Manny Chirico - Chairman and CEO Mike Shaffer - CEO Dana Perlman - Treasurer and Head of Investor Relations Ken Duane - CEO of Heritage Brands and North America Wholesale

Bob Drbul - Guggenheim David Glick - Buckingham Research Group Erinn Murphy - Piper Jaffray Michael Binetti - UBS Ike Boruchow - Wells Fargo John Kernan - Cowen & Company Lindsay Mann - Goldman Sachs Dave Weiner - Deutsche Bank Matthew Boss - J.P. Morgan

Good morning everyone and welcome to the PVH Corp’s Third 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 November 30, 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 third 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, Matt. Good morning everyone. And thank you for joining us on the call. Joining me on the call is Mike Shaffer, our Chief Financial Officer; Dana Perlman, our Treasurer and Head of Investor Relationships; and Ken Duane, who runs our North America Wholesale Businesses. Overall, our performance year-to-date and through the third quarter continues to exceed our expectations, and demonstrates our ability to deliver against the 2016 plan despite the ongoing macro environment. Overall, we have a terrific quarter with revenues increasing 5% on a constant currency basis, while EPS grew approximately 15% on a constant currency basis. The momentum across our Calvin and Tommy Hilfiger International businesses continued during the quarter. Our Europe and China businesses continued to be our healthiest markets, along with our North America wholesale business. The strength has been seen across all channels of distribution; wholesale, retail, and our digital channels. Speaking of digital, for Q3, we continued to generate revenue growth in access of 20%, and this channel continues to be our fastest growing distribution channels. The one challenging part of our business continues to be our U.S. retail businesses in third quarter. We did not see improvement in comp store sales trends from first half trends. Specifically, international tourist traffic and spending continues to weigh on our U.S. retail business. However, as we moved into the last two weeks of November, we have seen a significant improvement in comp store sales across all of our U.S. retail businesses. Let me move onto our brands, speaking about the Tommy Hilfiger brand. We have previously discussed with you, Gigi Hadid as our global ambassador for Tommy Hilfiger's Women's; representing apparel, footwear, accessories, and fragrance. And the reaction in brand awareness that she has helped to bring to our brand over the last few months has been terrific. This initiative reflects the brand’s strategic commitment to expand our women's businesses globally. We believe that we've a significant growth opportunity in women and we're encouraged by the improvements and positive momentum we're seeing globally in this full holiday season. Financially speaking, overall revenues for Tommy increased 6% on a constant-currency basis, and EBIT was up about 12% on a constant-currency basis. Our revenues were driven by the outstanding performance of our international business, which generate 18% constant-currency sales growth in the quarter. The Tommy Europe business performance was incredible, and it continues to highlight the strength of the brand in our largest region and highlights the market share gains the brand continues to achieve. We continue to see very healthy performance in all major European markets in the third quarter, demonstrated by a 10% comp store sales increase in Europe for our retail business. This strong performance has continued into November along with very strong margin. Again, we are pleased with the strong wholesale performance that we're seeing as our full holiday season to-date is up about 6%. Looking out to spring 2017 season, which starts to ship in the fourth quarter, our spring order book is running up 8% versus the prior year, which is ahead of our previous guidance of about 7%. Moving to Asia, our Tommy Asia business continues to perform well, led by our recently acquired China business, as that business will be on track to be accretive for this year's earnings despite the increased marketing dollars we have put into the China market to support the long term growth of the brand going forward. Moving to our North America business, Tommy North America continues to see a really strong men's wholesale business, which has continued to outperform our competitors, not only in the third quarter but throughout the entire year. We have now handed off the women's business to G3 and expect to see strong growth going forward for men as our licensee. Shifting to retail, as I mentioned, in the third quarter we continued to see challenging sales trends with our comps down 11% in our U.S. stores. This trend continued into the first week -- two weeks of November, however, we did see a significant improvement in comps in the last two weeks of November with overall fourth quarter comps to-date down mid-single digits. This stronger selling which is being driven by higher AURs, coupled with our healthy inventory position, has the potential to generate higher than planned gross margins in the fourth quarter. Moving to Calvin Klein, overall, we continue to see great momentum within the Calvin Klein brand and our business more broadly. The brand continues to drive relevancy with strong digital advertising campaign and by enhancing and diversifying our distribution of the brand to a number of key specialty stores in the U.S. and Europe. Over last quarter, we continue to see our awareness levels, and willingness to purchase metrics continues to improve in all major markets. As an update on some product initiatives, generally speaking, our scope to jean launch before has been well received across all markets where we have seen strong sell-throughs, higher AURs, and better overall margins. Our full launch in tailored bras was seductive comfort with lace where we took our best-selling seductive comforts silhouette and added lace, and have seen a great reception to-date around the globe. We have also expanded our size scale offering in the U.S. to include extended sizes of size 40DDD. These additional size bands of 36 to 40 have the potential to represent 25% to 30% of our total U.S. bra business. This represents a significant market share opportunity for us going forward. For men, we introduced our liquid stretch product, which provided the utmost comfort in a great new innovative stretch fabric and takes advantage of the active trend that has happening the market. From a financial perspective, revenues for Calvin increased 10% on a constant currency basis, and EBIT was up 9% on a constant currency basis. Our revenues were driven by strong top line growth out of Europe, China and North America Wholesale across all classifications with continued strong gross margin performance. Calvin Klein Europe’s performance continues to show incredible improvement year-over-year, and quite pleased with the progress of the business and where we are headed. The wholesale business continued its strong performance with full holiday 2016 sales up high-teens. This momentum is accelerating as we move into 2017, as our spring order book now is running up over 20%. Our European retail business continues to gain momentum with third quarter comps running up mid-teens, and the sales trend has continued into the fourth quarter. The strength of the European business is coming from all major markets and across all product categories with an acceleration in both jeans and underwear categories. And we have also seen strong growth in some of our new product categories, particularly accessories. Our Calvin Klein Asia business also continues to perform well, with China outperforming all other markets. We continue to see strength across jeans, underwear, accessories and our newer performance at leisure business within Asia. Moving to North America, our Calvin Klein North American business continue to see healthy growth across our wholesale channels in line with our plans which reflected lower open to buy dollars from retailers versus the previous year. I’m pleased to report that we’re continuing to see strength across all categories from our dress shirt business to sportswear, jeans, and certainly our underwear business, led by continued momentum in our women’s intermits business. Shifting to retail, as I commented on our Tommy Hilfiger North America retail results, we did not experience any improvement across our U.S. retail business at Calvin with overall comps down about 5% for the third quarter. This trend continued into the first two weeks of November, however, we have seen a significant improvement in comp store sales during the last two weeks of the month with fourth quarter comps to-date flat to last year. Finally, our Heritage business revenues were down 8%, driven by the ongoing impact of our rationalization initiatives announced in 2015, including the exit of the Izod retail business and the discontinuation of several licensed products within dress furnishings. Our Heritage business has continued to track possibly against our full year 2016 financial plan with operating margins improving 90 basis points for the quarter, driven by improved wholesale performance and a continued strength in our Van Heusen retail business with third quarter comps up 6%. Specifically, we continue to see solid performance across all of our Heritage businesses with the exception of our neckwear business, which has been soft for the entire year. Looking at our outlook for the year, we are increasing our earnings guidance for the year, while taking into accounts impact that the strengthening U.S. dollar will have on our reported results. We are being prudent in planning the fourth quarter holiday season, which we expect will be remain highly competitive. We also believe that geopolitical uncertainty has intensified, post the U.S. elections, which will drive microeconomic volatility. Given this backdrop, we believe it is prudent to be conservative with our financial projections for the fourth quarter as we move out. And with that, I am going to turn it over to Mike to quantify our third quarter earnings and our outlook.

