Manny Chirico - Chairman and Chief Executive Officer Mike Shaffer - Executive Vice President, Chief Operating & Financial Officer Dana Perlman - Treasurer and Senior Vice President, Business Development and Investor Relations Ken Duane - Chief Executive Officer, Heritage Brands and North America Wholesale

David Glick - Buckingham Research Erinn Murphy - Piper Jaffray Michael Binetti - UBS Dana Telsey - Telsey Advisory Group John Kernan - Cowen and Company Eric Tracy - Brean Capital Jay Sole - Morgan Stanley

Good morning everyone and welcome to the PVH Corp. Second 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 have 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 August 24, 2016 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 a subject of this call. These risks and uncertainties include PVH's right to change its strategies, objectives, expectations and intentions and its need to use significant cash flow to service its debt obligations. Therefore, the company's future results of operations could differ materially from historical results or current expectations. PVH does not undertake any obligation to update publicly any forward-looking statement including without limitation any estimate regarding revenues or earnings. Generally the financial information and guidance provided is on a non-GAAP basis as defined under SEC rules. Reconciliations to GAAP amounts are included in PVH’s second quarter 2016 earnings results which can be found on www.pvh.com and in the company's current report on Form 8-K furnished to the SEC in connection with the release. At this time, I am pleased to turn the conference over to Mr. Manny Chirico, Chairman and CEO of PVH.

