeans, which still has a way to go. As we previously mentioned, our fall 2019 order books are projected to be up close to 15%.

Moving on to Asia. Calvin Klein experienced the same pressure in China that I mentioned earlier as it was not immune to the softening consumer environment there, namely the combination of Chinese New Year shifting and the macro retail sales weakness, which is a direct result of the uncertainty created by the U.S.-China trade disputes.

Looking ahead, we have excitement planned for the China market, including the launch of several new local brand ambassadors, the introduction of a new CRM program and loyalty programs for shoppers and further digital investments and activations. Outside of China, the business continued to gain share in its market despite the soft macro environment.

Moving to North America. Revenues were up 2% in North America and earnings were up over 20% largely attributable to lower expenses and the better management of the overall business. The Calvin Klein North America wholesale business had a strong quarter overall, including very strong results from our digital businesses.

However, our retail businesses saw pressure as evidenced by the 5% comp store decline. This was largely due to weak traffic, which we experienced due to the toughest comparisons with tourism compared to last year. On our own digital site, calvinklein.com performed quite well during the quarter.

Finally, in our Heritage businesses, revenues for the quarter rose 1%, in line with our guidance, and margins declined 60 basis points driven by gross margin pressure from the more promotional U.S. retail environment. In general, our sportswear business saw healthy performance and our core intimates business continued to perform well. However, we did continue to experience pressure in our dress furnishings business, particularly neckwear and also in our retail businesses.

As we look ahead, we continue to see weakness in the U.S. retail marketplace where Heritage plays, and we expect our Heritage business to feel significant margin pressure in our second quarter, which is all encompassed in our earnings guidance as we look forward.

In summary, as we look at the overall business, I'm pleased with the company's first quarter performance and I'm proud of the progress that our teams are performing against our strategic plan in face -- in the face of this changing dynamic in the industry.

Looking to our outlook for the second quarter, we are certainly seeing a softer macro picture out there overall. Trends in May are under pressure with comps down high single digits in North America as we experienced the soft Memorial Day weekend in a highly promotional environment and a generally cooler weather -- wet weather May versus last year.

As mentioned earlier, international tourist traffic trends have decelerated and the tax impact on U.S. consumers is manifesting itself. We expect that these trends will significantly improve as we head into June and July with our expectations of continued negative low single-digit comps for the quarter.

I'm pleased to say that we're seeing some improving sell-throughs at wholesale as we came out of the Memorial holiday weekend. Internationally, we are seeing low single-digit positive comps in our Tommy International business and negative low single digits in our Calvin Klein International business.

Holiday shifts in Europe and a cooler weather -- wet-weather May are negatively affecting May month results month to date. We believe that the international business will improve significantly as we head into June as evidenced by the performance experienced in the last week of May, which was a significant improvement in trend.

Tommy Hilfiger International business is projected to be up high single digits, and our Calvin Klein International business will be up low single digits for the quarter. Asia, really driven by China continues to be relatively soft. Our -- as I discussed, our trade disputes continue to impact the business overall.

We believe that as we head into the second half of the year, we will be up against significantly easier comp store sales comparisons and that the noise around trade and tariffs will moderate. As such, we expect a much healthier back half of the year for the company. We believe that the incredible brand power behind Calvin Klein and Tommy Hilfiger continues to position us well in the marketplace against our competition in light of the difficult macro and retail environment.

And with that, I will turn it over to Mike to quantify some of our results.

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Michael A. Shaffer, PVH Corp. - Executive VP and Chief Operating & Financial Officer [3]

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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. For the first quarter, our reported revenues were up 2% and 6% on a constant currency basis, in line with guidance.

Tommy Hilfiger revenues were very strong, up 4% as reported and up 9% on a constant currency basis. Tommy Hilfiger International revenues increased 4% as reported and were up 12% on a constant currency basis. The Tommy Hilfiger International revenue increase was driven by strong performance in Europe with international comp store sales up 9%. Tommy Hilfiger North American revenues increased 3%. North America comp sales were down 4%.