Thanks, Manny. The comments I'm about to make are based on non-GAAP results and are reconciled in our press release. Third quarter revenues were up 4% versus our guidance of up 3%. Our Calvin Klein and Tommy Hilfiger businesses had a strong quarter. Calvin Klein revenues were up 10% on a constant currency basis, ahead of guidance and driven by all regions. Calvin Klein International comps were particularly strong with the comp store increase of 7%. Tommy Hilfiger revenues were up 6% on a constant currency basis for the quarter, driven by strong performance in Europe, as our Europe comp sales were up 10% and the addition of our China business as well. Our Calvin Klein and Tommy Hilfiger U.S wholesale businesses performed well in the quarter and exceeded the plan. However, our U.S. retail businesses for these brands remained under pressure due to continued declines in our stores located in international tourist destinations. Heritage revenues were down 8%, primarily due to the exit of the Izod retail business and the discontinuation of several licensed product lines in dress furnishings business. EPS for the quarter was better than the top end of our guidance by $0.20. It was driven by our strong Calvin and Tommy performance, as well as favorable taxes and interest of approximately $0.15. And a timing shift in marketing spends into the fourth quarter from the third quarter of $0.05. Our inventories for quarter were very clean at the end of the quarter, and were down 6% versus the prior year. We have increase the EPS guidance by $0.15 at the top end of our previous range and $0.20 at the low end of our previous range before a $0.05 negative impact from FX. For the full year 2016, we are increasing our non-GAAP earnings per share estimate to $6.70 to $6.75. If we exclude the negative impact of FX of $1.65, we have earnings per share growth of 18% to 19% over the prior year. As I mentioned, for the full year 2016, we're anticipating, based on current exchange rates that we’ll be impacted negatively by about $1.65 of earnings per share for foreign exchange, which is $0.05 worse than previous guidance. The $1.65 impact is approximately 80% driven by transaction and 20% driven by translation. Our guidance continues to reflect the prudent view of our business for the fourth quarter as a result of global consumer spending remaining volatile and the U.S. retail market continuing to be promotional. Overall, we are projecting full year revenue to grow approximately 3% on a constant-currency basis. Overall, operating margins are expected to increase approximately 75 basis on a constant-currency; on a constant-currency basis, as it decrease approximately 80 basis points on as reported basis. Our Calvin Klein business is projecting revenues to go 8% on a constant-currency basis with operating margins to increase about 50 basis points, excluding the negative impact of 160 basis points of FX. Tommy Hilfiger revenues are plan to increase 5% on a constant-currency basis with operating margins plan to increase about 110 basis points, excluding the negative impact of approximately 220 basis points of FX. Our Heritage business is plan to have a revenue decrease of 9% due mostly to our exiting of the Izod retail business and several licensed product lines in our dress shirt business. Operating margins in our Heritage business are planned to decrease about 30 basis points. The fourth quarter non-GAAP earnings per share is planned at $1.13 to $1.18, and includes $0.23 of estimated negative impact of foreign exchange. The fourth quarter will include an increase of $25 million versus the prior year in brand marketing, as well as investments associated with the recent Calvin Klein created leadership changes. The $25 million increase includes the shift of $5 million of marketing from the third quarter into the fourth quarter versus our previous guidance. Our full year marketing spend remains flat to the previous guidance. Revenue in the fourth quarter is projected to increase 1% on a constant-currency basis; negatively impacting revenue in the fourth quarter is a 2% reduction resulting from our transaction to form a joint venture in Mexico, which primarily impacts our Calvin Klein business; and licensing our Tommy Hilfiger North America’s wholesale business to G3. Calvin Klein revenues are planned at 3% constant currency decrease; Tommy Hilfiger revenues are planned at a 5% constant-currency increase; while Heritage revenues are planned to decrease 3%. And with that, we'll open it up for questions.