Thank you, Jen. Good morning everyone and thank you for joining me on the call. Joining me on this call will be Mike Shaffer, our Chief Financial Officer; Dana Perlman, our Treasurer and Head of Investor Relationships; as well as Ken Duane, who runs our wholesale businesses here in the United States and North America. We are very pleased with our second quarter and first half results. Our strong performance year to date exceeded our expectations and demonstrates our ability to deliver against our 2016 plan despite the challenging macro environment. Overall, we had a terrific quarter with revenues increasing 5% on a constant currency basis, while earnings per share grew approximately 40% on a constant currency basis. The momentum across our Calvin Klein and Tommy Hilfiger International businesses continued during the quarter. Our European and China businesses continued to be our healthiest markets. The strength has been seen across all channels of distribution, wholesale, retail, and our digital channels. Speaking of digital, we continued to see outsized growth across all of our digital e-commerce businesses. For the second quarter, we continued to generate revenue growth in excess of 20%, and this channel continues to be our fastest growing distribution channel. Key measures we have taken include enhancing the navigation on our own sites, elevating our own sites to focus less on promotions, investing in mobile capabilities, and taking steps to ensure that we are in-stock in high core demand items, which is the key to the profitability on digital commerce. In the second quarter, the US market continued to be our most volatile market that we operate in. Similar to the first quarter, our US wholesale business continued to grow and show improvement. For the first half, we are running well ahead of our wholesale plans and our prior year actual results. However, our US retail businesses have not seen much improvement in trend from the first quarter and continued to experience soft traffic and higher promotional trends. Specifically, our international tourist traffic and spending continues to weigh on our US retail business. And as we began August, these sales trends have not improved. Looking ahead to the balance of the year, given the strong momentum in our businesses, we are increasing our earnings guidance for the year while also further investing in our brands. We have also taken a prudent approach to planning our business in the second half of 2016, particularly our US retail businesses, which we are now planning second half comp store sales trends at the same levels that we experienced in the first half. Let me move on to a brand update to discuss each of our key brands. Moving to Tommy Hilfiger, let me start with an update on some of our brand marketing activities. A major focus of our fall campaign will be our women's businesses. As we have previously announced, Gigi Hadid will be our global ambassador for Tommy Hilfiger's Women's, representing apparel, footwear, accessories, and fragrance. This initiative reflects the brand's strategic commitment to expand its women's businesses globally. We believe that we have a significant global growth opportunity in women's and we are beginning to see positive momentum in these businesses. As part of her exclusive ambassadorship, Gigi has partnered with Tommy Hilfiger to launch our first collaborative collection. The collection will launch globally at the New York Fashion Week with Tommy Hilfiger's first consumer fashion show, where all looks will be immediately available for purchase. The collection will be available in over 70 countries around the world, in over 200 Tommy Hilfiger stores, and 150 wholesale partner stores, all with dedicated in-store marketing installations. The collection will also be available on our own e-commerce sites. Another important brand initiative for us has been Tommy jeans. Now in its second season, Tommy jeans celebrates the most iconic styles from the brand from the 1990s. We evolved nostalgic classics with a fresh, youthful energy. We first launched the jeans collection in April 2016 in 15 countries across Europe with strong sell-throughs on both e-commerce and at retail. The collection has allowed us to establish new wholesale partnerships that support our efforts to attract a new, younger consumer base. In the US and the UK, we have invested in the strategic partnership with Urban Outfitters. We have also established similar partnerships with specialty stores in France, Germany, and Scandinavia. The second delivery of the Tommy jeans capsule has hit stores in August and the collection continues to perform very well and has excellent sell-throughs. Moving to the financial performance in the second quarter, overall revenues for Tommy increased 7% on a constant currency basis and EBIT was up over 20% on a constant currency basis. Our revenues were driven by the outstanding performance of our international business, which continued to generate 11% constant currency sales growth in the quarter. Moving to our European business, we saw solid performance in all major European markets, demonstrated by a 8% comp store increase in Europe for our retail business with strength across all major markets. I think it's important to comment that our UK business continues to show strong momentum despite a short-lived slow down around the Brexit vote. We continue to be encouraged by the healthy comp trends we have experienced so far in the third quarter, which continued to run up high single-digits throughout Europe. Moving to wholesale, the Hilfiger brand continues to resonate with the European consumer and our fall sales are projected to be up 6%, while our spring 2017 order book is running up 7% over the prior year. Growth in the order book was generated across all product categories with acceleration across our denim and women's businesses. Strong growth is coming out of all markets, the UK, Germany, Scandinavia, Spain, and even Italy, which has not seen growth in many seasons. The only challenging market for the brand is Turkey, which is understandable given the current geopolitical situation there. Moving to Asia, as a reminder, we closed our acquisition in China in mid April for the Tommy Hilfiger business there. That business continues to demonstrate strong results and is tracking to our plan. This plant has added about 300 basis points to the top line during the second quarter, and we see it being slightly accretive to our full-year earnings. We affirmed up our planned marketing spend in China that we spoke to you previously about, and we believe this will help further support the brand and our fall initiatives that are primarily focused on promoting women's, as well as the foundation for sustainable growth in 2017 and beyond. Moving to North America, starting with our wholesale business, I'm pleased to say that our Tommy's men's wholesale business continues to perform very well. And during the quarter and first half, we continued to see good sell-throughs and higher sales. During the quarter, we continued to see stronger sell-throughs and higher average unit retails. We believe this healthy performance from the first half of the year will continue into the second half and we are excited about the developments in the men's business. Lastly, we are working with G-III to handle the women's sportswear business in the fourth quarter, and that transition continues to run on plan, and we continue to see strong positive reaction to the lines by our wholesale partners. Turning to our US retail business, unfortunately, we have not seen a material improvement in this business year to date with comps running down year to date about 8%. The business continues to be under pressure driven by weakness in traffic and consumer spending in the international tourist stores. As a reminder, we're taking a prudent approach and are not forecasting for the first half trends to improve for the balance of this year. Moving to Calvin Klein, let me take a moment and discuss some of the recent moves around the Calvin Klein brand. We announced a few weeks ago that Raf Simons has been appointed our Global Creative Officer to drive on new global creative strategy for the brand, which will unify all Calvin Klein brands under one creative vision across all other categories of the brand. We believe that this undertaking will further solidify the brand's positioning worldwide and pave the way for future growth. As Raf has only been in the building a few weeks, he is working with the teams as he builds out how the brand will continue to evolve from a creative direction point of view. As it relates to the overall brand’s relevancy and the power of the brand globally, we continue to see our awareness levels and willingness to purchase metrics continue to improve in all markets. The fall 2016 global advertising campaign continues to roll out featuring a provocative blend of talent and deeper storytelling while continue to leverage #MyCalvins. The campaign is featured in 26 global markets with a diversified media mix comprised of digital, print and outdoor advertising. As a reminder, we're also the official apparel partners of the European Justin Bieber's Purpose Tour, which kicks off in September and we will have dedicated branded top-up shops at the tour's Berlin, London and Madrid stops, similar to what we did for Justin's US tour. Specifically from a brand's perspective, I want to call out a few exciting launches for fall 2016. On the jeans front, we have a major global launch of our sculpted jean, which will hit stores at the end of this month. This launch will be supported by a global ad campaign that features Bella Hadid, Gigi's sister. This campaign will focus on all major markets with a diversified mix of media, both digital, print and outdoor. As a product category, we have seen significant growth in our Calvin Klein underwear and intimates business. And this is far and away been our most successful growth category, posting explosive growth and consistently growing its leading global market share position. We believe women's intimates will continue to be our most significant growth area and we have a number of fall growth initiatives taking place. Our Modern Cotton logo business continues to gain momentum and has enabled us to capture the number one market position in the bra-led category. For fall 2016, we are taking this logo application to tailored bras and are launching our seamless [logo Bra]. It marries bra technology with a great CK logo. This will allow us to continue to cater to a younger consumer and offer those that want more support the ability to purchase logo product as well. Additionally on the bra side, we continue to expand our Black Label offering, particularly in Asia and Europe, and have launched two new products for fall to address our broader tailored bra segment, offering seductive comfort with lace, adding new fashion details to our well-known proven seductive comfort silhouette, and offering a three-piece lace bra with a focus on our attempt to gain a larger portion the large size cup market both in US and in Europe markets. Lastly, we launched the brand's latest women's fragrance, Deep Euphoria, earlier this month, which will help expand the Euphoria business. The print and video advertising campaign for the fragrance features Margot Robbie and will receive support through a global campaign with print, broadcast and digital media. From a financial performance perspective in the second quarter, overall the global momentum in Calvin Klein continues as we posted revenue growth of 15% on a constant currency basis and non-GAAP EBIT growth of close to 50% on a constant currency basis. Let me start with the international businesses of Calvin. International revenues were up approximately 17% on a constant currency basis with comparable store sales growth increasing by 11% in the quarter. Europe continued to experience very healthy wholesale selling and comparable store sales increases across every major market. And our branded presence across the major markets continued to improve each season. The wholesale business continues its strong performance. Our fall 2016 sales are projected to be up high-teens, and I'm pleased to provide you with an update on spring 2017's order book, which is running up about 20%. The strength of the business is coming from all major markets and across all product categories with an acceleration in both jeans and the underwear categories. And we have seen growth in some of our newer categories, particularly accessories. Our European retail business continues to gain momentum with comps running up in the mid-teens in the second quarter. As we have moved into the third quarter, comp store sales in Europe continues to post strong double-digit sales increases. Moving to Asia, our businesses continue to perform very well with China outperforming our other markets. However, it is important to note that we did experience a nice improvement in our Korea business. The trends from our first quarter continues as we see strength across jeans, underwear, accessories and our newer performance at Leisure business. We continue to see nice square footage growth across the region with some key new store openings in Hong Kong and Mainland China this year. Additionally, by the end of the year, our Asia CK.com sites will be shipping to all major markets across Asia, including Australia and New Zealand. Second quarter comp sales in Asia saw a nice improvement and we continue to see that trend into our third quarter running up about positive mid single-digits. In North America, our revenues were up 15% on a constant currency basis, driven in large part by the strong performance of our wholesale business across all categories. During the quarter, we saw continued momentum in our underwear business, as our women's business continued to see tremendous growth and market share gains in the department store sector. We've seen market share grow in the bra business to the number five position overall in department stores and number one position in the bralette category. We also have grown to the number two position in panties with strong momentum in the logo bottoms business. In men's, we continue to hold the number one market share position in bottoms and the number two position in tops. Our newest launch in bottoms in the US is the 3-pack micro, which is off to a strong start. Historically, we have not offered micro product in multipacks, but only in singles, and the consumers reacted very positively to this. While the department stores continue to drive the lion’s share of our volume growth, penetration of our e-commerce and growth in these channels continues to outpace the brick-and-mortar trends. Continuing on the solid momentum from the first quarter is our men's sportswear and jeans business, which continued to see improvement from the fall season with better AURs and strong sell-throughs. Women's jeans continues to see outsized improvement through our specialty store accounts like Urban Outfitters and we did see improvement trends across all of our department store businesses there as well. Moving to our retail US business, that remains challenging with our international tourist traffic and spending under the same pressure that we are seeing in our Hilfiger US business. Retail comps continued to remain soft in the second quarter at mid single-digit negative and we are not planning for the sales trend to improve for the balance of the year. Finally, in our Heritage businesses, the Heritage business revenues declined 14%, driven by the ongoing impact of our rationalization initiatives, including the exit of the Izod retail business and the discontinuation of several licensed product lines within dress furnishing. Additionally, our Heritage Brands business was impacted by a shift in timing of our wholesale shipments into the third quarter from the second quarter. Our Heritage businesses continue to track positively against our full-year 2016 financial plan. We are very well positioned in these businesses. Inventories are very clean and our sales orders at wholesale are very healthy. We believe we are poised to post a significant earnings turnaround in the second half of the year. Finally, I'd be remiss if I didn't mention Speedo and its Olympic performance. I would like to congratulate team Speedo on their performance during the Summer Olympics. The Speedo brand was dominant during the games and very prominent to our consumers and we believe this exposure will continue to have a positive impact on our business. Finally, to conclude my remarks, overall, we’re quite pleased with our performance in the first half and believe that our world-class brands, proven business model and best-in-class management teams are well positioned to navigate through the macroeconomic and geopolitical volatility that we've seen, while being positioned hopefully to outperform against our second half projections. And with that, I'll turn it over to Mike to quantify some of the financial results.

