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PVH Corp. (NYSE:PVH)
Q3 2017 Earnings Conference Call
Nov. 30, 2017, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Please stand by; we are about to begin. Good morning everyone, and welcome to the PVH Corp. Third Quarter 2017 Earnings Conference Call. This webcast and conference call is being recorded on behalf of PVH and consists or copyrighted material. It may not be recorded, rebroadcast, or otherwise used without PVHs written permission. Your participation in the Question and Answer session constitutes your consent to having anything you say appear on any transcript or replay of this call.

The information being made available includes forward-looking statements that reflect PVHs view as of November 29, 2017, of future events and financial performance. These statements are subject to risks and uncertainties indicated in the company's SEC filings, and the Safe Harbor Statement included in the press release that is the subject of this call. These risks and uncertainties include PVHs right to change its strategies, objectives, expectations, and intentions and its need to use significant cash flow to service its obligations.

Therefore, the company's future results of operation could differ materially from historical results or current expectations. PVH does not undertake any obligation to update publicly any forward-looking statement including, without limitation, any estimate regarding revenue earnings. Generally, the financial information and guidance is on a non-GAAP basis, as defined under SEC rules. Reconciliations to GAAP amounts are included in PVHs Third Quarter 2017 Earnings Release which can be found at www.PVH.com and in the company's current report on Form 8-K 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.

Emanuel Chirico -- Chairman & Chief Executive Officer

Thank you, Sophia. Good morning everyone.

Joining me on the call is Mike Shaffer, our Chief Financial Officer, Dana Pearlman our Treasurer, and Head of Investor Relations, and Ken Dwayne the CEO of our PVH Heritage Businesses and our North America Wholesale Businesses.

I'm quite pleased with our results for the third quarter which exceeded our expectations. We continue to over-deliver against our strategic and financial plans. Overall, we saw Third Quarter revenues grow 5%; EPS increase 16%. We saw tremendous strength across all of our businesses with our international businesses demonstrating outsize performance. Europe, China, and Japan continue to be our healthiest markets in the Third Quarter. We saw improvements in our North America business which performed in line with our plan despite multiple natural disasters; particularly in Puerto Rico, that impacted our retail businesses.

Business trends in North America have continued to improve significantly as we move through the fourth quarter. Across channels, we continue to see outsized growth from the digital channel consistent with our trends all year. From a strategy perspective, we continue to invest in driving our brand relevance, and our consumer reach through our increased marketing investment. Given our strong our results we have decided to invest an invest an additional $20 million in brand marketing in the Fourth Quarter. Despite this $0.20 per share incremental expense, we are significantly increasing our earnings guidance for the year.

Moving to our Third Quarter results, let me begin with Tommy Hilfiger. The Tommy Hilfiger brand continues to experience significant demand, and we are seeing broad-based strength across all businesses. The Tommy brand relevancy and momentum continues, leveraging our key influences from Gigi Hadid, our women's brand ambassador, to the Chain Smokers, our brand ambassador for all Tommy Hilfiger men's categories, and Shuen Yu, our local brand ambassador for China. We believe that investing in the Tommy Hilfiger brand via these brand ambassadors will continue to drive performance in our global growth categories. Additionally, by offering limited jeans capsules and unique collaborations, we are continuing to propel the brand forward, allowing us to engage with a new and younger consumer.

From a business perspective, Tommy revenues increased 10%, and earnings were 35% for the quarter. We continue to be extremely pleased with the response from consumers and are benefiting from the market share gains in all regional markets. International revenues increased 16% with retail comp sales up 7% for the Third Quarter. This outstanding performance was driven by our Tommy European business which continued to outperform, and we continue to see positive momentum across the business, and we see strong sell-throughs at retail. As I previously mentioned, our spring/summer 2018 order book is up over 10% and we are quite pleased with the broad-based strength across all of our product divisions, and of course all of our markets within Europe. In addition, we continue to see strong momentum in early fall selling. We anticipate the strong selling to continue in Europe throughout fiscal 2018.

Moving to Tommy Asia led by the China Tommy business, it continues to perform very well as we've continued to build on the continued momentum in China, benefiting from the integration and investments that we've made in the Tommy Hilfiger China business. Our Tommy Hilfiger Japan business also continues to over-deliver against its repositioning and turn-around plan. Moving to North America, I am happy with the inflection that we have seen in the business. We started to see a turn in our retail business in the Second Quarter, and we saw even stronger momentum during the Third Quarter, as revenue increases driven largely by the improvement in our retail business which posted a 6% comp store increase and solid gross margin improvement. We have also seen continued strength across our wholesale businesses, both men's and women's. Our Macy's business, in particular, has been outstanding with strong sell-throughs at higher overall margins.