Thank you [Operator Instructions]. We'll take our first question from Bob Drbul with Guggenheim.

I guess the first question I have, Manny, is on the expectations for Calvin Klein North America. When you look at the expectations for the fourth quarter, comparisons that you're facing in. And can you elaborate on that a bit, as well as we look to 2017, the expectations for the sustainability of the strong performance you're seeing so far this year?

Yes, look, I think it's, from the beginning of the year, we’ve really focused on, in the U.S., that the fourth quarter in 2015 had a significant amount of fixture sale associated with the, particularly the expansion of our underwear and our jeans business, and our women’s intimates business. As we really, in that fourth quarter, we were getting such substantial growth throughout ’15, we really were in position now to fill the fixtures in as we came out of holiday season into that January period. So there was, from a regular price point of view, there was a significant amount of department store sales, and there was also in the off price channel a significant amount of fixture still going on there to service that channel, as well as the demand for the product continue to improve. That happened once, and now unfortunately, we’re up against that as we move forward. That’s the biggest issue we’re dealing with, that’s been factored in, from the beginning of the year, I guess, now as we move into the fourth quarter gets more highlighted. And also get in any way it puts any limit on those as we go forward into 2017. I think our growth internationally will continue to be very strong. And I think there’ll be some carry-over of that into the first quarter of 2017. But I don’t believe it will have any significant impact on our overall annual results for Calvin. There’s just too much momentum going on with the brand and too much push forward of goods that I just feel we’ll just overcome that.

Can you also talk about how you’re planning for the business in Russia?