Thanks, Manny. The comments I'm about to make are based on non-GAAP results and are reconciled in our press release. Second quarter revenues were in line with guidance with a 5% constant currency increase over the prior year after excluding the negative impact of 1% from foreign exchange. Our Calvin Klein and Tommy Hilfiger businesses had a strong quarter. Calvin Klein revenues were up 15% on a constant currency basis, ahead of guidance and driven by all regions. Calvin Klein International comps were particularly with strong comp store increase of 11%. Tommy Hilfiger revenues were up 7% on a constant currency basis for the quarter, driven by strong performance in Europe, as our Europe comp sales were up 8%, as well as the addition of our China business. Our Calvin Klein and Tommy Hilfiger US wholesale businesses performed well in the quarter and exceeded the plan. However, our US retail businesses for these brands remained under pressure due to continued declines in our stores located in international tourist locations Heritage revenues were down 14%, primarily due to the exit of the Izod retail business and the discontinuation of several licensed product lines in dress furnishings business, as well as the timing of shipment. EPS for the quarter was better than the top end of our guidance by $0.17. The beat was driven by our strong Calvin and Tommy performance for $0.10, a favorable shift of marketing spend into the second half for the year of $0.05, favorable timing on taxes of $0.03 and a partial offset from FX of $0.01. Our inventories were very clean at the end the second quarter, relatively flat to the prior year despite acquiring inventories as part of the Tommy China acquisition. Looking ahead to the remainder of 2016, we're increasing our earnings guidance for the year while continuing to take a prudent approach to planning our business in the second half as a result of global consumer spending remaining volatile and the US retail market continuing to be promotional. In particular, we are now planning second half comp store sales trends in our US retail business not to improve. Specifically, we are projecting our second half comps to be at the same level as our first half trends. For the full year 2016, we are anticipating based on our current exchange rates that we'll be negatively impacted by about $1.60 of earnings per share for foreign exchange, which is $0.05 worse than previous guidance and was primarily driven by the British pound. The $1.60 impact is approximately 85% transaction and 15% translation. For the full year 2016, we're projecting non-GAAP earnings per share of $6.55 to $6.65. If we exclude the negative impact of FX of $1.60, earnings per share growth is 16% to 17% over the prior year. We've increased our earnings per share guidance to $0.10 despite the $0.05 negative impact from FX. Our guidance continues to reflect a prudent view of our businesses for the second half of the year. In total, the second half of the year will include an increase of $40 million versus the prior year on brand marketing as well as investments associated with the recent Calvin Klein Creative leadership changes. Versus our previous guidance, our full-year marketing spend has increased approximately $10 million. Overall, we are projecting full-year revenues to grow approximately 3% on a constant currency basis. This guidance reflects a revenue reduction of approximately $40 million in the second half of the year related to our proposed joint venture in Mexico, which is expected to close late in the third quarter and would primarily impact our Calvin Klein business. Overall, we expect this transaction to be earnings neutral on a non-GAAP basis for 2016. Overall, operating margins are expected to increase 75 basis points on a constant currency basis and decrease 90 basis points on a reported basis. Our Calvin Klein business is projecting revenues to grow 7% on a constant currency basis with operating margins to increase about 50 points excluding the negative impact of FX of 160 basis points. Tommy Hilfiger revenues are planned to increase 5% on a constant currency basis with operating margins planned to increase about 75 basis points, excluding the negative impact of approximately 225 basis points of FX. Our Heritage business is planned to have a revenue decrease of 8%, mostly to the exiting of the Izod retail business and several licensed product lines from in our dress business. Operating margins in our Heritage business are planned to increase about 30 basis points. The impact of foreign currency in Heritage is relatively immaterial. Third quarter non-GAAP earnings per share is planned at $2.35 to $2.40 and includes $0.45 of estimated negative impact of foreign exchange. Excluding this negative impact, we're expecting earnings per share to increase 5% to 7% for the third quarter. Included in our third quarter guidance is increased marketing and investment spend of approximately $20 million versus the prior year. Revenue in the third quarter is projected to increase 3% on a constant currency basis. Calvin Klein and Tommy Hilfiger revenues are planned at 6% constant currency increase while the Heritage business is planned to decrease 6%. And with that, we'll open it up for questions.