Moving to our Calvin Klein business, and speaking about the brand, we are pleased with the momentum around the Calvin Klein brand and have just announced several significant marketing initiatives. We recently our Calvin Klein jeans and underwear campaign, which introduces an evolution in the #MyCalvins to a call to action to our family, #MyCalvins. This features several personalities including Solange Knowles and some talent which will be announced at a later date, as we head into spring 2018. I cannot wait to share with you the incredible talent and amazing reach we have planned when we announce our latest talent in mid-January for our spring 2018 campaign. Specifically, these jeans and underwear marketing initiatives are geared to an enhance direct to consumer focus to drive our business. We really feel that with the amazing talent we have planned, that I can't speak about now, and that we will introduce these initiatives will fuel tremendous growth in 2018.

We also recently announced our Calvin Klein X Amazon fashion holiday retail experience available for customers at pop-up shops in New York City and in Los Angeles as well as through our online brand store at Amazon.com #MyCalvins. While these are just two recent examples of our consumer engagement marketing investments, we believe that these together with our other upcoming and ongoing brand marketing initiatives will continue to drive the brand momentum, fashion relevancy and allow us to capture growth opportunities for the business.

Moving on to the business, revenues increased 6% for the Third Quarter reflecting strong global trends with a 20% increase coming from our international business. Overall earnings were slightly down in the quarter due to a planned $15 million increase in brand marketing investments. Absent these brand investments; earnings would have been up 8% in the Third Quarter. We continue to see strong topline growth out of Europe and China, with North America performing in line with plans. International retail comp store sales increased 9% in the quarter.

Calvin Klein Europe continued to deliver terrific performance both topline and bottom line with strong sale-throughs across all channels. As we discussed previously, Calvin continues to see market share gains across the European region, and the momentum continues into spring 2018 with our order book projected to be up over 25%. The broad-based strength across the business highlights the evolution of the brand and the business into a true lifestyle business in Europe in line with our strategic plan for the region. We see these strong selling trends continuing into fall, and would expect the strong sales trends to continue throughout 2018. In Asia, Calvin Klein continues to perform well with China outperforming our other markets across all product categories. We continue to see softness in Korea which has been pressured by the negative geopolitical news out of North Korea, overall, Asia business continues to post strong sales and earnings growth. Calvin Klein North America saw healthy growth across all of our wholesale businesses in line with our plans. Our CK North America business saw an improvement in comp

store sales trends versus the first half of the year, with comps down only 1% for the Third Quarter.

Finally, moving our Heritage businesses, revenues for the quarter were down 7% in line with our plans, due to some sales moving from the Third Quarter into the Second Quarter, as compared to the prior year. Therefore, earnings were down as a result of that planned sales shift. As a reminder, year-to-date for the nine-month period, our Heritage brands revenues are flat, and earnings are up 9% over the prior year. Retail comps were up 2% in our Heritage retail business in the Third Quarter. Given the challenging overall North America market dynamics, we are quite pleased with the financial performance of our heritage brands divisions.

Looking to our full year guidance, we have raised our full-year earnings outlook, and believe that our brands will continue to drive our Fourth Quarter performance. In addition, as a result of the momentum in the business, we have increased our Fourth Quarter marketing spend by an incremental $20 million to capitalize on the opportunities we are seeing across our businesses. Despite this incremental brand investment, we are planning Fourth Quarter earnings per share to grow 15% to 17% over the prior year. We feel highly confident making this incremental investment in our brands given the momentum we've seen in our business. In the Fourth Quarter, our early holiday sales and margin results are running well ahead of our financial plans. Our international businesses continue to see nice momentum with Calvin Klein International comps up high single digits and Tommy Hilfiger International comps up mid-single digits.

The big improvement we have seen has been in our U.S. business. We have seen a strong start to the North American holiday season, with improvements in both traffic and sales trends. Comps for Calvin Klein North America are trending up mid-single digits, and Tommy Hilfiger North America comps are trending up high single digits quarter-to-date. We also continue to see strong performance in our wholesale businesses in North America and Europe in the Fourth Quarter. We are well positioned for the Fourth Quarter and the balance of the year and believe given our underlying brand momentum and the strength across our businesses that we can continue to over-deliver against our financial plans.

With that, I'll turn it over to Mike to quantify our Third Quarter results.

Michael A. Shaffer -- Chief Operating & Financial Officer

Thanks, Manny. The comments I'm about to make are based on non-GAAP results and are reconciled in my press release.

Revenues for the Third Quarter were up 5% to the prior year including a positive impact of 2% for foreign currency and exceeds our guidance of up 4%. Tommy Hilfiger revenues were ahead of guidance, and up 10% over the prior year including a positive of 3% for foreign currency. The Tommy Hilfiger revenue increase was driven by strong international performance of plus 16% to the prior year including a positive impact of 5% for foreign currency, with international comps up 7%. Revenue growth was also positive in North America where we saw a 2% increase over the prior year including strong retail comps of 6%. Negatively impacting the Tommy Hilfiger North America revenues was a decrease of approximately 20 million due to the transfer of the North America women's wholesale business to G3 in the Fourth Quarter of last year.