Well, actually in Russia, I mean things have gotten -- again, it's all relative, but things have actually gone better than they were over the 12 months prior. So, we’re actually seeing business stabilize, and we’re -- it’s actually growing in the spring 2017 order book probably mid to high single digits. So, it’s a very profitable business for us, the way we operate it, and it seems to be on track. Obviously, there is currency issue there and it’s a bottle in the market. But right now, it was much more of a challenge first half of 2016 than there is now.

And I guess one last question. Manny, can you talk about what you’ve learned with your Amazon relationship on a global basis with the businesses that you’re partnering with them?

What we’ve learned, I guess, two things that we’ve learned; one is that Amazon does a great job of selling core products. And so replenishment in core products, which we have a fair amount of in our product categories, that was exceedingly well for us and continues to be a big growth opportunity for us with them. The second piece is that in North America there is a whole learning process that’s going on with their business and how we marketed, how fashion gets to be sold. They’re learning and we are learning what works well with their customers. It’s a nicely profitable channel of distribution for us. And I don’t like to speak about the Amazon in specific, but our dotcom business, be it a direct dotcom business or our brickandmortar.com business is by far off fastest growing business.

Next we will hear from David Glick with Buckingham Research Group.

If I could just kind of build on Bob’s question about the revenue growth. There is a lot of puts and takes this year in the Heritage business. You’ve got the Mexico joint venture, et cetera. Do you see that the Tommy and Calvin business growing in that mid to high single digit range in constant currency? And do you feel like you’ve rationalized Heritage business to the point where you could see overall mid single digit overall revenue growth going forward?

I think on a constant currency basis, when you take the noise out of any -- the licensing next year, we’re going to have the licensing of the Tommy Hilfiger North America women's business to G3, which we think, overall, is a big opportunity for us, both as our present at retail but also from, even a profitability point of view, given the confidence that they seem to have in the business and our retail partners have in the business, we think that’s a big opportunity for '17 and importantly for '18. So, I think taking those kind of ins and outs that, there is no reason that we shouldn’t be growing Calvin and Tommy in that mid single digit range overall to high single digits on a constant currency basis. And Our Heritage businesses, like always, we manage those business from a profitability and cash flow point of view, those would be flattish to low single digit growth we move with North America retail. I think we have talked about 4% to 6% mid single digit growth overall for PVH on a constant currency basis. We see no reason why that should change.

And that leads to my next question, you mentioned constant currency, obviously, you talked about the volatility you’re seeing in a lot of different aspects of the markets, including currency. Given where our rates are today, what sort of headwinds do you see to your revenue and earnings growth, given where rates are at the momentum going forward? Thanks.

I am not going to do -- we’re not going to do guidance today for 2017. But I think you can use as a basket of currencies, which I think is pretty representative, the U.S. dollar year-over-year, post of election, it's up somewhere in that 6% to 7% range on overall currencies. And that, depending where they move and they’ve been unbelievably volatile the last month and a half, that will have an impact. And our international business represents 55% of our overall profit. So, that’s something that we are watching very closely as we move forward. But I think when you really get down and look at the fundamentals of the business and the profitability levels and what's happening with our two major brands is our international growth has just never been better than it is right now, and the performance of that. So, I am pretty optimistic about the future. But again, we’re going to have deal with where this is all heading. And it's, as I said in my comments, it's just a very volatile situation with a lot of uncertainty not only around the U.S. elections but we’ve got a number of European elections coming out in the next six months that could also have impact. And it's just an area we’ve been managing for the last three years and we’ll continue to manage.

Our next participant is Erinn Murphy with Piper Jaffray.

Could you talk about how the non-tourist versus the tourist stores performed in North America during the third quarter? And then I guess as you have seen the North American trends improve over the last couple of weeks, what has been driving that improvement? And then have you seen a gap between non-tourist and tourist stores narrow?

I think the short answer is yes, we've seen the gap narrow. I think there's so many factors, and I don’t want to play where demand in the third, the end of the third quarter into the early fourth quarter. But it was, as much as at that point in time it was just even more mild than it was the year before, and I think that impacted business to a degree. And it was part of the rationale that we said let's move -- let's hold some of our marketing dollars in the third quarter, and use them when we think the consumer will actually be shopping, we’ve moved out into November and December $5 million, and clearly that had a positive impact on trends as well in North America. So the bigger benefits this year has been our domestic stores, but also we've seen an improvement in our international tourist stores. And if you think about where the trends had been for the first two weeks of November, for Calvin now to be flat, we had a very strong pre-Black Friday post-Black Friday business both in Calvin and Tommy compared to trends. And the best part is I think we've been really good at managing inventories, and how we've really focused on that area. And we're really seeing it flow through on the gross margin line, even more so on sales line. So, I think we're really well positioned in the fourth quarter. I'm really optimistic about our businesses.

