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PVH Corp. (NYSE:PVH)
Q4 2017 Earnings Conference Call
March 29, 6:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning everyone and welcome to the PVH Corp. first quarter and full year 2017 earnings conference call. This webcast and conference call is being recorded on behalf of PVH and consists of copyrighted material. It may not be recorded, rebroadcast, or otherwise used without PVH's written permission. Your participation in the question and answer session constitutes your consent to having anything you say appear on any transcript or replay of this call.

The information being made available includes forward-looking statements that reflect PVH's view as of March 28th, 2018 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 PVH's right to change its strategies, objectives, expectations, and intentions, and its need to use significant cashflow to service debt obligations. Therefore, the company's future result of operations could differ materially from historical results or current expectations.

PVH does not undertake any obligation to update publicly any forward-looking statements, including, without limitation, any estimate regarding revenue or earnings. Generally, the financial information and guidance provided is on a non-GAAP basis as defined under SEC rules. Reconciliation to GAAP amounts are included in PVH's fourth quarter and full-year 2017 earnings release, which can be found on www.pvh.com and in the company's current report on form 8-K furnished through 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 and Chief Executive Officer

Thank you, Ashley. 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 Pearlman, our Treasurer and Head of Investor Relationship and Strategy and Development, and Ken Duane, our CEO of PVH Heritage Businesses.

Overall, our fourth quarter and annual 2017 performance exceeded our expectations and demonstrated our ability to over-deliver against our strategic and financial plans. We grew 2017 non-GAAP EPS above our long-term targets and grew at 17%, even with the additional marketing investments we made during the year. Overall, we grew fourth quarter and full-year revenues 19% and 9%, respectively.

Throughout the year, our outperformance was driven by the momentum across our Tommy Hilfiger and Calvin Klein businesses, with our Heritage businesses achieving its financial plans. In particular, our international businesses continue to be the highlight of our performance. Europe, China, and Japan continue to be our healthiest markets. Today, our international businesses represent over 50% of our revenues and over 60% of our EBIT.

Throughout 2017, despite the bankruptcies and store closures in the North American market, we saw a relatively strong performance in our wholesale businesses as we executed well and gained market share. We also experienced an improving trend in our retail business in the second half of the year, as international store traffic stabilized and the domestic consumer shopped.

Broad-based strength was seen across all distributed channels, wholesale, retail, and digital. Digital continues to be our fastest growing channel. We saw outsized growth across our owned and operated and third-party digital e-commerce businesses with revenues up over 20% for 2017. Our diversification of revenue and earnings streams will be further highlighted in 2018 as our international mix grows and we expand across all channels of distribution.

Now, moving to our brands, let me begin with Tommy Hilfiger. Speaking about the brand, the Hilfiger brand's health and relevancy only furthered strengthened in 2017. The brand continues to experience significant demand, especially from new and younger consumers with both brand awareness and interest to purchase up on a year over year basis. Additionally, we are seeing broad-based strength across all businesses and are very pleased with the strong growth in our women's business in particular.

Consumer engagement continues to be a critical part of our strategy this year. Our recent TommyNow Spring 2018 show in Milan continued to highlight the incredible consumer engagement and excitement around the brand. We have seen double-digit increases across all key metrics, from owned engagement to earned engagement and most importantly, we have seen e-commerce traffic and sales increase.

In 2017, we leveraged our brand ambassadors and key influencers from Gigi Hadid as our women brand ambassador, to The Chainsmokers, our ambassadors for all Tommy Hilfiger men's categories. And Shawn Yue as our local ambassador for greater China. We believe that investing in the Tommy Hilfiger brand via these brand ambassadors have and will continue to drive performance in our global growth categories.

For Spring 2018, we announced two new exciting partnerships. First, Tommy announced a multi-year strategic partnership with four-time Formula One world champions Mercedes AMG Petronas Motorsports. Starting with the 2018 season, Tommy Hilfiger will be the official apparel sponsor of the Mercedes AMG motor sport, building on the sports sponsorship heritage that Tommy has embraced since the first founding of his brand.

Second, we announced our newest brand ambassador, Formula One World Champion Lewis Hamilton. Lewis will represent the world of Tommy Hilfiger men's. These partnerships underscore Tommy Hilfiger's vision to continuously elevate and expand the brand in key markets and further drive the global growth of its men's business, bringing the next generation of fans to the brand.

From a business perspective, driven by these initiatives, Tommy increased sales 22% in the quarter and 11% for the year with earnings up close to 50% for the fourth quarter and 28% for the year, a truly outstanding performance. We continue to be extremely pleased with the response from consumers and are benefiting from market share gains in all regional markets.

Our international revenues increased 37% in the fourth quarter and 19% for the year. Retail comp stores were up 6% for the fourth quarter and 8% for the year. Our Tommy Europe outperformance continued, as we saw incredibly strong business across all markets with strong sell-throughs at retail with lower year over year promotions.

As I previously mentioned, our spring/summer 2018 audit book is up over 10%. We are now providing our fall 2018 audit book outlet and I'm quite happy to report that fall orders are again running up over 10%. We continue to be impressed by the continued strength of the brand and the reception from customers across all of our product divisions and across all of our markets.