Our Calvin Klein revenues were ahead of guidance and up 6% to the prior year including a positive impact of 2% for foreign currency. Negatively impacting our Calvin Klein revenues versus the prior year was a deconsolidation of our Mexico business which was worth approximately $20 million. Calvin Klein International revenues increased 20% including the positive impact of 4% for foreign currency with strong performance in Europe and international comps up 9%. Heritage revenues for the Third Quarter were down 7% driven by a shift in the timing of shipments from the Third Quarter to the Second Quarter.

Our non-GAAP earnings per share of $3.02 represents a growth of 16% over the prior year and included a planned increase of approximately 15 million of marketing compared to the prior year, related primarily to Calvin Klein. The $3.02 was $0.10 better than the top end of our previous guidance, and the beat was driven by a $0.03 business beat favorable affects of $0.03, and tax expense which was favorable for $0.04. For the full year, we are currently anticipating that we will be negatively impacted by $0.17 per share due to foreign exchange, an improvement of $0.03 when compared to our prior guidance.

For the full year, we are projecting non-GAAP earnings per share to be $7.78 to $7.80 for 14% to 15% over the prior year which is $0.10 higher at the top end of the range in our previous guidance. This reflects a tax beat of $0.04, a $0.03 increase due to favorable affects, a $0.23 increase due to a stronger business, partially offset by an increase in Calvin Klein marketing of approximately $0.20. Overall, we are projecting revenue to grow approximately 7%. 2017 revenues will be negatively impacted by approximately 70 million related to our Mexico deconsolidation, and approximately 80 million related to the transfer of the Tommy Hilfiger North America wholesale women's business.

2017 revenues will also be positively impacted by an amount of approximately 50 million related to 2017 being a 53-week year, offset in part by the negative impact of the timing of Chinese New Year. Overall, operating margins are expected to increase about 10 basis points on an as reported basis, and to increase approximately 30 basis points on a constant currency basis. We project Calvin Klein revenues to grow 9% with operating margins down about 130 to 140 basis points on an as reported basis and to decrease about 90 to 100 basis points on a constant currency basis. Our Calvin Klein earnings are negatively impacted in 2017 by about a $50 million increase related to advertising and creative leadership changes. Tommy Hilfiger revenues are planned to increase 8% with operating margins planned to increase about 130 to 140 basis points on an as reported basis, that an increase of 160 to 170 basis points on a constant currency basis. Our Heritage businesses planned relatively flat revenues versus the prior year, with operating margins planned to increase about 30 to 40 basis points.

Our corporate segment expenses are planned to increase over 15%; the increase reflects low single-digit growth in our overhead, as well as start-up, losses associated with new businesses. Interest expense for the year is planned to be about 120 million compared to the prior year amount of 115 million. The increase is primarily the result of the 300 million Euro bond issued last year. Our tax rate for the year is planned at about 16½% to 17%. Fourth Quarter non-GAAP earnings per share are planned at $1.42 to $1.44 or 15% to 17% over the prior year and include $0.02 of estimated impact for foreign currency. Revenue in the quarter is projected to increase 11% including a positive impact of 3% for foreign currency.

Revenue will be positively impacted by the 53rd week and negatively impacted by the Mexico deconsolidation, the transfer of the Tommy Hilfiger North America wholesale women's business, and the timing of Chinese New Year. Calvin Klein revenues are planned at a 16% increase including a positive impact of 4% for currency. Tommy Hilfiger revenues are at a 12% increase including a positive impact of 5% for currency. Heritage brand revenues are projected to decrease 1%. Interest expenses are projected to be about 30 million, and taxes to be between 17% and 20% in the Fourth Quarter.

...

With that we'll open it up for questions.

Questions and Answers:

Operator

Thank you. If you would like to ask a question, please signal by pressing *1 on your telephone keypad. If you are using speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press *1 to ask a question.

We'll take our first question from Bob Drbul, with Guggenheim Securities.

Bob Drbul -- Guggenheim Securities -- Analyst

Hi guys, good morning. Manny, I was just wondering if you could maybe talk a little bit more around North America, especially in November, the last six weeks department stores. What do you think's going on in the market in this channel and for your business generally.

Emanuel Chirico -- Chairman & Chief Executive Officer

What I think in general is I guess there are two big items that are going on that I think are helping the business overall. Traffic is improved, and we've seen business just in general improved. The other big benefit that I think everyone is seeing is inventories are under real tight control. Again, we've got a month ahead of us of this holiday selling, but it feels like we're going into December with a lot of momentum, tighter inventories. I think it'll be promotional but probably not as promotional as last year, there'll be fewer goods to clear come January if these trends continue. We're very positive in all that we're seeing throughout North America across all of our businesses, and across the various channels of distribution with our key customers.