Our Calvin Klein revenues were flat to the prior year and up 4% on a constant currency basis. Calvin Klein International revenues decreased 2% as reported and were up 5% on a constant currency basis as strong performance in Europe was offset by currency headwinds and weakness in China. Our international comp store sales were down 4%. Calvin Klein North American revenues increased 2% and were up 3% on a constant currency basis. Strong wholesale business was in part offset by North America comp sales down 5%.

Heritage revenues were up 1% to the prior year. Our Heritage retail business comp store sales were down 6% to the prior year.

Our non-GAAP earnings per share for the quarter was $2.46, $0.01 better than the top end of our previous guidance.

The EPS beat versus previous guidance was driven by stronger-than-planned business for approximately $0.01.

Moving on to our guidance. For the full year 2019, we are projecting non-GAAP earnings per share to be $10.20 to $10.30, 6% to 7% growth over the prior year. This reflects a $0.10 decrease versus our previous guidance and includes an additional $0.10 negative impact of foreign currency translation.

Our total FX headwind on the year is now estimated to be $0.32 of translation. Earnings per share, excluding the negative impact of currency, is projected to grow approximately 10% to 11%. In addition, our new guidance reflects interest and tax savings of $0.08, offset by $0.08 of a business takedown, which includes new tariffs of approximately $0.05 on goods manufactured in China and delivered to the U.S.A.

Tranches 1, 2 and 3 of the China tariffs at 25% are now included in our current guidance. However, our guidance does not contemplate any future increase in tariffs on additional goods imported from China into the U.S.

Overall, we're projecting revenues to grow approximately 3% as reported and 5% on a constant currency basis. Included in our revenue guidance for the year is an addition of approximately $150 million related to the pending Australia and Greater China acquisitions, partially offset by a decrease of approximately $100 million related to our intent to license the CALVIN KLEIN WOMEN's jeans business and the closure of our Calvin Klein collection business.

Overall, operating margins are expected to increase approximately 20 basis points for the year for the company. Tommy Hilfiger revenues are planned to increase 6% as reported and 9% on a constant currency basis. Tommy Hilfiger operating margins are planned to decrease about 20 basis points, including the negative impact from the pending Australia and Greater China acquisitions as these businesses shift from a licensing model to a directly operated model.

We project Calvin Klein revenues to be flat and up 2% on a constant currency basis. We're also planning Calvin Klein operating margins to increase 80 to 90 basis points. Our Heritage business is planned to have flat revenues with operating margins planned to decrease about 30 basis points.

Interest expense for the year is planned to be about $120 million, down to our previous guidance and reflects the benefit of our recent refinancing. In 2019, we're planning to pay down at least $150 million of our debt. Stock repurchases in 2019 are planned to be about $200 million.

Our tax rate for the year is estimated at 14% to 15%, which at the midpoint is up approximately 110 basis points versus the prior year. The increase in the tax rate is the result of changes in the U.S. tax code.

Second quarter non-GAAP earnings per share is planned at $1.85 to $1.90 and includes $0.06 of estimated negative impact from foreign currency translation. Revenue in the second quarter is projected to be flat to the prior year as reported and up 2% on a constant currency basis.

Tommy Hilfiger revenues are planned at 3% increase as reported and 6% on a constant currency basis. Calvin Klein revenues are planned at a 4% decrease as reported and 2% decrease on a constant currency basis. Calvin Klein second quarter revenues reflect the negative impact from the planned transfer of the women's jeans business and the Calvin Klein collection closure, which was worth approximately 4%. Heritage brand revenues are projected to decrease 2%.

Interest expense is projected to be about $28 million and taxes to be 21.5% to 22.5% in the second quarter. Our tax rate for the quarter at the midpoint of our guidance reflects an increase of about 320 basis points to the prior year, which is worth about $0.08 less of earnings per share in the second quarter.

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) We will take our first question from Bob Drbul from Guggenheim Securities.

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

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Manny, I have two questions for you. I guess the first one is, when you look at the trends second quarter to date, I just -- when you look at what you delivered in the first quarter or second quarter to date, can you just give us an element of your confidence in the guidance going forward and the improvement that you're forecasting in the numbers overall?