[Operator Instructions] And we'll go first to David Glick with Buckingham Research Group.

Couple of questions. First, on the outlet business, can you talk through when you saw the big falloff last year? And why at this point you decided to not bake in any improvement? And then I have a couple followups. Thanks.

Sure, I guess, David, last year, the falloff, I guess, really started late August to September. We'll start to anniversary that right around Labor Day. I guess, from a guidance and projection point of view, it just seemed prudent to try whatever risk might be in the business, the idea was to try to de-risk any of the guidance as we went forward. Given the momentum that we see in other parts of the business, we felt comparable taking that sales trend down. I think just to say it, if we were to see somewhat of a leveling off in that environment, we're well positioned with inventory there to take advantage with it, both from a top line point of view and even more importantly, I think, from a margin point of view as we go forward. So opportunity exists if that channel were to bounce back somewhat in the third and fourth quarter. I think the real opportunity to be, to sum it up, is really the fourth quarter, given the weather issues that we faced last year and the pressure that was put on margins last year to liquidate goods.

A follow-up on denim, that was a big conversation at MAGIC. A number of retailers have talked about, a lot happening, a lot of newness in denim. Clearly, the underwear and intimates is driving your Calvin growth. And I'm really more focused on the Calvin Klein jean business. Can you talk about where you are in terms of some of these trends, whether it's stretch or ripped, destructed, narrower leg openings, et cetera, like how you're positioned in line on the women's side? And do you feel like you're where you want to be to really start to take advantage of what appears to be a fashion trend moving in your direction?

I think there's a couple of stores and some of it is geographic and some of it is men's versus women's. I think, geographically, outside the United States, I think the brand, the Calvin Klein brand in jeans is very well positioned. A lot of innovation really, and we're seeing very strong momentum in the business, both men's and women's. A lot of the fashion issues that you touched on and what's moving forward, be it skinny, flair, stretch, whatever case, we're really on all of those issues and really doing very well with it. I'd be remiss if I didn't mention that the Tommy Hilfiger, our Hilfiger denim line continues to really post very strong results as well. That business internationally, well, in Europe, is larger than the Calvin Klein jeans business there, and we're seeing real real strong growth in that denim category with Tommy Hilfiger in that area. Moving to the United States, the men's business, as I've mentioned a couple of times, is ahead of the women's business both from a fashion point of view and from a performance point of view at departments – in our performance at department stores. I think from a fashion point of view, our fall line really moves us forward on the women's side of the equation and will be well positioned for the back-to-school season and hopefully to capture significant amount of growth in that area. Our retail partners really feel strongly about how the line is positioned and we're starting to see in our order book as we look beyond 2016 and 2017 where our retail partners are gaining more confidence in the line and placing stronger orders as we go forward. So I feel positive about the moves that are being made on the Calvin Klein jeans side of the business. Men's, first and foremost, really performing very well in the US and then women's really seems to be coming on and we'll be able to report better to you as we get into third quarter.