Bob Drbul -- Guggenheim Securities -- Analyst

Great. I was just wondering if you could comment a little bit, your inventories at the end of the quarter, the content of those inventories, your comfort level with what's in there, and the expectation on moving those inventories forward.

Emanuel Chirico -- Chairman & Chief Executive Officer

I'm gonna turn it over to Mike. I would just say qualitatively that inventory's very strong and we're really trying to capture as much of the growth opportunities above plan that we see ahead of us, and I think that inventory is gonna be a valuable asset for us, and I think Mike can give us some details.

Michael A. Shaffer -- Chief Operating & Financial Officer

Yeah, Bob look.

Our inventory's up about 17%, our Fourth Quarter sales have climbed up about 11%, the content of that inventory we are very clean on fashion across the globe. A big piece of the investment that we made was in international inventories. It is really core and basic. There is really no risk in terms of liquidation or becoming obsolete. It could fuel a good increase for the Fourth Quarter.

Emanuel Chirico -- Chairman & Chief Executive Officer

I think yeah. I think Mike said it well; I think the bigger core replenishment business today than we had 12 months ago in our two big brands, and I think the opportunity to capture the momentum in those brands is in front of us with very little markdown risk given the composition of that inventory. We really see it working to our advantage.

Bob Drbul -- Guggenheim Securities -- Analyst

Great. Thanks very much.

Operator

And we'll hear next from Erinn Murphy with Piper Jaffray.

Erinn Murphy -- Piper Jaffray -- Analyst

Great, thanks. Good morning. And congratulations on a solid Third Quarter.

I guess I love to, Manny, hear you talk a little bit more about the Amazon fashion holiday collaboration that you guys just announced a few weeks ago. How has that been trending thus far? Any insights into what you're learning from consumers? Has that changed anything with your relationship with your Legacy department stores?

Emanuel Chirico -- Chairman & Chief Executive Officer

I think the experience for us has been terrific; we think it's great for the brand. We've seen strong sales performance coming out of the two pop-up shops, and more importantly, we're seen strong sales performance in the Calvin business and our Amazon business with them as well online. The interesting fact that we've seen is that we think it's really created a lot of momentum around the brand and more excitement around the brand. We've seen our Calvin Klein underwear business, that's what this is really focused on, we've seen our Calvin Klein underwear business and all channels of business really accelerate through the month of November, and in particular the Black Friday week through Cyber Monday. Department store channel distribution we've had one of our strongest weeks on record with the Calvin Klein underwear business. I think it's lifted all boats and I think it's created a level of excitement around the brand. No, we haven't seen a lot of any kind of pushback from our accounts. We have a strong relationship with all of our key customers, and we try to drive everybody's business.

Erinn Murphy -- Piper Jaffray -- Analyst

That's good to hear. Thank you.

Then I guess my second question for you guys, just on the Tommy Hilfiger business. I think it's the first time in a long time that North America is actually out-performing international. Obviously, they're building off very different bases, but just maybe a bigger picture, how sustainable do you see the North American Tommy traction? And how are you thinking anniversarying the success you've had this year with Gigi. Thanks.

Emanuel Chirico -- Chairman & Chief Executive Officer

Sure. I think.

There are two specific questions. The North America business just continues to perform. If you look at that business over the last three years, we've really felt the pressure coming from currencies, and the lack of international tourism. As that starts to turn, and we clearly see that start to turn, I think our Tommy retail business will be one of the biggest beneficiaries given the strong international presence that that brand has. I think there's opportunity that's continued to comp on top of these comps given the fact that we really had two-and-a-half years of challenging business going into the Second Quarter of 2017. We really haven't seen an inflection point in that business until we got to that point in them. We don't see any negative downsides.

I really can't talk about the new talent that's gonna be happening at Tommy. What I can tell you is there will be a significant spring 2018 marketing campaign with new talent, and I think the focus will be a little different in that Gigi was such a driver for the brand, but she was the women's ambassador. I think our focus will sift a bit, we'll continue to focus on women's, but we'll really focus on our strength which is our men's business as well. I think you'll see some exciting things come January/February of 2018 around the Tommy Hilfiger marketing campaigns which will be a continuation of what you've seen for the last 18 months and I think has helped to really fuel the topline growth that we've seen in that business.

Erinn Murphy -- Piper Jaffray -- Analyst

Great. Thank you. Merry Christmas, and Happy Holidays to you all.

Emanuel Chirico -- Chairman & Chief Executive Officer

Merry Christmas to you.

Operator

Our next question will come from Kate McShane with Citi Research.

Kate McShane -- Citi Investment -- Analyst

Hi. Good morning. Thanks for taking my question.

My question is centered around the relationship with Amazon as well. We've heard from some vendors that they're starting to have conversations with Amazon about markdown money. I wondered if you had any commentary with regard to that. In regard to the pop-up shops, I wondered if the incremental 20 million that you're spending in the Fourth Quarter is being allocated to that initiative.