And the second question is just can you just maybe give us some insight on what you think is really happening in China on your own business there in China as well and the slowdown that you're seeing?

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

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Sure, Bob. I guess on the first point, well, when you really look at last year and the comp store trends for the business, the first 4 to 5 months of last year, our comps were running up high single digits overall when you -- in North America when you blend it all together. And May was one of our strongest months overall when you look at it.

So the Tommy business, I think, U.S.-focused only, it was probably up about 10% on a comp store basis. And that trend significantly decelerates in the second half of the year. So our comparisons get much easier in Tommy, get much easier in Calvin and in our Heritage businesses. So I think that gives us a level of confidence as we go forward. We're just up against some really dramatic business, strong business last year.

And I think as you look at some of the product initiatives we have going forward, we feel very good about the position of our inventory as we move forward. And I -- we feel that the trade tension and talks should start to soften as we get into the second half of the year as I think that the -- it should actually play out, hopefully, that those things work their way through the overall economy. So in North America, that's the backdrop.

And I think if you look at the stock comp basis for us over a 2-year period in all of our brands, you'd see positive comp store performance overall, even through May. But the challenge is we're up against this very strong trend as we go forward. So we think we -- we think that will start to change.

China, which is really I think in some ways very similar, we had a very, very strong first half last year with positive comps throughout. And then, as you recall, the whole trade discussion and the nervousness around the tariffs and the tensions started to come into play around July. And with that, we really saw a drop-off, and we reported that in our results in the third and fourth quarters. So I think we start to anniversary that negative trend in business and [our star fall line] as we go forward, so from that perspective.

I think the only other thing I would say about our China business, which I think is a little different than some of our competitors, is we are -- we've got a significantly larger overall penetration in China, particularly with Calvin Klein, and our brand is much more widely distributed throughout China.

So we don't just sit in Tier 1 cities like Beijing and Shanghai. We are much more broadly distributed throughout China. And that has been part of I think the strength of the brand overall and the recognition of the brand throughout China as we were one of the first movers in China, and I think we continue to benefit from that.

But with that comes a much more broader geographic spectrum, and I think we're being more impacted by some of these trade issues because we are much more developed in some of these Tier 2 and Tier 3 cities throughout China where manufacturing is even a greater portion of the overall economy. We tend to play more with the middle-income consumer versus the luxury consumer, and I think that's where we really sit.

And overall, when you look at some of our -- the comparisons that people are making, you have to recognize, we're playing in the apparel space, not necessarily the accessory space. And I think that's one of the big differentiators for us in China.

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Operator [4]

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We'll take our next question from Erinn Murphy from Piper Jaffray.

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Erinn Elisabeth Murphy, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [5]

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I guess I had a follow-up first on the North American market. Manny, if you could just speak to what you're seeing broadly in the wholesale side of the business. And as we get closer to back-to-school in fall, are you seeing any shift of how your wholesale partners are planning their orders?

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Emanuel Chirico, PVH Corp. - Chairman & CEO [6]

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Yes. I think as -- look, in the last few weeks, I think there -- a number of our key customers and then retailers in general have reported. And you've seen the results and they've been challenging. And I think also, as people have looked at the guidance and looked at the second quarter results, they've also seen the trends soften in May. And I think that's the backdrop that we're dealing with today, and that's the reality of what we're dealing with today.

I think as -- our customers, our key retail partners have tightened inventory and have clearly tightened open-to-buy, and we've reflected that in the guidance that we've given. So I think we've already planned that into our second half results as we move forward.

I think inventories in general are in reasonable positions at wholesale. And I think if sales pick up as we expect in June and moving into the second half, I think inventories will be in reasonably good position as we go into fall. Of course, you always worry about inventory starting to back up, and that would be the concern if we don't start to see some positive improvement in trends as we move into July and August.