Last question, if I could. You talked about how you're kind of balancing the decrease in footprint in department stores, how this 100-door closure may affect you from, obviously, it'll affect you from a sales perspective, but your thoughts on a possible EBIT impact and then how you're kind of repositioning the organization from a staffing standpoint to grow the Amazon business, which is obviously not the easiest thing to do. But if you can talk to that dynamic, I'd appreciate it.

So I think what's critical, I guess, first, let's start with the Macy's 100-door closure. I think Macy's spoke to it as a net impact of about $1 billion. I think it'll be relatively immaterial to our top line as we move forward as that happens over a period of time. I think it may put a little bit of pressure on top line, but from a profitability point of view, these obviously weren't Macy's most profitable stores and they weren't our most profitable margin stores. So I think the opportunity is to have a healthier presentation and healthier profitability in the brick-and-mortar side of the business. From a positioning point of view, for the last 24 to 36 months, we've been really trying to drive our digital growth, both not only site, but also our partner sites, Macy's.com, our key players there, and also couple – a number of the pure plays globally, be it Amazon, Zalando, Alibaba, Tmall. So those are clearly areas for us. And we have tried to segment our product, make sure that we're well positioned in those areas, significantly investing. I mentioned in my comments the investments we're making from a digital presentation point of view. Clearly, our marketing campaigns have shifted their spend to – well over 50% of our marketing spend now is digital, both for Calvin and Tommy. So I think we're making all the right moves. And we need to be where the consumer is. They want our brands and we're positioned there. And over the next 12 months, we're trying to position ourselves that we're agnostic about where we make the sale, whether it's in our own retail stores, department stores, through their brick-and-mortar or their own e-commerce sites. So that's the way we're positioned. I think we are as well positioned as anyone with our two key brands to take advantage of that.

We'll go next to Erinn Murphy with Piper Jaffray.

I guess, Manny, first question for you is on Calvin Klein. With Raf Simons coming in, can you just talk a bit more about the product, how to look under him? And then I guess the message is towards more unification. Does that change how you’re thinking about your existing Calvin Klein licenses under Raf?

I think for the first time since we've owned the business and we're going to have one clear strategic direction for the brand. And I think you can't underestimate what that will mean to us from a brand point of view moving forward. I think we haven't had that since 2003 when Calvin Klein ran the business. So I have a cohesive view the brand and the product in being able to really take advantage of the collection business to diffuse it down to our white label and bridge lines. I think it'll be a huge benefit for us as we go forward. As far as how that will impact our marketing campaigns and as we move forward, I think, look, that's a work in process. I think what you will probably see is the last two years appropriately so, given the size of the business, disproportionate amount of our marketing spend has gone to Calvin Klein jeans and underwear, and I think as we move into 2017 and beyond, you'll see more lifestyle marketing of the brand that will capture and take advantage of the other product category where we think there is significant growth. So I view this as all very positive. From a licensing point of view, I don't think it changes any of our direction. I think we continue to look to take control of the more geographic components of our brand, where it makes sense, particularly where we have strong operating platforms like we did with the Tommy Hilfiger business in China. We could see that happening both with Tommy and Calvin going forward. And that there's always the opportunity as we move forward to potentially bring in some significant product categories in-house. Those opportunities exist. If anything, I think Raf's presence only gives us more confidence to take it on as we move forward.

And then if I could just follow up on Glick's question on the digital growth, you mentioned in your prepared remarks there's a number of strategies towards [indiscernible] addressing more profitable growth in that channel. Can you just help us then where does that channel fit from a profitability perspective relative to the balance of your business? And then Amazon business, obviously, that's a wholesale business for you, but where is profitably on that spectrum to the [indiscernible]?

Sure, I'm not going to speak to specific customer, but I will just say that our e-commerce wholesale business where we are selling to our pure plays and all – where we are selling to our pure plays and to our department store partners is a very profitable business, consistent with all of our other businesses. The only business that is a challenge for us from a profitably point of view is our own e-commerce businesses, which we're truly running as flagship sites. We don't over promote on those sites. It's very event-driven. We don't do flash sites and flash selling on our own sites. We don't drive excess product through our sites. We really view that as flagship sites where the consumer comes to our sites, be it Tommy or Calvin. They investigate the brand, better understand the brand. They can buy on our sites or we will drive them to our retail partner's sites, or they'll use that investigation to shop in department stores as we move forward. So we see it as a very cohesive strategy that works together. And I think from a pure profitability point of view, the only issue we're dealing with on our own e-commerce sites is scale. As that business continues to grow, we've talked about the kind of growth rates we're seeing, we're 12 months away from going from a loss position on those businesses to a profit position on those businesses. And each incremental sale that we make online is as profitable as an incremental sale in wholesale on our own retail stores. So from that perspective, we truly are becoming agnostic about where the customer shops.

[indiscernible] one clarification on the guidance for Mike. From a sales perspective in Q3, I think it was much better than a lot of us were looking for [indiscernible].

Erinn, we lost you.

We lost you on the much better than...

Can you hear me?

Yes, now we can.