Moving to Tommy Asia, the performance continues to be very strong there as we've continued to build upon the continued momentum in China, benefiting from the integration and investment in the Tommy Hilfiger China business. Additionally, our Tommy Hilfiger Japan business had a terrific end to the year. That business has found solid footing and we have demonstrated our ability to successfully elevate the brand position in the highly competitive Japanese market and we see future growth for the brand as we move forward.

Moving to North America, I'm pleased to say that we feel strongly we have seen a clear inflection point in this business. We started to see a turn in our retail business in the beginning of the summer and the momentum has accelerated in this business as we've moved through the second half. For the fourth quarter, we saw our business up 5% in revenues with an outstanding 10% comp in our retail business for the quarter along with solid gross margin improvement.

Importantly, we not only saw an improvement in our retail business, but also saw continued strength in wholesale. Our Macy's business in particular has been outstanding, with strong sell-throughs at higher overall margins.

Moving to Calvin Klein, creatively, the Calvin Klein brand had a tremendous year. We believe the one singular brand vision articulated by the design team can be felt throughout the product category, from the runway in our 205 campaigns on down to our jeans and underwear marketing and product. In particular, over the last few months, the momentum over the CK brand has intensified with its cultural relevancy resonating and consumer interest and conversion to purchase seeing nice improvements. We believe we continue to reach a new consumer and we are expanding our distribution reach across all channels, from premium luxury doors to new specialty retail accounts.

Our family #MyCalvins marketing campaign continues to perform very well for us across the globe. I'm happy that I can finally talk about the Kardashian Jenner sisters as well as the entire brand family, from Solange and A$AP Rocky to the Gerber siblings, Millie Bobby Brown, and Paris Jackson, all of which are driving engagement with the brand.

The impressions and engagements we have seen as we rolled out this campaign has been amazing. We are seeing strong engagement and most importantly, strong spring selling as we move into the first quarter. Specifically, we believe these marketing initiatives underline our commitment to our consumer-centric approach and engaging the consumer to live the Calvin Klein brand.

While we discussed our Calvin Klein-Amazon Fashion partnership for the holiday retail season last quarter, I'm pleased to report that it really helped to drive awareness to all our channels of distribution and continues to show that Calvin Klein is thinking first about the consumer and is thinking digital first as well.

From a product perspective, 2017 also delivered strong performance across all major product categories, with an incredible improvement in selling across our jeans and accessory business around the world. We feel really good about the direction of the brand from a creative and fashion relevancy perspective, but most importantly about the traction we are getting in our core existing categories, as well as our newer, faster-growing businesses in Europe and Asia.

From a business perspective, revenues increased 23% for the fourth quarter and 10% for all of 2017, reflecting strong global trends, with a 30% increase coming from our international business in the fourth quarter and revenues up over 20% in 2017.

As we discussed previously and planned for, the fourth quarter was the first quarter we lapped our investments from 2016 and we saw a 5% increase in overall earnings despite the planned $15 million increase in brand marketing investments. We continue to see strong topline growth out of Europe and China, with North America experiencing improved sales trends across all channels. North America and international retail comp sales both increased 4% in the quarter.

From an international perspective, our Calvin Klein Europe business continues to deliver terrific results, with market share gains across the region and strong sell-throughs across all channels. As we previously mentioned, the Calvin Klein Spring 2018 audit book is up over 25%. Based on the strong selling we experienced during Fall 2017 and Spring to date, our Fall 2018 audit book is projected to be up again over 25%.

We are quite pleased with the broad-based strength across the business, with Calvin Klein Jeans showing tremendous strength and outsized growth above our average audit book growth. Clearly, the elevated jeans product we have been focused on in rolling out is paying huge dividends for us.

In Asia, Calvin Klein continues to perform well with improving trends across the region. China, which represents over half the business, continues to outperform other markets across all product categories. During the quarter and throughout the year, we are pleased to report that we have continued to see strong performance and momentum across our greater China business and Southeast Asia.

Calvin Klein North America saw an acceleration of growth across all channels of business in the fourth quarter. Importantly, we saw a tremendous growth in our digital businesses, in part driven by our Calvin Klein-Amazon initiative and our Calvin Klein North America retail business saw an improvement in comp store trends versus the first nine months of the year with comps up 4% for the fourth quarter.

Finally, in our Heritage business, revenues for the quarter and the year were flat, in line with our plans, and earnings were up 2% over the prior year. Retail comps were up 1% in the fourth quarter and 2% for the year. Given the challenging overall North American dynamics, we are quite pleased with the financial performance of our Heritage businesses.

Looking out to 2018 overall, I believe our 2017 performance demonstrates our strong execution and our continued commitment to execute against our strategic priorities. In 2017, we purposefully invested in areas most impacted by the changing dynamics in the industry. The growing prominence of digital, the importance of having a nimble and responsive supply chain, and our ever-present commitment to driving consumer engagement.

In 2018, we continue to build upon the investments made in 2018 around talent, our global operating platforms and systems, our consumer experience, and most importantly, our brands.

From a regional perspective, business perspective, in North America, in the first quarter, the environment continues to improve. Despite door closures and the recently announced Bon-Ton bankruptcy, our own North American stores continue to see improving traffic trends with comps up mid-single digits for Calvin Klein and high single digits in the Tommy Hilfiger business. Our Heritage business is also seeing low single-digit comp store increases.