And then just in Europe, it seems that the momentum in Calvin Klein is really broad based across denim underwear accessories. I guess, at what point can you start to push the envelope with new category opportunity, such as sportswear? And then how big you see that opportunity overtime?

Look I think it's -- Calvin today in Europe, is about $550 million to almost $600 million business. But to compare that to Tommy, which is about a $1.7 billion in sales. I think there's the opportunity long term to match Tommy pretty close to it since Europe is the only region is Tommy is larger than Calvin. But I also think that in the next three years, we don't see any problem getting to a $1 billion in sales in the European market. I think sportswear, men's, there's a huge opportunity for us. And I think again that would be really healthy margins as we go forward. And the women's opportunity, given the Calvin DNA, is even significantly larger for us in Europe as we go forward. And listen it's early in the -- with Raf Simmons joining us, but Raf has been really an amazing women's designer. I think he's going to have a significant influence on Calvin overall. And I think that just bodes well for our women's businesses as we go forward. It's just influence that I don't think we've had in the Company. And clearly, our expertise, as a Company, is stronger in men's then women's; I think bringing Kim and his entire team onboard will really enhance that opportunity for Calvin.

And then just last one from a macro perspective. You've already referenced some of the uncertainty with some of the European elections coming forward into next year. There's been a lot of chatter with Italy recently, just with the upcoming referendum vote on December 4th. Can you just level-set the conversation and remind us how much exposure you have to Italy? Thanks.

Well, I guess, Italy represents about in consolidated basis 2.5% of our sales. It's a strong market for us, particularly Calvin, which has a long heritage there. And I think our business there right now is doing very well. So, yes, it’s something we’re watching, that election I think is the, again, I think that’s the first election we’ll see and how that might play itself out and what the impacts of that might be. But it's less -- the market is smaller than the UK, which is well a little bit over 3% but 2.5% of our consolidated sales.

We will now hear from Michael Binetti with UBS.

Let me ask two quick modeling questions, and then I have a follow-up. We get a lot of great color on the parts of the business to look forward to a bit here, but the one blind spot we have right now is North America wholesale out over the next few quarters. I know North America order books are probably to change. But any color you can give us on the forward look you have there, and what really help with the model over the, I guess, the near-term. And then the second modeling question is just as we look at the gross margin into 2017, it seems like that should exit the year with pretty strong momentum, given what amounts have taken out product margin basis to get to what you delivered in third quarter and what you’re guiding to in fourth quarter, knowing that FX rolls off here, or should get stronger. I mean that should really enter '17 from a fairly strong position as well. Am I right there?

Mike, I guess, I would agree with you, just in concept, I’m not going to go into that specifically. But if you think about whatever you just saw at the group to project next year sales growth. I think second half sales growth will be stronger than first half sales growth, mainly in the Calvin Klein North America business. Because of the lot of the fixtures sales and fall brands that went into effect this year, that our anniversary, but that big top-in, particularly on those Ezi core base programs we’re are significant in our big money makers for us as we go forward. I think in the first half of the year, the opportunity is greater, from a gross margin point of view for the reasons you pointed out is that, not only us but I think everyone, will come out of fourth quarter in much cleaner inventory position, just given the fact that we went into the third -- we’re going into the fourth quarter with 6% less inventories, and projecting overall sales growth to the business. So, I think that will bode well from margins as we go forward. And some of the costing benefits that we’re seeing in the first half of the year, I think, margins continues to be -- will continue to be improve. And I think that will be more of the first half story, where I think sales will be more of -- little bit more of the second half story next year when you’re thinking about modeling.

Let me get to the follow-up, so we have, I guess, two different stories going on as we look through the model here on the top line, and I’m trying to reconcile. It's a significant momentum under the business as you guys are focusing on with Calvin and Tommy, but then you have this, the reported revenues that are lower than you would think on that momentum in those instances. You guys have done a great job staying on the balls at your feet with the portfolio with the transaction this year. But are there some areas that come under the microscope as you guys start doing your mid-range planning here, in specifically like how do you look at the U.S. store fleet. It’s been a while now that they’ve been under pressure. It looks like the drivers that caused that pressure a few years ago are starting to flare up, again. I know you guys de-risked the inventory position there to protect P&L this year. But do those stores still have a long-term economic return opportunity versus hurdle rates that you guys target for your business today?