So just [indiscernible] I think a lot of us looked at it up 3%. It would basically imply your fourth quarter sales guidance effectively [indiscernible] your 2% sales guide for the year. So I guess it seems that you could be fairly conservative given the [indiscernible] the offsets the JV in Mexico [indiscernible] going forward...

I think we got it, Erinn. We understand your questions. It's more about fourth quarter sales and how the profits are evolving.

So look, I guess a couple of things. As Manny said in his comments and I did as well, we are looking at the fourth quarter prudently. We are expecting our trends from the first half in our outlet business to continue through the second half. We are taking a prudent view of the wholesale business in North America as well. And then, lastly, I would just point out that there were some very strong fixture builds and launches in the fourth quarter of last year. I believe the comp – the Calvin Klein revenue increase was in excess of 20% in the fourth quarter of last year. So overall, I'd say it's a prudent view of the fourth quarter.

I think, if I could just add, I think the real – look, there could be sales opportunity for us as we move forward into the second half of the year, particularly in the fourth quarter. But the real key, I think, to go forward is overall profitability from a gross margin point of view. Really, I think our department store partners and again this is a focus on North America, they've really heightened open to buy dollars, which is a positive, and I think they're going to be well positioned if we get any kind of reasonable weather in the third into the fourth quarter last year. So I think some years are top line growth years or some seasons, and some seasons are margin seasons. I think this is really a margin season where the opportunity really exists to show dramatic improvement over last year's fourth quarter on the margin line, if we can continue to keep the channel clean from an inventory point of view and if we just get some reasonable weather. So I think it's laying out really well for us and I'm pleasantly surprised about how well positioned our department store partners’ inventory seem to be. They really got under the sales trend and so I feel positive about that as well. So I think we're all well positioned to capture a strong back-to-school season and a strong Christmas holiday season.

We'll go next to Michael Binetti with UBS.

Let me try to ask a little extension of Erinn's question there. I guess, if you could help us isolate how much of the, I guess, the implied revenue down for Calvin, 6%. Can you just help us isolate how much of that in your mind is non-recurring items that are holding back that growth rate in the fourth quarter and the optics that you spoke to so we can start to think about whether 2017 is still a mid to high single digit growth year for Calvin again, just to help us filter through some of the noise.

Look, the Calvin business is strong. So there's nothing that has changed in our outlook as we look forward. In the third and fourth quarter, we are going to – in the third quarter, we'll execute our Mexico agreement, that's predominantly a Calvin Klein transaction. That will move this business from an operating business today to a joint venture. We'll have about $40 million revenue hit in the second half of the year and that's three quarters or more weighted to the fourth quarter.

I guess I would also just say on the – if we're focusing just on Calvin Klein, I don't think we can anticipate 15% constant currency growth for 2017 as we go forward. I mean, I'd love it to happen, but we'll see how it plays out. And when you go forward about a quarter, like any business, there's somewhat ups and downs. We've had such a strong first half of the year. I think there are some timing shifts that we’ve had to deal with on shipping and accelerating shipment with the strength of the Calvin business. I would not lead anything into the fourth quarter sales trends that would any way indicate that either Tommy Hilfiger business or the Calvin Klein business are seeing any type of slowdown against what we're seeing going forward. So I just think it's a quarter. Maybe we're being a little bit conservative, but there's no fundamental changes in the business, no fundamental changes in the sales trends that we see. And I think if you just talk to most of our North America department store partners, they'll tell you how strong that business is despite what's going on around everywhere else.

And then since you're focused on the profitability opportunity on the back half as well, could we get a little bit of color on how you're thinking about grosses for the balance of the year? I think you previously spoke to about 53% with grosses up in each quarter. But the inventories were flat including an acquisition so maybe down, excluding the acquisition grosses are really healthy in the second quarter. Sales momentum to your point is strong. Can we assume that directionally grosses should be up by more on a year over year basis in the third quarter than what we saw in the first half?

Our gross margin view for the year has remained unchanged at 53%. As we move through the third and fourth quarter, we've got a little bit more opportunity in the fourth quarter because comp comparisons last year were just – it was a very promotional quarter. But Manny said it; this is more about the opportunity on gross margin than revenues this year. So we feel there is an opportunity there, but we'll plan prudently at this point.

And I just would say, if I think – just by the way things get recorded, the way things got hit, I think the opportunity is really the fourth quarter from a financial performance point of view, also see a little bit less pressure from foreign currencies, which is principally transactional gross margin related year over year. So just as you look at it sequentially this year to last year, I think the fourth quarter has the opportunity to see the biggest improvement.

We'll go next to Dana Telsey with Telsey Advisory Group.

Can you talk a little bit about the Tommy Hilfiger women's license, how that's progressing, when we should begin to see things from that and also on China and the accretion opportunity for Tommy Hilfiger?