Our international business continues to see great momentum quarter to date, with Tommy Hilfiger international business up mid-single digits and Calvin Klein international comps running up high single digits. Asia is also benefiting from a strong Chinese New Year selling season. We believe that the incredible brand power behind Calvin Klein and Tommy Hilfiger positioned us well in the marketplace against our competition and will drive continued momentum with earnings growth projected this year between 13% and 15%.

This earnings growth outlook reflects the macroeconomic and geopolitical volatility around the world and the uncertain global retail landscape. Given that backdrop, we are conservatively planning the second half of 2018. If this global landscape continues to stabilize and I saw business trends continue at this current level, we are in excellent position to outperform our 2018 financial guidance.

With that, I'm going to turn it over to Mike to quantify the fourth quarter and full-year results.

Michael Shaffer -- Executive Vice President, Chief Operating and Financial Officer

Thanks, Manny. The comments I'm about to make are based on non-GAAP results and are reconciled in our press release. I'm going to briefly touch on 2017 and then move on to 2018. Overall, our fourth quarter benefited from a 53rd week in 2017. Comparable store sales percentages that I mention exclude the extra week of sales.

Our reported revenues for the fourth quarter were up 19%, which exceeded out guidance and was inclusive of a 6% benefit from FX. Tommy Hilfiger revenues were very strong, up 22% inclusive of a 7% benefit from FX. The Tommy Hilfiger revenue increase was driven by exceptional international performance of 37% inclusive of a 13% benefit from FX. Outstanding performance of all geographies and channels drove the increase.

Our Tommy Hilfiger international revenues included a comp store sales increase of 6%. Tommy Hilfiger North America revenues were up 5%, inclusive of a 1% benefit from FX. North America was driven by strength and retail with 10% comps, all set in part by a planned decline in off-price sales.

Our Calvin Klein revenues were up 23% inclusive of a 5% benefit from FX in the fourth quarter. Calvin Klein international revenues were very strong, increasing 33%, inclusive of a 10% FX benefit, driven by outstanding performance in Europe and Asia. International comp store sales were up 4%. Calvin Klein North America revenues increased 13%. Strong wholesale performance across all categories and retail comps of 4% drove the increase. Our Heritage revenues were flat to the prior year, with our retail business running comp store sales of plus 1% comp.

Our non-GAAP earnings per share of $1.58 was $0.28 higher than the previous year and $0.14 better than the top end of our previous guidance. The EPS beat versus the previous guidance was driven by strong business for approximately $0.10, favorable FX of $0.02, and favorable taxes net of interest for approximately $0.02.

We ended the full year 2017 with record revenue of $8.9 billion, an increase of 9% over the prior year, inclusive of a 2% benefit from FX. And non-GAAP earnings per share was $7.94, which was 17% higher than the prior year.

Moving on to 2018 -- for the full year 2018, we are projecting non-GAAP earnings per share to be $9.00 to $9.10, 13% to 15% growth over the prior year. Included in our earnings per share is the positive impact of foreign currency translation of $0.35. Overall, we're projecting revenues to grow by about 7%, including the positive impact of 3% related to foreign currency.

Overall operating margins are expected to increase approximately 20 basis points for the company. Tommy Hilfiger revenues plan to increase 8%, inclusive of a positive impact of 4% related to foreign currency. Tommy Hilfiger operating margins are planned to increase about 50 basis points.

We project Calvin Klein revenues to grow 9% inclusive of the 2% related to foreign currency. We are planning Calvin Klein operating margins to be down 20 basis points, due to our highest operating margin business, the licensing business, will be down as a result of the impact of the Bon-Ton bankruptcy. In spite of the headwinds created by the Bon-Ton bankruptcy, we are still planning Calvin Klein earnings growth to be in the high single digits.

Our Heritage businesses plan to have relatively flat revenues and flat operating margins and is also negatively impacted by the effects of the Bon-Ton bankruptcy. Interest expense for the year is planned to be about $120 million compared to the prior year of $122 million. This decrease is primarily the result of the lower interest €600 million were issued in December of 2017, partially offset by higher interest rates in some of our variable debt.

In 2018, we are planning to pay down at least $250 million of our debt. Stock repurchases in 2018 are planned to be between $200 million and $250 million. Our tax rate for the year is estimated at 14.5% to 15.5%. As IRS regulations are expected to be issues later in 2018 related to the recent tax reform actually, our current estimates could be subject to change if the regulations differ from our current interpretation.

Capital expenditures for the year are planned at $450 million and reflect a $50 million shift from 2017 into 2018. First quarter non-GAAP earnings per share is planned at $2.20 to $2.25 and includes approximately $0.20 of estimated positive impact for foreign currency translation. Revenue in the first quarter is projected to increase 15% including positive impact of 6% from foreign exchange.

Tommy Hilfiger revenues are planned at a 19% increase, including 9% related to foreign exchange. Calvin Klein revenues are planned to increase 17%, including the positive impact of 5% related to foreign currency. Heritage brands are projected to increase 2%. Interest expense is projected to be $29 million for the first quarter and taxes to be about 16% to 17% in the first quarter.

And with that, Operator, 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're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is *1 if you'd like to ask a question.

We will open our questions with Bob Drbul from Guggenheim. Your line is open.

Bob Drbul -- Guggenheim Securities -- Senior Managing Director

Good morning.

Emanuel Chirico -- Chairman and Chief Executive Officer

Good morning, Bob.