With the two big brands, Calvin and Tommy, we have no stores than our money losers in the fleet that are not marketing vehicles, like our flagships stores in New York or Miami. So, absent those stores, which are critical for the brand perception, our retail business is continued to be one of our most profitable businesses. So the challenge we’re facing is, as you rightly point out is, the business that was so strong in '13 and '14 is been under pressure, but that pressure was still double digit EBIT margins on a fully allocated basis for our two big brands as we go forward; so very happy from a profitability point of view. I think you also rightly pointed out that we are starting to really lack a lot of the pressures that we saw from the U.S. dollar strengthening where, particularly the euro and Brazilian real, and Canadian dollar being down anywhere from 15% to 30%, and really having to deal with that in '14 and '15, that was really pretty. We’re expecting that to subside as we go into the fourth quarter, and I think that’s part of some of the improvement we’ve seen in late November early December. I would like some more time to see that and see where we’re going. And the dollar pressure so far that we’ve seen happening in the businesses is not nearly to the levels we saw before. So that means that all work itself out and to be honest, Mike, some of this is just so recent. I mean, when I was on the fourth quarter call, the euro was $1.13 and today it's $1.06, so down 6%-7%. It's all of a month old -- a month and half old. So we really got to get our arms around a little bit more and understand what the impact of that might be as we move forward.

And our next question comes from Ike Boruchow with Wells Fargo.

I guess just on the gross margin line, so very strong Q3 and sounds like that should continue into Q4. First, just wondering if you could maybe give us what the negative impact to gross margin was in Q3 due to FX? And then just more broadly, just curious how we should think about the gross margin improvement you’re seeing in regards to geographic mix versus maybe sell-through improvement in pricing?

I’ll let Mike answer.

So in the third quarter, we were about 370 basis points of impact due to FX. And as you think about the fourth quarter, what's going to happen to the year, the fourth quarter is going to be the strongest quarter. All our businesses will have gross margin improvement in the fourth quarter, and it will be the strongest quarter year-over-year growth in terms of gross margin.

And I guess the second part was…

Sell-through improvement versus pricing…

Yes, geographic sell-through, and look, the Europe is just on fire. I mean -- and so sell-through is just been spectacular. So nothing compares to what's going on in Europe, particularly in Calvin but also in the Tommy business. How much of that is the global environment, I think, a piece of that is also European sustain, holding steady in the European market to shop, everyone is concerned about Brexit rightfully. But our UK business, post Brexit, has never been stronger. And I think that’s a reflection on the fact that the euro strengthened against the British pound. Obviously, the dollar strengthened as well. And I think people are just viewing that as this is a great place to shop and really get value for their dollar, or their euros. And that business is just been off the chart strong. So, I think, as much as we see a negative impact in the U.S. in our own retail stores, the flip side of that is we really benefited in our European stores overall.

And I will just say that when you think about the growth as Manny just described that faster growing internationally, that comes with higher gross margins. It does have higher expense but also higher operating margin. But the gross margin is really felling it both performance wise and benefiting to mix as well.

And then there's a really quick follow-up, Manny, it's good to hear about the quarter-to-date improvement in the retail business as you've seen. I am not sure if I missed this. But can you comment on what's baked into your Q4 guidance on the domestic comp performance. Are you assuming that it was a continuation of first-half trends weaker, are you assuming that it does improve and hold that improvement?

We were, I guess -- look I'll be very specific. We were planning Calvin Klein at low single-digit negative comps. They're flat. And Tommy, we were planning at high mid single-digit negative comps in there, they've improved to mid single-digit comps. So, the trends have gotten better in both businesses.

[Operator Instructions] We will now hear from John Kernan with Cowen.

Can you just talk a little bit about the outlook for SG&A spending? Obviously, third quarter saw a big investment in marketing SG&A dollars grew double-digit year-over-year. You're guiding them up pretty significantly for the fourth quarter. Does this -- do you expect this to continue into next year? And is this the sector that you’ll expand your operating margin next year, which I think the consensus is assuming will happen?