Emanuel Chirico -- Chairman & Chief Executive Officer

Sure, Kate.

A couple of things. I think having discussions with retailers about markdown money is not very unusual. I think as Amazon becomes a bigger and bigger player there'll be a discussion about performance and markdown money as needed. It continues to be a very profitable channel for us, and I don't see any reason why that wouldn't continue. The interesting thing about that business it tends to be much more of a core driven business. Given our strength in that area of the business, particularly our Calvin Klein underwear business, our dress shirt business. I continue to think that our profitability will continue to be pretty high as we look at that business. We haven't seen anything that drastically changed. I think I would say we're supporting them more so from an inventory point of backing up inventory particularly in core programs, so we can maximize the business as opposed to really seeing any pressure on margins in any way. We're not seeing that at all.

Your second question on the marketing, yes. Part of the investment that we're making on the Calvin Klein brand, that $20 million, a portion of that relates to the promotion PR related to the Amazon pop-up shops, and the Amazon relationship which I think is helping all of our Calvin Klein businesses, not just Amazon.

Kate McShane -- Citi Investment -- Analyst

Okay. That's very helpful thank you.

Emanuel Chirico -- Chairman & Chief Executive Officer

You're welcome.

Operator

Our next question will come from Matthew Boss, with JP Morgan.

Matthew Boss -- JP Morgan -- Analyst

Great. Congrats on the nice quarter.

As we think about improved inventories in the channel, what's the best way to think about near-term gross margin opportunity, then more so as we think beyond this year? What's the best way to rank the continued drivers of gross margin beyond?

Emanuel Chirico -- Chairman & Chief Executive Officer

With the outsized growth of the Calvin Klein and Tommy Hilfiger businesses in general, and with the outsized growth we see internationally both in Europe and Asia, the biggest opportunity for gross margin expansion is the continued growth of those businesses which will continue to drive gross margin expansion as we go forward.

Matthew Boss -- JP Morgan -- Analyst

Great.

Just on the expense front. What's the best way to think about the right mix of marketing dollars to sales? On that line how best to think about SG& A dollar growth versus sales as we move forward there as well?

Emanuel Chirico -- Chairman & Chief Executive Officer

I think, in general, in general, we've tried to invest and continue to invest as a percentage of sales in the business. However, in fairness, I can't say that's what we've always done. When see momentum in the business and our performance in the business, like we're doing in the Fourth Quarter of this year, we've made a determination to take a portion of that earnings growth and invest it back into the brands above the historic level of profitability. I think if we continue to outperform, we'll continue to spend more in the marketing area. We'll make sure to deliver more on the bottom line as we're doing that. At the same time in order to fuel the momentum of the brand, not to be a pig and have to throw everything onto the bottom line, I think this spend that we're doing in the Fourth Quarter of this year, this extra $20 million, I think is really gonna set us off for spring/summer 2018 to go into that fiscal 18 with a lot of momentum, and gives us the confidence that we can hit all our financial goals as we move forward and continue to grow at this double digit earnings growth where..., When I look at most of our competitors, I don't see them growing at those same kind of levels. I think marketing investments are clearly paying off.

Matthew Boss -- JP Morgan -- Analyst

Yeah. No complaints from me. Great job.

Emanuel Chirico -- Chairman & Chief Executive Officer

Thanks, Matt.

Operator

Our next question will come from John Kernan with Cowen & Company.

John Kernan -- Cowen & Company -- Analyst

Good morning, Mike, Manny, and Dana.

How do we think about international growth for Tommy and Calvin into next year? The run rate of wholesale order books and the comps for Tommy and Calvin are pretty robust. I'm just wondering how you're thinking about the sustainability of low double-digit topline growth, excess that for Tommy and Calvin into next year in international.

Emanuel Chirico -- Chief Executive Officer

I guess I would say it this way. We've got a metric that basically talks about overall delivering mid-single read that as 4% to 6% topline growth. That's our formula. I think clearly that we've said that our international businesses will be in the high single-digit range, and our domestic businesses would continue to trend in low single-digit range. Blended it would drive that 5% to 6% topline growth. That's the metrics that we have when we look out. The reality of the situation is, and what's been happening in the last two years, and what appears to be happening into next year as we start to feel it, is our international growth has been more significant than that. The surprise has not been Calvin Klein, which we've anticipated that kind of double-digit growth with Calvin given the momentum of the brand, the underdevelopment of the European business, and being able to put 25% topline growth in the wholesale side of that business, we think that will continue into 2018 based on our order books and early selling of fall. The surprise, to be honest, has been the Tommy business. That's a very big, what I would describe, as a mature highly profitable business with great market penetration. To be able to be growing that 10% in the first half of the year is somewhat pleasantly surprising to us. I gotta be honest, what we're seeing initially, and we're not ready to quantify anything, but we're seeing initially in our early selling those trends in the high single-digit growth in the European wholesale business feel like they should continue based on the momentum of the brand and the early selling of fall. We're optimistic as we look out into 2018.