Bob Drbul -- Guggenheim Securities -- Senior Managing Director

Manny, I was surprised Mike didn't correct it, but it's A$AP Rocky versus ASP Rocky. We're going to give you a pass on that one. Speaking of that, when you look at the marketing initiatives under way at both of your big brands now, the Tommy brand and now the Calvin business, where do you think we are in terms of the dollar expenditure or the rate? Are you at a good level in dollars or rate? Can you just talk us through how you think about the business investments that are going on around your two big brands there?

Emanuel Chirico -- Chairman and Chief Executive Officer

Okay, Bob. I guess I would say as a percentage of sales, I think we're at an appropriate level today to continue to drive the business and drive the growth going forward. We've taken advantage over the last couple of years, our outperformance to do what I think are some interesting and brand-moving initiatives and to really build upon that.

So, I guess I would say we're more than covered from a marketing point as we go forward as we hopefully continue to outperform our financial results, I think we would like to take some of that incremental profitability and put it back into the brand in events or initiatives that really, I think, are game-changers, like the Kardashians, like some of the things we've done with Amazon. I think it's trying to connect with that younger consumer, the next generation coming into both brands, making those emotional connections with them.

We are clearly at a very strong level today from where we were three years ago and we'll look to continue to do it opportunistically as we go forward.

Bob Drbul -- Guggenheim Securities -- Senior Managing Director

Okay. I guess my second question is whether it's in the North American market in the first quarter or even throughout Europe, is the weather impacting your business at all? Do you think it's hindering it? Can you maybe address that a little bit, please?

Emanuel Chirico -- Chairman and Chief Executive Officer

I would say in the first quarter here in North America, our business trends are very strong. We're living through a bunch of snowstorms that clearly didn't help business and trends. It doesn't seem like we can get out of these, especially in the Northeast and Midwest. We can't seem to get out of this dreary winter weather and move to spring early. But we're really not seeing it in our business trends in North America. So, I'm very happy with our trends, but from what I hear from other people, it is having an impact. In Europe, it's very cold. It's very dreary and it is having some negative impact on traffic and the conversion at those stores. So, as we are so clean with goods, we're very well set up for spring. We're ready to really rock and roll for spring. I think just working our way through that, we get some warmer weather, I think business will really pop again in Europe.

Bob Drbul -- Guggenheim Securities -- Senior Managing Director

Great. Thanks very much, Manny. Good luck.

Emanuel Chirico -- Chairman and Chief Executive Officer

Thank you.

Operator

And our next question is from Erinn Murphy from Piper Jaffray. Your line is open.

Erinn Murphy -- Piper Jaffray -- Analyst

Great. Thanks. Good morning and really nice end to the year. I guess just expanding on Bob's question on North America in Q1, broadly, you do sound pleased with the environment. Could you talk a little bit more about how you feel about the inventory in the channel, the promotional environment? And then if you think about the summer and fall business, how are retailers effectively positioning the forward business there?

Emanuel Chirico -- Chairman and Chief Executive Officer

I think inventories are really clean, came out of January in very strong position, not just as our businesses, which given the sales trend, we were chasing product constantly through the fourth quarter. But I think when I walk through stores, I was in Macy's, I was in a number of retailers, I just see a very clean inventory position. I don't see the aggressive clearance sales that we saw this time last year.

So, I think it's really benefiting in North America everyone's profitability as we move forward. I think that the topline will be fine, but I really think most retailers are going to be benefiting on a gross margin basis as we move forward through spring/summer.

Erinn Murphy -- Piper Jaffray -- Analyst

Okay. And then maybe just talk a little bit more about the denim category. You referenced some positive traction there. I believe you're relaunching Calvin denim globally. Can you just talk about how you're expecting that launch to kind of unfold as we get throughout the back half of the year? How big is denim overall, both for Calvin and Tommy and any other context for that category, which seems to be picking up?

Emanuel Chirico -- Chairman and Chief Executive Officer

Globally, we're very happy with our trends across both Calvin and Tommy on the denim side of the business. We're really benefiting from -- there seems to be a bit of the 1990s fashion cycle back into the brands. Our brands, particularly Tommy from a logo point of view, continues to be a big deliverer, T-shirts, that whole jeans area, and even our performance business is benefiting both in Calvin and Tommy from that trend in the market. So, I think we're very well-positioned as we go forward for that.

We are launching in fall -- it's more of an internal matter. For the last few years, we've been developing our jeans product both in North America and in Europe. The two teams have worked very closely together. But we've transitioned that now to one denim center of excellence in Europe before product has been previewed with all the retailers is that product. I think it just has made the brand presentation globally more cohesive and consistent. I think you'll see, particularly in North America, an elevation of product as we go into the fall season. The reception at retail from our partners has been very, very strong.

I think from a consumer perspective, I think you'll see a much sharper presentation of our varied fits that are there. I think at times, we weren't as clear to the consumer about our fits as we could have been. I think that's been adjusted. I think it gets further adjusted in very crisp, concise, clear messaging for the consumer and I think that's what they want to see to understand the Calvin product.

All of that, again, will be supported with the marketing that will continue. The Kardashian Jenner partnership continues into the fall season. It runs through all of 2018. That's been a real lift. Combined with great product, I think we're feeling really strongly about that business. And we're seeing tremendous growth in the audit books throughout Europe and Asia in that business. That's like our first clear indication. And sell-throughs at retail have dramatically improved over the last four months in the whole jeans category. So, I think we're really in excellent position to capture all of that.