Well, I think there's two things going on, John, that you really think about is one is, we are stepping up our marketing spending overall. And in the second half of the year, we reached $40 million, so that's the number. We'll anniversary that again next year and then in the first half there'll be some additional spend on top of that as we anniversary this spend. And we also have a full year impact of the creative direction that's going on and change in creative direction is going on in Calvin Klein. But I really think a bigger part of the SG&A movement is mix of business. Our European and our China, and all of our international businesses come with higher overall SG&A expenses, probably in the tune of 1,000 basis points but also come with higher gross margins for those businesses. And then overall, we bundle together probably 100 basis points higher operating margins put together. And our international businesses of Calvin Tommy are growing substantially faster than our North American domestic business. That mix of business and SG&A growth is going to continue. And I think you just have to keep your eye on s constant-currency basis on operating margins overall. So, that's a significant piece of what's happening.

And then just if we go back to the North American wholesale channel, one more time, can you just help us understand what a sustainable growth rate for the Tommy and Calvin looks like over the next two to three years? It's obviously some high profile department store door closures over the next year, and there'll be more in the future. So just wondering if I…

John we don't get -- just not getting into slicing and dicing. We don't get into talking about department store growth, or whatever. I mean we give a substantial amount of information; North America, EU, International and where we are. And I think it's also, what's going on at brick-and-mortar as that continues to shrink as a base. The real growth has to be market share gains. But at the same time, the digital space continues to grow, and all has to be balanced together. So, I think we’re really looking at it, from an Omni-channel point of view. Overall, I think, when you look at North America, North America is not going to be it’ll be always fast as our international businesses will given the dynamics. So, I think you have to just factor that into your model.

And we will hear now from Lindsay Drucker Mann with Goldman Sachs.

My question was on, with some of the dynamics shifts we’re seeing in department stores, whether it's a evolution how they’re thinking about their inventory buys, or maybe their own footprints. I was curious is the way that you were doing business with that, or they are trying to do business with you is also changing?

Look, I think everybody is -- and speed is becoming more and more critical, and our ability to service that department store base, and react quicker to it. It’s not only the department store base, but it’s also our own retail stores. And our size and scale gives us that flexibility. And clearly we’ve been making significant investments in supply chain, logistics systems. So, it’s really -- that’s where the pressure points are coming. And the companies that can’t address that are the ones that are going to struggle. So, changing calendars, trying to make decisions later in the cycle, trying to get build more flexibility into the cycle, that’s all critical as we go forward. And that’s an ongoing process. It cost dollars to do that, but to payback on that is significant.

And then on Calvin, you talked about some of the potential opportunities for Raf. I know it's early. If you could -- is there any other way that you could give us sauce on how your assortment might evolve? And maybe, specifically, on the women’s business, how the interplay between your women’s business and G3 might evolve?

Okay. I think -- look Raf Simons from a -- to Calvin Klein is a game-changer. It has opened doors and has expanded the brand’s reach at the highest channels of distribution. That has to be good for every business as we move forward. Bringing that credibility to the brand in the collection area, and the expertise that come with the team that Raf has brought-in to enhance, particularly the women’s business, and the opportunity there is significant. Now, he’s been here, I guess, now it’s three months. His first show is February 10th. We’re all excited about it. The buzz is going to be amazing. The retailers’ commitments from, Barneys and Stack and Lehman’s to the line and the ability for them to obtain the line has been great. And I think that hallow effect has to be significant. Coupled with that, as these develops more innovative product, the ability to take that, defuse that line is down to our bridge. And the inspiration that I’ll give to our bridge businesses, as well as our white table businesses in North America and in Europe. I think will also be a significant opportunity. But we have to deliver against all that. So right now it’s great words. The momentum feels fantastic. But in fairness Raf hasn’t shown anything yet to the market. And I think as he has said to me, people talk too much before they deliver against what they’ve committed to. And let me deliver and then we can talk about what it means. So we’re enthusiastic, optimistic, and committed to that business and we think it really will pay dividends for us, and we have to deliver against that.

Our next participant is Dave Weiner with Deutsche Bank.

So, I just had two quick questions, the first, I was wondering you give a little color about what you’re seeing in your accessories business. I think you mentioned a little bit but maybe just a little bit about how that is trending and maybe where you see that business going, especially on the Calvin side? And then also on China, if you could just maybe give a little bit of an update on what you’re seeing there with some mix trends depending on what type of company has reported. But it would be interesting just to get a little more color about what are you seeing in China. Appreciate it.