I think, the G-III – actually, in G-III sales, you really start to see it in the fourth quarter. Holiday 2016, they'll start shipping, I guess, there'll be some deliveries beginning of November as they set up. I'll leave it to them; I don't want to start talking about the business for them. I know they're optimistic and enthusiastic about how they see that business. I know the dresses hit the floor – the dresses are hitting the floor and women's suits are hitting the floor earlier. And they're really feeling good about that portion of the business as it relates to Tommy Hilfiger. But I think they're reporting in another few days, I think let them lay it out for you. The transition really is going smoothly. The two companies have worked together very well to make sure from an inventory point of view, there's no carryover merchandise that's going to negatively impact the business. And it really worked well with Macy's, in particular, in our other key department store accounts to make sure that transition is seamless. And I'm very confident about the way that's moving. G-III, what we're hoping for is what they've delivered in Calvin Klein over the last five to seven years that they'll deliver for Tommy Hilfiger and really take a business that's a couple of hundred million dollars and turn it into a $500 million to $700 million business at much higher price points and at better margins. You mentioned China, again, this year with the transition and some of the amortizations and some of the accounting stuff that we have to deal with, it's going to be slightly accretive. I think that business will continue to grow. I think we are going – I guess, we were projecting it to grow high single digits. There's an opportunity to do more than that. But it's a question of how fast and quickly we want to move. Clearly, if you look at the size of the business, round numbers, $140 million to $150 million compared to a Calvin Klein business that's at least twice as large. There's clearly a footprint opportunity for us to grow. And I guess just having the two brands under one roof, under one logistics platform, one operating platform, the synergies should start to come towards the second half of next year in a bigger way. So it'll be a much bigger contributor to profitability next year as we move forward. And it will be a big contributor to our top line growth as well. So I feel – really think that, that will be, probably without a doubt, it will be next year for sure our highest operating margin business in the company for the Tommy Hilfiger brand, very similar to how profitable our Calvin Klein China business is. So as we look forward, we're enthusiastic and I think it'll be a contributor significantly to our top and bottom line.

We'll go next with John Kernan with Cowen.

I wanted to stay on the topic of licenses and potential acquisitions. What other regions are out there, whether licenses are out there that you could potentially bring back in-house? Obviously, the leverage ratio on the balance sheet continues to come down well north of $500 million in free cash flow this year, which is only going to grow over the next couple of years. So how do you think about deploying cash at this point between balancing acquisitions of licenses and maybe deleveraging the balance sheet?

I think, look, we've been pretty transparent about that Asia is the region that we continue to see the biggest growth and the biggest potential opportunity to take back license businesses and to operate businesses directly. Clearly, Korea will be a big market for us. We believe Japan could be a market for us. And Central and Southeast Asia, which would include Hong Kong, Macao, Taiwan, so some pretty substantial markets as we go forward, which should be nicely profitable as we go forward. The key in all of that is Tommy have license expirations, really working hand-in-hand with our strategic licensing partners who've really done a great job in building the brand throughout Asia. The other opportunity will be Brazil. Calvin Klein has a very profitable business there that despite the economic conditions in Brazil continues to be close to 20% operating margin business for us and is about 25% -- the Tommy Hilfiger business in Brazil is about 25% the size of the Calvin Klein business in Brazil. So clear growth opportunity there that we're doing with the strategic partner where we own a little bit over 40% of the joint venture and the ability there over time to bring that in-house will play itself out. So clear opportunities there. And that's really our focus area at this point, the focus areas at this point as far as license take backs.

Then shifting gears a little bit, Tommy Hilfiger International, the comps here have been incredibly consistent since you bought the brand. You're lapping double-digit comps with the high single-digit comps. Help us understand the drivers of this. Is this AUR driven? Is it traffic driven? Are there new stores coming in the comp base? How sustainable are the continued comp store sales increases? How much more productive it can – can your direct business get in Europe?

Look, I think that business, as you said, has been real high performing for us, particularly over the last two years. And then we are putting on comps on top of comps and we're comping on top of double digit comps from last year in certain quarters. As we look at it, we continue to see opportunities. The big improvement in our retail stores has been very healthy women's business and I think that only continues. If you think about the brand in Europe, it is 65% to 70% men's versus women's. And we all know how much larger the women's market is than men's. So that opportunity keeps presenting itself. The productivity in our stores continues to improve and a lot of it is being driven by the women's sales per square foot growing closer and closer to the men's productivity in those stores. So the opportunity is there to continue this momentum and a big piece of it will be driven by the women's component getting better. And as our men's tailored business becomes a bigger piece of the pie and we continue to get strong success there throughout Europe at the wholesale level as we bring that product category into the stores, given the much higher price point, it really – it does wonders for the sales productivity in the stores. The margins are comparable to our sportswear apparel margins and footwear margins. So clearly, the opportunity there is to grow men's tailored in our stores and to grow the women's businesses in our stores. And there's a lot of momentum behind those businesses. So I think we'll continue to see positive comps. I can't talk about double-digit comp store increases, but I can continue to say we'll continue to see momentum. Europe seems much healthier as a market to us. I know all the headlines about Europe and what you see. But as far as the consumers being – spending discretionary money, it's very healthy there. I think the fact that the dollar has strengthened has only made our – the pressure that puts on our US business, I've talked about, the flip side of that is it really significantly helps our international businesses as people travel or people stay closer to home in Europe, within Europe and buy when they're on vacation or on holiday that's really been a big win for us as well. So I think those trends will continue.

We'll go next to Eric Tracy with Brean Capital.

I guess just a point of clarification, in terms of the spring order book, CK up 20% and I believe Tommy up 7%, just to make sure that was Europe? And if so, can you provide the global order book for spring?