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

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Okay. That's helpful. And then maybe just secondarily, on the Tommy Hilfiger brand, it seems like that brand broadly is still seeing some pretty good trends. And you lifted the full year sales guidance by about 100 basis points constant currency. What are you seeing there that kind of gives you the confidence to raise that revenue guidance for that brand?

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

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I guess two pieces where we're really seeing very strong performance. One is Europe, in general. Overall, the performance is just outstanding and continues to be. I know people keep asking me with all the noise coming out of Europe, why does both Calvin and Tommy continue to do so well?

I think the brands are resonating. I think Calvin is gaining white space and market share based on just the relative size compared to Tommy, the opportunity. The Tommy brand just continues to perform, gain market share against its competitive set.

As I said, for a brand its size to have an order book increase that's close to 15% in the second half, and we haven't seen any kind of slowdown as we look out to early spring results. So that trend continues. We feel really good about how that business is shaping up for us [and how we're doing].

So Europe, a key strength for us as well. And then our wholesale business here in the United States is just having very strong performance. Both sell-throughs and spring at some of our key retailers like Macy's has been very strong. Collection product on sportswear, men's; our denim product. I know the G-III business, both in Calvin and Tommy, but particularly in Tommy as it's on a growth cycle and getting more and more shelf space throughout department stores here. That trend just continues.

I think it's a testament to the management team how well they've managed the brand, the marketing that continues, it seems to connect with the consumers and the strength of the product assortments as they move forward. That's given us confidence on the Tommy side, and the numbers are in front of us.

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Operator [9]

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We'll take our next question from Matthew Boss from JPMorgan.

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Matthew Robert Boss, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [10]

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So maybe first at Calvin. I guess, Manny, can you outline the driver behind the slight reduction to the constant currency revenue guide for this year? And maybe what you're seeing from an underlying product and marketing perspective that gives you the confidence for improvement as we move into the back half of the year and beyond?

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

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I think, as you know, the takedown in Calvin, slight takedown in Calvin, really driven by China and what we've seen there and what we really need to -- and what we felt we needed to adjust that number as we move forward. So that 1% drop in sales is where we are.

At the same time, we continue to see positive reaction to sell-throughs here in North America. The reaction to the jeans line that's coming out for fall, both on the men's side, but particularly also with G-III's launch of women's here in the United States, we're really seeing strong momentum there.

I think the comparisons on Calvin in particular, as you recall, the challenges that we faced through the second half of last year, the comparisons are just much softer as we get into the third and fourth quarter of 2019 compared to 2018. Spring was still strong at Calvin last year. We continue to put those results on.

So we're -- we feel we're really seeing the momentum with -- the marketing clearly is back to the brand DNA and is connecting with the consumer. We think the product continues to improve season by season. And given the strength of the brand and what it historically has delivered and the reaction we've gotten from retail as to the line, we have strong confidence in the business. And with just a little help from the macro environment, I think we're well positioned there.

Clearly, well positioned from, of course, management of the brand with the restructuring initiatives we put in place around the collection business, the reinvestment of marketing dollars back into the brand.

In the first quarter, I think when you take the first half overall, you'll continue to see operating margin improve in that 70, 80 basis point range that we've given from the beginning. Even though first quarter was ahead of that, I think you have to look at it on a season-by-season basis. You can't look at just quarterly, and I think the -- that part of the momentum of the business just keeps moving forward. So I think we feel pretty good about how Calvin is shaping up, particularly as we go into the second quarter -- second half.

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Matthew Robert Boss, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [12]

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That's great. And then maybe just a follow-up. On the gross margin on the consolidated PVH front, could you just walk us through the drivers of the 70 basis point decline in the first quarter? Any change to the 70 to 80 basis point expansion guide for the year? And maybe just touch on any embedded gross margin forecast for the second quarter.

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Michael A. Shaffer, PVH Corp. - Executive VP and Chief Operating & Financial Officer [13]

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Yes. So look, for the first quarter, we had always talked about gross margins being down. We had the Chinese New Year shift, high margin -- high gross margin business, and the currency impact was a first quarter event, plus there was a big wholesale quarter in the first quarter, which also impacted the gross margin down 70 basis points.