Let me speak with China first. I think China, depending where you sit in the market, is a mix story. The high -- if you are a luxury brand, I think you’re feeling pressure in that market. And I think China and Hong Kong market, surrounding areas, has been under more pressure. Both for Calvin and Tommy we tend to see the net premium space. And we’re benefitting from that. Tommy is at an earlier stage of development, and Calvin has been in China for a longer period of time. So, Calvin -- Tommy, we believe has a significant opportunity. Today, it's much more of a men's sportswear business, and we believe that it gives us a significant women's and denim opportunity in China for the Tommy brand. So, I think we’re going to continue to just see growth with the existing businesses that are in China. The Calvin, the brand is arguably one of the strongest brands in China with amazing consumer recognition, and ability. And we’re really taking the brand to places where it hasn’t been before. It's really been a jeans underwear play, accessories now becoming more and more meaningful, sportswear as a future opportunity will become more and more meaningful as we go forward. And I think the women's opportunity there continues to be a significant opportunity for us. Lastly, we’ve seen at the beginning some real momentum in our performance at leisure business. They’re running directly throughout Asia and in China, in particular. And the trends that we’ve seen here in the states with that category has been, I’ll say, it's clearly mature in here, but in China it's probably three or four years behind that trend, and that -- it's just starting to get more and more exclusive as a category. And I think we’re well positioned to capture a significant portion of that market as it happens as a fashion brand that will be placed well there. So we’re excited about what that might mean. So, I hope that gives you enough color on China. And accessories, overall, I have always talked about it. Calvin is a lifestyle brand. It's not case fade and it's not cold shore, might import that’s really an accessories driven business. So, relatively speaking, we have a small accessory business. But it's growing very fast. And as you know the accessory business carries a much higher gross margin and operating margin when it's done right. So, the opportunity is there for the Calvin Klein brand. I don’t think it's -- we're not going to be telling this as big, it's huge accessory play globally. But we think it could continue to be a significant growth vehicle for us given that, on a relative basis, it's still a very small business.

And if I could just one quick follow-up, back on China, regarding, margins. I think yesterday on Cramer you mentioned higher operating margin -- or higher margins in China geography. Were you talking about gross margins or operating margins or both, and kind of how significantly higher are those?

I was talking about both, and just specifically on operating margins, it's at least 100 basis points higher.

And our next question comes from Matthew Boss with J.P. Morgan.

So, on the margin side, excluding FX, your guidance this year implies almost 12% EBIT margins. So, Manny, what's the best way to think about a long term target? Is it still 13%? And just if you ranked the brands, where do you see the biggest opportunity from here?

At these currency levels, it's -- I think 13% is a good place to really think about where we could go, and one step at a time. Given the pressure that since apparel product around the world is more in U.S. dollars, there is pressure that's been put internationally on gross margins. We've been able to pass along some of that -- some of that impact, but not all of it. So I think that's the difference. So let's say where we potentially could have been two years ago, where I said the number was more or like 15% overall for the Company. So I think 13% is a good place to be. Obviously, both Calvin and Tommy have the greatest opportunity. I think Calvin will be slightly higher than Tommy given just the mix of business and where it comes from. So hopefully that gives enough color.

And then just a follow-up on the Tommy side, can you talk about any underlying improvement, potentially in North America, maybe beneath the surface. Just how to think about maybe any potential halo impact that you're seeing from the new marketing campaign?

Well, look, I think, we're clearly seeing it. Now it's a question of how sustained, is it sustainable, where we are, the overall market, all of those good things. But as I said on Cramer last night, I guess, on comfortable quoting and because he said it on public TV is Terry London said the Tommy Hilfiger business that mace is on fire. It's our biggest customer and it's an exclusive relationship in a number of product categories. So I think that just a piece to it, so the kind of momentum we're seeing and it's momentum that's really being driven by more units selling but also higher AURs across the board. And then just if you just think about, from a pure profitability point of view, the opportunity for G3 which they've called out as long term $1 billion women's business, but let's just say it's $500 million opportunity over the next three years or so. They're taking over a business that did a little bit over $100 million. so that's a huge opportunity at 100% gross margin rates as a royalty business, healthy royalty rate. And we're planning that business at sales minimums. So if they outperform, which they expect to, that's applied for us in second half of '17 moving into '18.

Great. Best of luck.

Okay, with that, we're going to call it a call. I appreciate everybody's time. I'd like to wish everybody a happy healthy Merry Christmas, happy [54.53], and a really healthy prosperous New Year. And we look forward to speaking to you in the first quarter of 2017. Thank you very much. Have a great day.