John Kernan -- Cowen & Company -- Analyst

Okay. That's helpful.

Just one follow-up, somewhat of a follow-up to the prior question. As you exit transactional from affects that you've based the prior two years, how do we think about operating market expansion not just for next year but beyond that and your confidence in the portfolios ability to grow EPS double-digits over a multi-year period?

Emanuel Chirico -- Chairman & Chief Executive Officer

I think I always have to consider, when it comes to foreign currency, the margin benefit that will come over time, assuming that the Euro continues to strengthen, and foreign currencies continue to strengthen, and the U.S. dollar stays at this level or weakens further. If that trend were to continue, you would expect to get margin improvement coming from currency. Given our hedging strategy and that we go out 12 to 18 months, that portion of the foreign currency benefit will probably be pushed out the second half of 18, more significantly into 19 from a margin benefit. The benefit we'll get next year is on the translation side of the business which is really arithmetic, just converting our earnings at the average currency rates, which clearly will be higher than this year. The big benefit is we've gone through two and a half years of affects pressure on our earnings; we start to see that turn in the Fourth Quarter of this year into next year, it should become a tailwind for us. That's how I would think about it, John.

John Kernan -- Cowen & Company -- Analyst

Okay. Thank you.

Emanuel Chirico -- Chairman & Chief Executive Officer

You're welcome.

Operator

We'll hear next from Ike Boruchow with Wells Fargo.

Ike Boruchow -- Wells Fargo Securities -- Analyst

Hi everyone. Let me add my congrats.

Manny. I just wanted to go back to Tommy's international growth in Asia. You talked about, think you took China in-house about a year ago with revenues around 140 million with two cities, I think Shanghai, Beijing. Can you talk about the pace of expansion there in terms of new cities that you're looking at and what kind of sales you're expecting maybe this year and going forward in the region?

Emanuel Chirico -- Chairman & Chief Executive Officer

Sure.

I think, just to clarify, I would say is we were much more exposed than just in two cities, but we were directly operating in two cities. Meaning a direct-to-consumer model in Beijing and Shanghai. Over the last 12 months we've taken in two additional cities, we're operating those businesses directly. That's driving some topline growth and some overall operating income that you see coming forward. We look at China as a market for Tommy to be able to grow high single digits, low double-digits for the next two or three years. To put it into perspective versus Calvin Klein, the Calvin Klein business in China is probably three times the size of the Tommy business, and I think over time there is no reason that Tommy shouldn't approach the same size as the Calvin business. I think that opportunity in Asia will continue for Tommy as we go forward.

Ike Boruchow -- Wells Fargo Securities -- Analyst

Got it.

And this is a follow-up. Maybe your current appetite for taking other Asian geographies in-house for Tommy, there's Southeast Asia and Korea, I believe. Just how you're thinking about that in the near term to medium term?

Emanuel Chirico -- Chairman & Chief Executive Officer

I think that's an opportunity for us. I think probably if you were to prioritize it, we'd probably focus more on Southeast Asia first, meaning Hong Kong, Macao, Taiwan it's more aligned with the China business and the opportunities there. Korea we've got a great partner in Korea with Hyundai Department Stores as our operator, licensing partner in Korea for Tommy Hilfiger, I think we would be looking to really continue to grow that business with them as we move forward. I think Southeast Asia, Hong Kong, Taiwan, and Macao would be the markets we'd be looking to expand into probably over the next 12 months.

Ike Boruchow -- Wells Fargo Securities -- Analyst

Got it. Thanks. Best of luck.

Emanuel Chirico -- Chairman & Chief Executive Officer

Thank you.

Operator

Your next question will come from Omar Saad with Evercore ISI.

Wes -- Evercore ISI -- Analyst

Hi, this is Wes on for Omar. Can I just follow-up on how you're thinking about the online relationships outside the U.S. Zolando, Tmall you know how those relationships are developing and how you contrast it with your relationship with Amazon and how you see that moving forward. Thank you.

Emanuel Chirico -- Chairman & Chief Executive Officer

I think the focus on this call has been Amazon because the marketing initiative that's going on with Calvin. The growth has been pretty explosive in Europe and Asia with the partners you described. We had a great Cyber Monday; we had a great Single's Day, we continue to see very strong growth coming out of China. Again, it's a little bit a different business model in that in China when you're talking about Tmall, it's really a direct consumer model where you pay a commission, versus Amazon for us, which is really a wholesale model, but both business models worked really well for us. They're very profitable for us. In Europe, our biggest online continues to be Zolando, and they do an excellent job presenting the brand. They do an excellent job really selling fashion and not just core. They're strong partner, strategic for both Calvin and Tommy as we grow the business, and we'll be looking to continue to grow that business throughout Europe. We're seeing nice growth in all regions, as I said. Our biggest growth channel continues to be digital; we define that as our own digital businesses, our department store, customer businesses, Macys.com and the like. Then the three players you said, the Pure Play, Amazon, Tmall and Zolando, those businesses, when we put that all together by far our fastest growing channel of distribution.