As we look at the year, we've talked about 90 to 100 basis points for the year. And that continues to be our plan, and our plan is also to be up in the second, third and fourth quarter. So that -- there's been no change, and we did hit our plan for the first quarter.

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Operator [14]

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And we'll take our next question from Michael Binetti from Credit Suisse.

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Michael Charles Binetti, Crédit Suisse AG, Research Division - Research Analyst [15]

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I guess just to check a box, with Tommy International, the -- I think you mentioned the current quarter-to-date comps had slowed a little bit to low singles. But most of the rest of your commentary on Tommy suggests that you're still feeling pretty good about the international trends. Any reason that you think the current quarter to date has slowed in Tommy International?

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Emanuel Chirico, PVH Corp. - Chairman & CEO [16]

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I think two key pieces. I think that there's a -- again, I don't want to get into -- there's a holiday shift going on in Europe as Easter was later, then a number of the holidays, some of the Christian holidays that follow are also late -- are also about 3 weeks later. So we start to pick the potential calendar shift benefit as we go into this week and into next week and beyond, so we should be able to see an improvement in that.

So that's the big piece of the comp. I guess the other piece is with the strength of the business that's been so strong through the first quarter, we've gotten much less carryover merchandise needing to liquidate this year. And hitting the promotional button, we've been a little slower this year than last year because of the great position of the inventory and really trying to milk a bit of the gross margin dollars that are available to us.

So in a short period in this window when you get between May and June where promotions really start and clearance really starts in Europe, all of our competitive set are 2 or 3 weeks ahead of us on clearance discounts, and we are just starting that. We saw a reaction to that just last week when we hit the button to move on that. So I think that's timing. We are confident that as we look at -- into end of May going into June that the Tommy trends continue to improve from where they are.

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Michael Charles Binetti, Crédit Suisse AG, Research Division - Research Analyst [17]

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Okay. Makes sense. I remember you commenting on things like that in the past this time of year. And then I'm just -- I'm curious on North America and the guidance rolling forward into 2Q and beyond this. I think you guys were thinking and hoping that trends in the channel would get a little bit better in April after a slow start when you commented in March. We didn't see a pop on April. You think things will get better in the back half.

And it sounds like in first quarter, the tourism is still decelerating. I know the currencies are on the lows here on a -- at least on a year-over-year basis. I mean in the past, you've spoken to us in terms of permanent population versus tourism. But can you help just roll us forward a little bit on how you're building to the improvement in North America if things like tourism continue to decelerate from here? Or how many levers you have in the P&L to help if you don't get that improvement in tourism or if the trade tensions don't settle going forward?

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

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Look, I think as -- when you think about the outlet channel and when you think about global brands like Calvin and Tommy, in particular, and when we look at our business, somewhere between 35% to 40% of our business in the North America retail outlet channel is driven by international tourism. That's a big component.

I think it -- I would go back to what I mentioned before is that trend was very, very strong in the first quarter of last year into the first 4 or 5 months of last year as well. As we start to move into July and beyond, we really -- that's where we start to anniversary the comparisons where we really started to see a tail off of the tourism trends that benefited us so strongly in the first half of 2018.

So I think that, in and of itself, should be a key driver for us as we go forward, just being up against much softer traffic trends from last year in that international component as we move forward, particularly the Tommy Hilfiger and Calvin Klein businesses.

So I think that's what we're looking at. And I think as this starts to play itself out, we'll be able to report back on that as we move forward. But that's the key driver that we feel that, that will start to level itself off in the second half of the year.

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Operator [19]

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We'll take our next question from Tiffany Kanaga from Deutsche Bank.

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Tiffany Ann Kanaga, Deutsche Bank AG, Research Division - Research Associate [20]

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Do you believe we can return to the 13% to 15% constant currency earnings growth algorithm after getting past this year's challenges? Or are there any fundamental changes to the business that would lead to a lower long-term target range?