Erinn Murphy -- Piper Jaffray -- Analyst

Thank you.

Operator

We'll take our next question from Michael Benetti from Credit Suisse. Your line is open.

Michael Binetti -- Credit Suisse -- Analyst

Hey, guys. Good morning. Let me add my congrats on a great quarter.

Emanuel Chirico -- Chairman and Chief Executive Officer

Thank you, Michael.

Michael Binetti -- Credit Suisse -- Analyst

Let me just pick on the guidance for a second. I want to think about after first quarter -- Manny, you did mention that the momentum today could drive upside through the year based on what you've seen in the business today, but certainly understandable with a bankruptcy in the channel last month why you'd want to be conservative.

The implied revenue momentum slows down a lot in the back half. You have things like pretty sticky order books in Europe that you pointed to. You've got great trends in first quarter, even with weather in both continents. Can you just talk about where you have confidence that if we don't have any kind of macro shocks, where do you see the most opportunity in the global model to deliver upside in the back-half if things continue at today's pace.

Emanuel Chirico -- Chairman and Chief Executive Officer

I'd say the biggest opportunity right now, I think there's two big opportunities for us. It's North America, particularly in our retail businesses, which really seem to have momentum right now. I think it's being driven by a couple of things. I think there's a strong consumer sentiment. There's general sense that the consumer environment is fairly strong and some positive momentum around that consumer as we move forward, coupled with foreign currencies moving where the dollar has weakened somewhat from where it was a year ago.

We're seeing more and more international tourist traffic throughout the United States. For our two brands, Calvin and Tommy, that really plays very strongly. So, we've seen a real uplift in North America on international traffic that usually drives a higher consumer spend on average at higher unit retails given the global brand position of both brands elevated throughout Europe and Asia compared to North America, the value equation is that great.

The other area where I think against our guidance which clearly should really outperform is Europe. The audit books are really running ahead of our guidance. We've been surprised by that. I think as we get through the first quarter and start to get even more visibility, we'll start to adjust the second half sales.

But given the kind of growth that we've already been able to come out with and just our past practices of trying to be conservative in the guidance and moving it along with the trends and not wanting to disappoint, I think we have a real opportunity to outperform those two sales plans in particular and that would clearly drive profitability in the second half of the year.

Michael Binetti -- Credit Suisse -- Analyst

Can I just ask a follow-up? I think you've given us enough breadcrumbs in how you think 2018 plays. Maybe we can talk a little bit about non-core opportunities like licenses and M&A. I guess does US tax reform change your ability to access cash to make some strategic moves? Do you see any licenses that make sense to bring into the business based on opportunities in front of you this year? Then thoughts on a third big brand -- obviously, your playbook is working for more than one brand at this point. How actively are you looking at new ideas and if so, what are some of the more interesting areas you might hunt in?

Emanuel Chirico -- Chairman and Chief Executive Officer

Sure. Let me take that in pieces. One is the tax changes really don't impact or ability or access to cash in order to make investments, just demonstrated by the last year, we've made a number of license buybacks. We've made a number of investments. It's not slowing us down at all. Thankfully, we're not capital constrained and our capital allocation and our capital structure has dramatically improved over the last two years. That gives us a lot of access to cash at these levels, which I think are relatively attractive interest rates.

So, we're not constrained at all from growth from cash and capital. We'll continue to look at license buybacks. I think the most interesting opportunities continue to be international with both Asia, particularly greater China for the Tommy Hilfiger brand, Hong Kong, Macau, the Central/Southeast Asia market, which is with a license partner today, that's an area that we'd look to aggressively move in.

Brazil is another area that we think is on the uptick. I think that's probably a little further out. That's an area where we'd also like to take back our Tommy Hilfiger license over time and grow that business as aggressively as we have. We feel that that geographic region over the next 12 to 18 months is going to start to see some significant improvement against where they've been. So, we're looking at that opportunistically as well. And there are some product category opportunities. They're not as large, but there are opportunities that we're looking at as well.

As far as a third brand, it's clearly an area we're spending time on. We're trying to be aggressive and at the same time prudent. We are looking at different opportunities. I think we're not going to go very far afield from where we've been. So, I don't think the market has to worry about us going all the way skewing one way or another into categories that we don't have expertise in. So, I think we're looking, we're aggressive, and we would hope that some opportunity would come across that makes sense.

Michael Binetti -- Credit Suisse -- Analyst

Thanks a lot, guys, and congrats again.

Emanuel Chirico -- Chairman and Chief Executive Officer

Thank you.

Operator

And our next question comes from Matthew Boss from JPMorgan. Your line is open.

Matthew Boss -- JPMorgan -- Analyst

Thanks. Congrats on a nice quarter, guys.

Emanuel Chirico -- Chairman and Chief Executive Officer

Thanks.

Matthew Boss -- JPMorgan -- Analyst

So, larger picture, Manny, do you see anything structural constraining your ability to reach the 12% multi-year margin target? As we think across the brand portfolio, where do you see the most opportunity or low-hanging fruit remaining from here?

Emanuel Chirico -- Chairman and Chief Executive Officer

I don't see any problem over time the next three years getting to that 12% operating margin. I think probably our financial projections aren't anywhere near that, but I think structurally, there's nothing that should stop us. In that light, the biggest issue that we've had to deal with has been currencies in the past.