Wes -- Evercore ISI -- Analyst

That's great. Very helpful. Thank you.

Emanuel Chirico -- Chairman & Chief Executive Officer

Thanks.

Operator

And we'll hear next from Chetan Mallela with Barclays.

Chethan Mallela -- Barclays -- Analyst

Good morning. I wanna ask about the Calvin Klein women's opportunity in Europe which I think you've previously discussed as an initiative you'll be pushing in 2018. Can you just provide an update on your efforts there and how you're thinking about that opportunity from a category and country perspective? I think it's been cited as one of the main unlocks in getting that business to your $2 billion longer-term target for Europe. Are you seeing anything that makes me feel better or worse about that ultimate potential?

Emanuel Chirico -- Chairman & Chief Executive Officer

We are launching women's initiative in fall 2018. The market response and the receptivity to the brand in those categories has been very strong and very high. We wanna make sure we go into the market the right way and hit it at the appropriate price point. Right now, that focus is on our wholesale model as we start to roll that out. But we will be adding retail stores probably more so in 2019 than 2018 to really present the full lifestyle presentation for the brand as it goes forward. It is early; I guess the best signal we have is the performance of the Calvin Klein brand overall in jeans and underwear particularly in the women's categories in jeans and underwear that we're seeing such strength. That's been a big part. I would say to you; we've always had strength in our men's underwear and our men's jeans business. As we look out internationally the biggest growth that we've seen with the Calvin Klein brand has been in our women's intimates business and our women's jeans business to really see the growth there. I think the brand has got a right to be in the sportswear category similar to the strength that we see in North America. Given the strength of our European organization, we're very optimistic about being able to keep that growing. Women's sportswear, ready to wear including accessories and related categories will be one of the big drivers as we look at 2019 and beyond.

Chethan Mallela -- Barclays -- Analyst

Great. Just as a quick follow-up, I think in North America wholesale, one of the reasons you cited for your outperformance is just the square footage expansion that you're seeing there. Can you just remind us of the key categories where you are gaining space? Just in terms of the runway, where we stand from an ending perspective with distribution gains.

Emanuel Chirico -- Chairman & Chief Executive Officer

Again, we're seeing door expansion, we're see square footage growth with indoors, and we're seeing growth with some key partners that were really in the business in a big way. I think that it's' coming from all different pieces, I just feel that that's gonna continue as we move forward.

Chethan Mallela -- Barclays -- Analyst

Perfect. Thanks so much.

Emanuel Chirico -- Chairman & Chief Executive Officer

Thank you.

Operator

Our next question will come from Heather Balsky with Bank of America.

Heather Balsky -- Bank of America-Merrill Lynch -- Analyst

Hi. Thank you for taking my question.

I guess, first off, can you just remind us about your priorities in terms of excess cash? I think a couple calls ago you talked about outside M& A being on hold given the border task threats. Now that's off the table, does that change your view? Thanks.

Emanuel Chirico -- Chairman & Chief Executive Officer

Sure. I think I'll make Mike and Dana speak about some of the uses of cash in the short-term. Just on the acquisition front, we would love to do an acquisition; we would love to do something that fits in besides just what we've been doing which is I think has been strategically strong for us is adding our licensed businesses and taking more direct control of the Calvin and Tommy businesses globally. We've been looking to take on, if we could find the right balance, to find a third brand that we could put on our operating platforms, Europe, North America, Asia, and then Brazil. We think that's a competitive advantage for us, and we really know how to attack those markets and do it in a very synergistic way. M& A, it happens when it happens, when the opportunities present themselves. But clearly, with our balance sheet, some of the uncertainty has been lifted from the overall environment, and we're feeling more bullish about our own businesses, we're in a place where we'd love to do an acquisition if we could add it. In the short-term, some of the primary use of the cash. I'll turn it over to Dana.

Dana Pearlman -- Treasurer, and Head of Investor Relations

Our focus continues to be around debt paydown, and shareholder purchases which we've executed to date this year.

Heather Balsky -- Bank of America-Merrill Lynch -- Analyst

Great. As a follow-up on M& A adding a potential brand. Are there thing that you're looking for in a potential target and are there things that you'd like to avoid. Would you wanna do a more stable company or a turnaround. How do you think about that?

Emanuel Chirico -- Chairman & Chief Executive Officer

We would not be looking to do a turn around of a brand. Find a great brand that's got operating issues, that would be fantastic. We would be looking for an established brand that has credibility regionally and has the potential to have growth and opportunities globally. Be it on the fashion side, or maybe moving a little bit more into some other areas, but I think that's where the focus would be on the business. Find a third brand that we don't think would be overly cannibalistic to either Calvin or Tommy that we can really fit into the portfolio.