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Emanuel Chirico, PVH Corp. - Chairman & CEO [21]

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I think -- look, I think the fundamental issue for us is we don't see any reason why that 13% to 15% algorithm would change. The 2 big drivers for us that have been hard to manage and have been impossible to manage as they come at us has been foreign currency translation and the strengthening dollar in this environment, and then obviously, this whole tariff issue, how that plays itself out and the levers we can pull there. That will put some pressure on that earnings growth.

If those kind of tariffs go in effect and if they stay in effect for a period of time, that will translate and we'll have to deal with that. But I think as -- fundamentally, as things level off and we look at our business dynamic, the balance sheet and how we've been utilizing our cash, we think that 13% to 15% algorithm is in place and ones that we hit in '17 and '18. And I think as things level out, we should be back on that.

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Operator [22]

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We'll take our next question from Ike Boruchow from Wells Fargo.

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Irwin Bernard Boruchow, Wells Fargo Securities, LLC, Research Division - MD and Senior Specialty Retail Analyst [23]

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I don't know if this is for Manny or Mike. But on Tommy Hilfiger, understanding they have a larger retail business than Calvin, so comps in the outlets are a little bit under pressure right now. But on the wholesale side, the distribution opportunity into next year is still pretty compelling.

I guess again, Manny or Mike, is there any way you could kind of size that opportunity now that the Macy's exclusivity is kind of broken and you have the right to distribute to more partners? Just trying to think about North America Tommy Hilfiger growth into next year and what kind of visibility you have maybe in the order book already.

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Emanuel Chirico, PVH Corp. - Chairman & CEO [24]

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We've said -- I guess I've said over time, I think the opportunity is a $100 million opportunity in sales as we go forward, just to kind of size it. I don't -- obviously, I don't think that comes in 1 year like 2020. I think that's built over a period of time. But that would be -- that was -- I mean it comes from 3 key customers. I think it's Belk, Dillard's and Amazon as we move forward, being able to increase our penetration there. Those are historically very strong partners for PVH overall.

So I think those opportunities do exist, and I think there's clearly an appetite for the brand with those, both in our men's product that we run directly ourselves as well as our women's product with G-III, who -- and growing their footprint throughout the U.S. So I think that pretty well sizes it for you.

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Operator [25]

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We'll take our next question from Dana Telsey from Telsey Advisory Group.

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Dana Lauren Telsey, Telsey Advisory Group LLC - CEO & Chief Research Officer [26]

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As you think about the incremental uplift that you got last year, whether it's from wage increases and tax reform, that gave strength to Q1 and obviously to May, how do you triangulate the current May performance given the compares and the thoughts on the rest of the quarter? Then I just have two quick other ones.

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Emanuel Chirico, PVH Corp. - Chairman & CEO [27]

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So let me try to triangulate that. I think as -- look, the -- May I think was -- May was a challenging month. I think everybody's talked about that. And I think just given where we're coming out and announcing in this timeframe, I think is -- we're probably ahead of everyone since we report later than most everyone. And I think that's the pressure -- that's the real pressure we saw.

How do I triangulate it? Last year, if you look at the comps in May, May was our strongest month overall. We had 11% comp store increase in May. We knew it was going to be our most challenging month. May last year, the weather was perfect. It was summer early, and we benefited from all those things.

The momentum coming out of the tax, and you touched on it, Dana, the tax refunds and the lower withholding taxes that everyone was seeing in their paycheck, I think really gave a boost to the consumer. And we saw that in the business, and we're able to take advantage of that.

And I think the challenge we're facing right now is being up against some of those real positive dynamics from last year and some of the negative issues that have come up this year around trade. And the uncertainty that's been created in the market overall with the consumer, I think has put pressure on the apparel segment.

And I think in outlet retailing, which you touched on, is the channel we're talking about, that has such a big international tourist component that you really see that currencies are down 5% to 7% compared to this time last year, and that's putting pressure on international tourism purchasing.

So that's what we're up against. I think those things start to reverse themselves as we move through June into July and get into the second half of the year, and the comparisons do get easier. But we have to get through the next couple of weeks, and then I think the comparisons start to get much easier.