And again, if currencies like the euro were closer to $1.30 to $1.35, we'd already be at 12%. That transactional hedge and transactional hit that we've had to take has really put pressure on our profitability. You saw that in '15 and '16. So, we're starting to recover from that and we're starting to see improvements in '18 and '19. If currencies stay where they are, there's clearly opportunity there.

I think the biggest opportunity from a product and a brand point of view or region point of view continues to be Calvin Klein Europe. That's totally driven by the fact that the business today, Calvin Klein is about 40% or 45% the size of the Tommy Hilfiger business. We use that as a benchmark because we think from a sportswear and most categories we're in, Tommy Hilfiger is the leader in market share throughout Europe.

We believe on the more modern contemporary side of the floor away from the traditional, more US preppy type of product that Tommy has, we think Alvin could have a similar size business in Europe, which would basically translate into a doubling in size over the next five years. So, that continues to be, I think, our biggest opportunity. I think after that, both Calvin and Tommy have an unlimited runway in Asia, driven by the growth that can come from China and our position with China in that region and the greater China market. That continues to be a growth area for us.

I think given our development in those two areas, our operating platforms in Europe and Asia, we're in an excellent position to take advantage of those opportunities as we move forward and as we've done for the last three years.

Matthew Boss -- JPMorgan -- Analyst

Great. And then just a follow-up question -- the 20% growth in digital to me was the clear callout. I guess what's your sales penetration of digital today? Do you think this kind of growth is sustainable? What's the best way to think about your digital margins versus your store margin today and the best way to think about it going forward?

Emanuel Chirico -- Chairman and Chief Executive Officer

Okay. I would say our digital penetration today on a retail sales basis -- a lot of our transactions or on a wholesale basis selling through our retail pure play and retail department store customers, I think our penetration, round numbers, is around 10%. I think we would target over the next five years that it should be 20%.

The profitability in that channel overall is very similar to our profitability across our other channels. I think the wholesale business there is very nicely profitable and as we scale our direct to consumer e-commerce business, that's clearly today not as profitable as our other channels of distribution. But we believe that's really scale-driven and as that scale grows, there's no reason why that scale shouldn't be double-digit kind of operating margin moving forward in a 10% to 12% kind of range and our direct to consumer e-commerce platform, very similar to our retail model.

So, I think that's where we're headed and I think it feels like those numbers are very attainable as we sought to drive the business forward.

Matthew Boss -- JPMorgan -- Analyst

That's great color. Best of luck.

Emanuel Chirico -- Chairman and Chief Executive Officer

Thanks.

Operator

Our next question comes from Kate McShane from Citi. Your line is open.

Kate McShane -- Citi -- Managing Director

Hi, good morning. Thanks for taking my question. Manny, I was wondering if you could remind us with your Amazon business, do you have a percentage or general percentage of mix of what is pure fashion versus more what's replenishment? I'm just asking because I wonder how this mix might change over the upcoming year and any insights into how buying fashion versus more of the commoditized replenishment product.

Emanuel Chirico -- Chairman and Chief Executive Officer

At this point and time, given our mix of product and their propensity to sell core much better than fashion at this point in their evolution, I think we're between 70% and 80% core replenishment or basic kind of product. I think that mix will change over time. But I think it's a -- right now, again, depends whose crystal ball you look into -- right now, at this point in time, I think that's a slow evolution as the consumer really gets more and more comfortable about buying fashion online and how well not only Amazon, but a lot of the pure plays, present fashion.

I think their algorithms and how it drives the business are very much built on a replenishment, continue to keep the consumer happy in key core categories, the maturity level at Amazon in particular when it comes to fashion needs to be further developed. It's just not where it needs to be right now. I think clearly they're on it and there's opportunity there, but they don't have the metrics at this point and they don't have the presentation of product at this point that would really drive it.

Kate McShane -- Citi -- Managing Director

Okay. That's helpful. Thank you. Mike, I just wanted to ask a question about gross margins. I wondered what was being contemplated for some of the higher commodity costs this year, like cotton. Will there be any planned price increases and any thoughts around the potential for tariffs and how that might be managed?

Michael Shaffer -- Executive Vice President, Chief Operating and Financial Officer

Okay. So, I guess overall product costs, we're looking at low single-digit kind of growth, very low single digits. We've seemed to manage to offset and move around, get the price benefits we needed to offset some of the cotton increases. We have been feeling some pressure on silk and a lot of talk about freight. But freight costs have not impacted us, the nature of our contracts are a little longer-term, I think, than most. So, we've managed to not see any freight increases.

On duties and tariffs, we do business. We do bring product in from China. If there were changes, we would be impacted to some degree. It is one of our larger countries. However, for the US, it's not as significant as one might think. While we're about a third of our business coming from China for the company, the US is only between 20% to 25%.

I think when you look across the retail of the wholesale landscape, I think you'd find that that's much lower than most others in terms of how people source from China today. So, there would be impact but we would have over time looked to raise prices and/or move product out of that country over time.

Emanuel Chirico -- Chairman and Chief Executive Officer

And I guess, Kate, the only thing I would ad -- I'll do a commercial -- is we're really opposed to the idea of tariffs to solve this problem with China. Clearly, there's a problem with China. It's not a level playing field and I personally think the administration needs to be aggressive and needs some tools to bring China to the table to have a reasonable negotiation, but it just doesn't seem appropriate for an apparel category that already has tariffs between 20% and 30% on our goods coming in from China today to think about putting another 25% on top of that.