Heather Balsky -- Bank of America-Merrill Lynch -- Analyst

Thank you again.

Emanuel Chirico -- Chairman & Chief Executive Officer

Sure

Operator

Our next question will come from Eric Tracy with Buckingham Research.

Eric Tracy -- Buckingham Research -- Analyst

Good morning guys. Thanks for squeezing me in.

Manny, I just wanted to follow-up on the North America situation. You guys are taking share; I appreciate that some year-over-year comparisons in terms of affects, tourism. Is the strength that you're seeing toward the improvement in the market somewhat of a sign of a stabilization of the disruption we've been seeing in brick and mortar retail more broadly? Or is really just specific to how you guys are executing.

Emanuel Chirico -- Chairman & Chief Executive Officer

I think we're executing at a very high level and I think we're able to take advantage of it. I'm not ready to say that everything is great in North America retail overall. I think we're gonna continue to see a downsizing of businesses and store closings, but I think our retail partners have done a terrific job of managing into the Fourth Quarter. Really good control over their inventories, and I think it will be a profitable Fourth Quarter for us and in general as we move forward. That doesn't mean that the ills that are impacting retail in North America in the over storing of North America is over, I think those issues still linger, and we're gonna have to deal and manage through that. I think we're gonna have to deal and manage through some, probably, bankruptcy situations with some of our smaller accounts as we move forward, I think that's just the nature of the Northern America retail business.

Given the time, we're gonna take one more question then end the call.

Operator

Our final question will come from Lindsay Drucker Mann with Goldman Sachs.

Lindsay Drucker Mann -- Goldman Sachs -- Analyst

Hey. Thanks for taking my question.

I know you guys are not ready to give full-year guidance for 2018, but you have alluded to some of the drivers that would affect the business. Manny, I was just hoping you could give us some more holistic view of some of the puts and takes as you think about 2018 relative to your typical double-digit earnings algorithm view.

Emanuel Chirico -- Chairman & Chief Executive Officer

Looking at that algorithm we don't see any reason why we shouldn't be able to grow next year in that mid-single digit range for sales, and that we can keep that double-digit earnings quote as we move forward. Any more than that, it's just premature for us to really get into any more detail. The one thing I would add is obviously the momentum in the business, the strength of the business gives us a great deal of confidence particularly for the Fourth Quarter, and then as we go into spring next year. I think we've got the wind at our back.

Lindsay Drucker Mann -- Goldman Sachs -- Analyst

Great. Then just to clarify something that was in your prepared remarks where you talked about the spring campaign for Calvin and how you felt these initiatives, in particular, we're focused on driving the direct business. Maybe you could just elaborate on what that means.

Emanuel Chirico -- Chairman & Chief Executive Officer

These are our Asian campaigns that really, I think, drive sales and business. It's brand building, but it's less about brand halo, on the marketing and on the collection initiatives that we have in place continue. This incremental $20 million that we're spending is right at the heart of the business and right at driving what we think will not only be great for the brand but really will drive topline growth not just in the long-term but in the short-term as well. We think these campaigns will be seen in our retail stores and with product behind it to drive sales with our key retail partners around the world, this campaign will be aligned with them, and we think our key partners are taking positions in the goods with the anticipation that the campaign is gonna drive topline growth. A little different than some of the first half initiatives that we had around the Calvin businesses which was really focused on halo, positioning, and driving our collection business and the fashion relevancy of the Calvin brand. This is really driving traffic and sales. We think it's gonna pay big dividends for us in 2018.

With that, I'm gonna call an end to the call. I'd like to wish everybody a happy holiday season. Merry Christmas. Happy Chanukkiah. A healthy and Happy New Year. We look forward to speaking with you on our First Quarter call in March. Have a great day and speak to you soon. Thank you.

...

Operator

Ladies and gentlemen this does conclude today's call. Thank you all for your participation. You may now disconnect.

Duration: 53 minutes

Call participants:

Emanuel Chirico -- Chairman & Chief Executive Officer

Michael A. Shaffer -- Chief Operating & Financial Officer

Dana Pearlman -- Treasurer, and Head of Investor Relations

Bob Drbul -- Guggenheim Securities -- Analyst

Erinn Murphy -- Piper Jaffray -- Analyst

Kate McShane -- Citi Investment -- Analyst

Matthew Boss -- JP Morgan -- Analyst

John Kernan -- Cowen & Company -- Analyst

Wes --Evercore ISI -- Analyst

Chethan Mallela -- Barclays -- Analyst

Heather Balsky -- Bank of America-Merrill Lynch -- Analyst

Eric Tracy -- Buckingham Research -- Analyst

Lindsay Drucker Mann -- Goldman Sachs -- Analyst

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