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Dana Lauren Telsey, Telsey Advisory Group LLC - CEO & Chief Research Officer [28]

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And then progress on the potential for licensing the CK women's jeans North America business, how is that moving along?

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Emanuel Chirico, PVH Corp. - Chairman & CEO [29]

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It's funny, Morris and I -- we -- at G-III, Morris, the CEO of -- Goldfarb, the CEO of G-III, we keep saying the deal is over. We signed, we shook hands, whatever. The lawyers are still playing around with some wording. I think that will all be behind us shortly. That deal is done. They're showing product. They're actually talking about buildings spaces in certain key department store doors with new shop-in-shops. So clearly, that's all just moving forward as we go forward.

And the product has started to be sourced and put together. And we really feel good about how strong their product presentations to the department store channel has been. The reception of the product at retail has been extraordinary. And they're just great partners, G-III, and they've done an amazing job with our Calvin women's business overall. So obviously, giving them jeans is a bit of a no-brainer at this point. So I think they're going to do a great job with it.

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Operator [30]

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We'll take our next question from Jay Sole from UBS.

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Jay Daniel Sole, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Softlines & Luxury [31]

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My question is about the operating margin guidance. I think you said it was up 20 bps for the year. I think last quarter, it was up 20 to 30. So can you just talk about maybe what's driving the change in the operating margin guidance for the year?

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

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Yes. I think a big piece of it is just the foreign currency is having some impact, the initial pressure on that. I don't think fundamentally anything has really changed dramatically. And the -- and then I guess just when you look at our Heritage business, it's -- with the promotional environment in North America and what we're seeing in the open-to-buy, we've really moved those operating margins down most of all.

So no change on Calvin and Tommy fundamentally, but the Heritage business is seeing what's going on in North America. Second half sales, we moved down, and that's puts -- that's putting pressure on margin and some of the expense structure and deleveraging there.

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Jay Daniel Sole, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Softlines & Luxury [33]

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Got it. Then maybe, during the quarter, you announced a new licensing agreement with Nike for the men's underwear business. Can you give us an idea of what kind of impact that might have on the business, maybe not this year, but perhaps next year?

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

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Yes. I think that's a fall -- no. I think that's a fall 2020 launch. We think that the business has a potential of a $100 million business. I'm not sure how quickly it gets there. We're viewing product and talking to key customers. There's huge enthusiasm for the product. And given our expertise in that area on the men's side, they -- it seems like a huge opportunity.

It opens up really new channels of distribution for us as well as existing channels. So there's a strong department store distribution. There's also, because of this -- the Nike brand strength, it really goes from Kohl's all the way up to Nordstrom and beyond.

And then it opens up the whole athletic sporting goods market that I think there's a real opportunity to develop a greater underwear presence for men's, in particular, that's got a -- that has an athletic theme to it, that has performance product associated with it. And I think we know how to do that product better than anyone and understand that. That's why Nike picked us. And I think it's a real opportunity as we go forward.

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Operator [35]

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We'll take our next question from Kate Fitzsimons from RBC Capital Markets.

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Kate Bridget Fitzsimons, RBC Capital Markets, LLC, Research Division - Associate VP [36]

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I guess going back to Ike's earlier question about the widening North American distribution of Tommy Hilfiger. I guess what is your approach to maintaining and -- to broadening the distribution while maintaining and balancing that strong relationship with Macy's?

And then secondly, I noticed you called out the appointment of the Chief Digital Officer. Just what are her priorities for the brands' go-forward as she ramps in the new role and maybe some digital focuses for the remainder of 2019?

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

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Sure. I guess on -- the first part was the Tommy distribution?

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Michael A. Shaffer, PVH Corp. - Executive VP and Chief Operating & Financial Officer [38]

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And Macy's relationship.

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

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And the Macy's. Look, I think if you look at Macy's biggest brands, those brands, like Calvin Klein -- and I'm not going to talk about other competitors, but you could do it yourself -- those are their biggest brands within the stores. It's not the exclusive brands. And I think Jeff Gennette has been very clear about looking for brands that are desired by the U.S. consumers. And the need for exclusive national brands, they've clearly taken a different track as they move forward.