Two things. Yes, to confirm, that was Europe. Second, we don't give global order book because most of our businesses tend to be retail based, not wholesale based. It's a misleading statistic, I think. And secondarily, in the US, we never give order books because we just don't believe in laying that out, given the fragile nature of orders in the United States. So there's a lot of momentum behind the business. Nothing has changed, but it doesn't make sense to call those out.

And then just a follow-up on that in terms of Europe, I mean, you mentioned some of the dynamics at play that sort of support that European business. But maybe just a little bit more color both for CK and Tommy in terms of the drivers, is it accelerating on the jeans wear side, just continued strength in underwear, just a little bit more color on that would be great.

On the Calvin Klein side, look, it's more product categories. I don't mean to sound cavalier about it when I say it, is the strength is across all countries, all major countries, all product categories, we're really seeing tremendous growth in jeans and underwear because they're the two largest categories, but our accessory business is also performing very strong there. We've just only recently launched men's sportswear. And the percentages there are very, very high, but the dollars there are small as it starts to roll out. And we haven't done anything with women's sportswear and apparel outside of jeans and underwear at all. So that's really a major opportunity for us as we move forward. [indiscernible] just match up from where we are positioned geographically in the United States and or even in Asia, where Calvin women's represents about 40% of the volume, there's a huge opportunity in Europe for that to continue. Just to remind everybody, the European strategy, first and foremost, was to take a broken Warnaco jeans and underwear business that was in the wrong distribution at – and still basically breaking even. And when you pulled out the bad distribution it was losing money. Our European business today is healthy, growing. You see the international numbers. You see the margins there. So our European business is really contributing significantly. If you use Tommy Hilfiger as a comparison, the Tommy Hilfiger business in Europe is three times the size of the Calvin business. It's the only region in the world where Tommy is larger than Calvin. The profitability is 200 basis points to 300 basis points higher and that has to do with scale. And I think those opportunities as the brand now, the Calvin brand has solidified its position has got a profitable foundation. The ability to take that forward and the enthusiasm that our wholesale partners have for the brand just makes us just more optimistic about this European trend could continue for the next three to four years.

And then if I could switch gears, I mean, Manny, when you think about the US retail business, understandably the currency, tourism challenges, but a little bit bigger picture, as you think about potentially rationalizing some of those stores, is that a fair thing or is it just you really believe the challenges are more cyclical in nature?

I guess, here is the dynamic, the stores we're talking about that are feeling the biggest pain from the international tourist market are also located in areas like Miami, Orlando, New York, Los Angeles that they are by far our largest stores from – and our highest product profitability stores. So I used as a comparison is the Macy's Herald Square is the most profitable department store in the world, I believe. And it's being impacted by international tourism, but it is still one of the largest, most profitable department stores in the world. And not to put us in the same category as Macy's Herald Square, but these stores are our largest, most profitable stores. And I think this tourism will balance out. I'm not going to sit here and say it's coming back. But I do think as we get through the third and fourth quarter of this year, it should level off, and we will continue to have very profitable stores. If you look at our retail profitability, it's as strong as our wholesale profitably. And you see how profitable our Calvin and Tommy North America businesses are, double-digit operating margins, very profitable businesses. So this is just a shift in sales trends. And I think our European business is benefiting from that shift and our Asia business is to an extent and our Latin America businesses, but the US retail business is just such a big component of our sales. We just feel it directly here. Operator, we’ll take the next question as our last question.

And we'll go to our next question from Jay Sole with Morgan Stanley.

Just want to ask about the US wholesale business versus US retail because you mentioned international tourist sales as one reason the US retail business was weaker than the wholesale business. But is there another factor because the difference is pretty stark? What is allowing you to it seems like grow at a such greater rate in US wholesale relative to the peers and also relative to the retail business?

Well, I think there's two things, right. I think fundamentally, it's the two brands. What we’re really talking about is Calvin Klein and Tommy Hilfiger. We talk about all the momentum in the wholesale department store channels in the United States. And I mean, if you talk to most department stores, they'll tell you how healthy the Calvin Klein business is, how it continue to fuel growth be it on the women's side of the floor or men's side of the floor. So I think we do have, with the Calvin brand in particular, a lot of momentum behind the brand. We've been able to take advantage of some of the weakness with some of our competitors to grow square footage and to gain market share in that channel. So I think we are outperforming. We positioned ourselves and I don't believe we've overextended our brands in that channel of distribution where other players have talked about that they’ve overexposed and we've been continuing to grow, but I think we've been doing in a very healthy way. We're in categories that department stores really are focused on growing, women's and men's, and we've been a solution in both of those areas. With the Tommy brand, with Macy's, it continues to perform very well for us on the men's side of the floor. And now with the G-III initiative, Macy's has really gotten behind the brand and the things that really can make up for some of the market share losses that they've had with other brands. So I think we've been better positioned. We know where we play in the US and understand that market positioning and it has worked for us even in difficult times like last year's third and fourth quarter. Our two brands really outperformed the competitive set. And I think that's what's paying off for us now as we move forward. I hope that explains it. And with that, we're going to close our call. I thank everybody for their attention. We look forward to speaking to you in December about our third quarter results. And I wish everybody a great Labor Day. Have a nice day. Thank you.

This does conclude today's conference. We thank you for your participation.