It's not logical. It doesn't seem like that's really where the wind is blowing in Washington that apparently would be one of the targeted categories, but there's no guarantees, but that's what it feels like. It feels like as a parent if my son does something wrong, it just feels like I'm punishing my daughter for his misdeeds. It's not logical to us that apparel towers should be the weapon of choice if we're going to really deal with technology, communication, heavy industry issues with China. That seems the place where appropriately would go. Sorry for the commercial.

Michael Shaffer -- Executive Vice President, Chief Operating and Financial Officer

And Kate, just overall, for our guidance for 2018, we've reflected about 90 basis points of improvement in gross margin. Of course, a portion of that is mix. We are seeing our international businesses grow faster with higher gross margins and a portion of that is getting higher AURs.

Kate McShane -- Citi -- Managing Director

Thank you, very helpful.

Operator

Our next question comes from Chethan Mallela from Barclays. Your line is open.

Chethan Mallela -- Barclays -- Vice President

Hey, good morning. I just want to ask about the True & Co. acquisition that you announced around a year ago. Can you provide an update on how that integration has gone? I think at the time of the announcement, you expected to see some benefits from their data mining expertise and leveraging your capabilities to grow the brand. So, it would be helpful to get a better sense of how that manifested.

Michael Shaffer -- Executive Vice President, Chief Operating and Financial Officer

Look, it's been, from an integration perspective, we've definitely seen the company move into PVH without a hitch. We've managed to retain the talent. We've managed to keep the systems up and running. It's been a good learning experience for us. To put it in perspective, it was a fairly small acquisition in the scheme of PVH.

As we look backward at the acquisition, we did talk about some of the benefits of data. We are working with the True team and the True team is working with the PVH team. We have seen some benefits cross-divisionally, particularly in the underwear and the women's intimates categories. Consumer data is a focus for us. We are moving it forward through true and with our underwear and imitates group at PVH.

Emanuel Chirico -- Chairman and Chief Executive Officer

And the only thing I'd add is the learnings that we've really gotten have been on the data mining side. We're really sharing across platforms, both Calvin, Tommy, and True to really understand that consumer and their shopping behaviors. We've also learned a lot about what the most efficient way to gain eyeballs, drive sales and traffic, we've really had some real learnings that I think will benefit particularly the Calvin Klein business as we move into 2018, our online digital business, about how to be more efficient with some of our advertising.

Chethan Mallela -- Barclays -- Vice President

Great. Just as a quick follow-up, can you just dimensionalize how you're thinking about the Chinese New Year shift in the context of the sales and EPS guidance for 1Q?

Emanuel Chirico -- Chairman and Chief Executive Officer

Yeah. Sure. So, Chinese New Year was a negative for us in the fourth quarter of 2017 and was a nice positive for us in the first quarter of 2018. I think it explains part of the reason why the sales momentum and the earnings growth in the first quarter significantly exceeds our guidance for the full year. Besides our conservatism about the second half of the year, the first quarter is really benefiting from Chinese New Year. I think that does it well.

Chethan Mallela -- Barclays -- Vice President

Perfect. Thanks so much.

Emanuel Chirico -- Chairman and Chief Executive Officer

Thanks.

Operator

Our next question comes from Heather Balsky from Bank of America. Your line is open.

Heather Balsky -- Bank of America -- Analyst

Hi, thank you for taking my question. Can you just talk about your supply chain initiatives and where you are in terms of speed to market and your ability to chase sales? Thanks.

Emanuel Chirico -- Chairman and Chief Executive Officer

Sure. Mike?

Michael Shaffer -- Executive Vice President, Chief Operating and Financial Officer

Look, speed to market is a focus for us. We're a heavy -- one of our opportunities to continues to be more and more -- on the core products side we've made great strides in terms of replenishment product and being able to do quick replenishment in 10 to 20 days in terms of getting product from factory or from order to North America and even in Europe now as well.

So, we're very much up and running on the basic categories and on the core categories of our business. Now we're moving more into the read and react and to the fashion categories and trying to understand how to get quick replenishment or quickly back into goods there. We've made some great strides on the underwear side of the business and on the dress shirt side of the business and now continuing to move that forward outside of those two categories.

Emanuel Chirico -- Chairman and Chief Executive Officer

If I could just, the last point I'd just add to that is particularly in our international markets, which I don't think in general are as developed from a core replenishment point of view as our North American business is. I think there's been a lot of progress made there and I think that has been a big part of our outperformance. You get great sell-throughs and great selling.

If you're not able to keep that momentum going, you lose the momentum and you lose the potential sale and the teams have done a great job of positioning product, positioning inventory and raw materials in order to really narrow that cycle and capture that growth opportunity. I think that's one reason over the last six to nine months you've seen our inventory grow a little bit more than our sales growth because we're really making those investments in raw materials, positioning in order to have the goods in order to sell it.

The risk on that core replenishment business from a markdown point of view is very low when you think about it, both even in core sports where it's very low and you just have some cost of inventory. Given our margins globally and even in the United States on core being so high, the payback on that is tremendous. I think it's been a great investment for us and I give the management teams great credit for going after it.

Heather Balsky -- Bank of America -- Analyst

Great. Thank you. As a follow-up on operating margin, would you be able to help break it down a little bit more for 2018? There were a couple of, I guess, one-time items, like the Bob-Ton bankruptcy and the 53rd week, and your getting a benefit from currency. Could you just help us piece it all together? Thank.