I think performance drives the amount of open-to-buy dollars you get. And I think if you speak to anyone at Macy's, they'll tell you how strong the Tommy Hilfiger performance is and has been. Macy's is a key customer, a strategic partner for us along -- our largest customer in the world overall from a wholesale point of view. So obviously, they are always a priority for us.

We make sure that they're first with product. They have the ability to do exclusive product with us for all of our brands, and Tommy in particular, and we'll continue to have that opportunity as we move forward. They've got some of the best showcases for brands in the United States with places like Herald Square and Union Square. So clearly, there's a marketing advantage, a brand advantage to be in those key spots, and we understand that.

So I think the relationship has never been stronger between the 2 companies. Their preference to buy the brand has never been stronger.

And if you look at the growth of the brand with G-III expanding women's broadly across the floor and us expanding the men's assortment, really growing the denim component there as well and looking to expand the athleisure component of that business, I think Macy's will continue to be a growth account for us for -- in total, but also for the Tommy Hilfiger brand. So I think it's a question of balance. And I think it's a very good result for us, and I'm glad it works for Macy's as well.

And with -- we'll take one more question, operator, as we're getting past the 10:00 hour.

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Operator [40]

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We'll take our next -- our last question from Kimberly Greenberger from Morgan Stanley.

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Kimberly Conroy Greenberger, Morgan Stanley, Research Division - MD [41]

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Manny, Tommy Hilfiger has put up really strong results now for a number of years. And the May slowdown here sounds calendar related or transitory. Is there any reason to think that the Tommy Hilfiger momentum has slowed or skipped a beat and that we won't see that momentum restored in the back half of the year?

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Emanuel Chirico, PVH Corp. - Chairman & CEO [42]

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No. I don't -- I mean, look, we have tremendous confidence in that brand. We see it in our order books with wholesalers in Europe, but also here in North America and how we're being planned here in North America and the opportunities that are open to the brand as we start to discuss new customers.

We're dealing with -- let's be fair, we're dealing with a channel issue in the outlet channel that I think is being overly pressured by international tourism. I think that will work itself out over the next couple of months. And then I think the brand is back on a trajectory as we move forward. So I feel highly confident about the Tommy Hilfiger brand. And before -- so I think that answers that question.

Before I close the conference, I just realized I didn't answer the second part of the last question, which is really around digital and some of the things we're doing. Marie's charge is to really work closely with the brands and the marketing teams on a regional basis and on a global basis to really focus on marketing.

As we shift more and more our marketing online, we want to continue to make the right relationships throughout the world of digital, be it with Google or other key players. I think Marie brings that experience from her days at L'Oréal and her experience on the digital side of the platform. She really is helping us leapfrog as we move forward to engage with consumers.

The other thing that's really where we're making tremendous investment, and I think Marie is helping us, is the organization of the consumer data, being able to take that consumer data and use it in a way that connects us with the consumer. And we're not only making a connection, but we're making an emotional connection that will translate into a sales transaction.

So we're trying to bring our marketing and she's trying to take our marketing and make the connection. Our marketing for so many years has been about build the brand, build the brand strength, which is key. And I think it's served us well over the long term.

But I think she brings more of the laser focus to the brand, where we're connecting directly with consumers on more of an individual basis, tailoring our market message consumer by consumer and trying to really resonate with that consumer. Better understanding the relationships would drive sales. She's really opened some -- opened our eyes about some of the correlations between what drives consumers and how to get them to make a call of action on the brand.

So I think her experience and knowledge will serve us well as we're making these investments. And our brand messages, which our brands and our CEOs around the world and their own CMOs drive that component, I think is -- her role will be really helping them align that consumer message and making it tighter, more tailored as we move forward. And I think it's the way of the future, and we need to be at the forefront and move forward. So I think that's going to help drive our business.

So with that, I'd like to close the conference. Thanks for your attention, and we look forward to updating you in August about results going forward. Have a great day.

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Operator [43]

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