Michael Shaffer -- Executive Vice President, Chief Operating and Financial Officer

Yeah. Look, I've been trying to lump it all together. The way I look at it is we've got about $0.35 in benefit for FX. We've got a hit of about $0.20 on the Bob-Ton, which affects both direct business as well as hit on the licensing business. Then the 53rd week, losing it this year offset by the benefit of Chinese New Year is worth a dime. So, that's how I've been just pushing it all together at this point.

Emanuel Chirico -- Chairman and Chief Executive Officer

That explains the earnings really well. On the margins side, I think Mike laid it out really well, the details by business category. The Bob-Ton, particularly on the licensing side of the business, obviously, licensing is a 100% gross margin business. There's no product cost. So, when you lose a nice stream like that, we were really planning it for zero this year, that has a minor hit on the Calvin Clein operating margins for '18, which I think if you took that out of it, you'd be seeing growth on those operating margins.

Heather Balsky -- Bank of America -- Analyst

Great. Thank you again.

Operator

And our next question comes from John Kernan from Cowen & Company. Your line is open.

John Kernan -- Cowen and Company -- Analyst

Good morning, Manny and Mike. Thanks for squeezing me in. Just a follow-up question on the conservatism and the guidance in the back half. Would you consider reinvesting into SG&A if the environment does turn out to be better than what you're planning for at this point. You've obviously earned some fairly high returns on the topline from the marketing investments in Fiscal 17. So, I was just wondering if you'd ramped that back up on the back-half. Should the environment get a little bit better?

Emanuel Chirico -- Chairman and Chief Executive Officer

A couple of things, John -- we're maintaining, even with the investments we made in '17, the incremental investments, we're maintaining that marketing spend as a percentage of sales at that level. We're not backing away from where we are. I think there's a potential that we might potentially invest a little bit more if we outperform significantly.

I don't have the math in front of me because part of that outperformance would be topline growth. If we grow the topline, we'll increase the marketing spend as a percentage of sales. Might we, if there's something that's dramatic that we can do from a marketing point of view like we did with Amazon or we've done with the Kardashians or Lewis Hamilton, might we want to take advantage of that? Yes. But we would only do that in the context of outperforming our plan.

The guidance we've given, the projections we have have more than enough marketing, SG&A investment in order to deliver the plan and beyond. It's just a question if we start to outperform, I think we will take some of that outperformance and put it back into some of the brands and growth initiatives. That formula the last three years has worked really well for us as we've been able to, in a tough environment, continue the momentum, keep going. The real focus will be marketing and digital investments where we're making substantial, but being able to to more could drive business in the future.

Operator, we'll take our last question.

Operator

And our last question comes from Ike Boruchow from Wells Fargo. Your line is open.

Ike Boruchow -- Wells Fargo -- Managing Director

Hey, thanks. Good morning. Let me add my congrats. I guess, Manny, just a quick one from me. You talked about how clean the US whole channel looks right now. You also talked about a planned pullback with Tommy in the US within the off-price channel. Could you just talk about how you're looking at the off-price space maybe into 2018, not just for Tommy, but Calvin, thinking about that channel as you balance your growth domestically.

Emanuel Chirico -- Chairman and Chief Executive Officer

Sure. The last sentence is really the key. It's all about balance. As that channel distribution is -- it's not a channel I shop directly all that often, but it's a channel that continues to appear pretty healthy to me. I know there's been some blips along the way and some of those things. I think it's a channel the off-price retailers continue to gain share in the overall market and it's a market that in the US, if done appropriately, is a great complement to your business and to your profitability, but it needs to be done appropriately.

For us, what we've done over the last four years, as our topline has grown, we've actually lowered the percentage of our exposure into that channel, although the total dollars are about flat. As a percentage of sales, it's come down. I think that will be more of the strategy as we go forward.

We want to, especially for the two big brands, Calvin and Tommy, as we are really expanding our higher end component of that business, both the Calvin with some of our key retailers in North America, and Tommy, with some of those key retailers in what I would call the premium distribution, Macy's up, we want to really support that so we don't want to be overexposed in the off-price channel. I think there's a balance given the dynamics of this market and we'll continue to press those levers going forward.

With that, we're going to close our call. I want to wish everybody a happy Easter and a happy Passover. We look forward to speaking to you at the end of May and early June about our first quarter results. Have a great day, everyone.

Operator

That concludes today's conference. Thank you for your participation. You may now disconnect.

Duration: 63 minutes

Call participants:

Emanuel Chirico -- Chairman and Chief Executive Officer

Michael Shaffer -- Executive Vice President, Chief Operating and Financial Officer

Dana Perlman -- Senior Vice President, Business Development and Investor Relations

Ken Duane -- Chief Executive Officer, Heritage Brands and North America Wholesale

Bob Drbul -- Guggenheim Securities -- Senior Managing Director

Erinn Murphy -- Piper Jaffray -- Analyst

Michael Binetti -- Credit Suisse -- Analyst

Matthew Boss -- JPMorgan -- Analyst

Kate McShane -- Citi -- Managing Director

Chethan Mallela -- Barclays -- Vice President

Heather Balsky -- Bank of America -- Analyst

John Kernan -- Cowen and Company -- Analyst

Ike Boruchow -- Wells Fargo -- Managing Director

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