Manny Chirico - Chairman and CEO Mike Shaffer - COO and CFO.

Bob Drbul - Guggenheim David Glick - Buckingham Research Group Erinn Murphy - Piper Jaffray Michael Binetti - UBS John Kernan - Cowen & Company Ike Boruchow - Wells Fargo Kate McShane - Citi Jay Sole - Morgan Stanley.

Good morning everyone and welcome to the PVH Corp’s Fourth Quarter 2016 Earnings Conference Call. This webcast and conference call is being recorded on behalf of PVH and consists of copyrighted material. It may not be recorded, rebroadcast or otherwise used without PVH's written permission.

Your participation in the question-and-answer session constitutes your consent to 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 22, 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 a subject of this call.

These risks and uncertainties include PVH's right to change its strategies, objectives, expectations and intentions and its need to use significant cash flow to service its debt obligations. Therefore, the company's future results of operations could differ materially from historical results or current expectations.

PVH does not undertake any obligation to update publicly any forward-looking statement, including, without limitation, any estimate regarding revenues or earnings. Generally, the financial information and guidance provided is on the non-GAAP basis as defined under SEC rules.

Reconciliations to GAAP amounts are included in PVH’s fourth quarter 2016 earnings results, which can be found on www.pvh.com and in the company's current report on Form 8-K furnished to the SEC in connection with the release. At this time, I am pleased to turn the conference over to Mr. Manny Chirico, Chairman and CEO of PVH..

Thank you, Karina. Good morning everyone. Joining me on the call is Mike Shaffer, our Chief Financial Officer and Chief Operating Officer; Dana Perlman, our Head of Treasuries and Investor Relations; and Ken Duane, who runs our North American Wholesale Businesses.

Overall our strong performance in the fourth quarter exceeded our expectation and our full year 2016 performance demonstrated our ability to over deliver against our initial 2016 plans. Despite the ongoing challenging macro-environment and a highly promotional retail market in the United States.

We grew 2016 earnings per share 20% on a constant currency basis above our long-term growth target. Throughout the year our performance was driven by the momentum across our Calvin Klein and Tommy Hilfiger businesses, with our international businesses truly the highlight. Our European and China businesses continue to be our healthiest markets.

And we have seen relatively strong performance in our North American wholesale businesses. Strength has been seen across all distribution channels; wholesale, retail, and our digital channels. Speaking of digital, outsized growth continues across our digital e-commerce business.

For both the fourth quarter and the year we continue to generate revenue growth in excess of 20%. And this channel continues to be our fastest growing distribution channels. During the quarter we started to see an improvement in trend in our U.S. outlet stores located in international tourist destination locations as terrific begin to stabilize a bit.

As important as the domestic business has been historically, our international business continues to outpace our domestic growth, which is further diversifying our revenue and earning streams. We believe this trend will only continue to accelerate in 2017.

Before I get into our individual brand performance, I would like to comments on our recently announced acquisition of True&Co. True is a direct-to-consumer intimate apparel e-commerce retailer.

This acquisition will enable us to further participate in this fast growing online channel and provides a platform to increase innovation data driven decisions and speed in the way we see -- we serve our consumers. We believe that over time we will also be able to leverage the mindset and expertise of this model across our other apparel businesses.

Moving to our brands let me begin with Tommy Hilfiger. The Hilfiger brand health and relevance remained exceptionally strong globally during 2016. The brand has seen a positive reception from consumers with both brand awareness and interest to purchase up on a year-over-year basis.

One of the brand highest profile initiatives was a successful re-launch of its global women’s business in second half of the year, with Gigi Hadid as our brand ambassador.

The partnership has enabled the brand to reach a new women’s consumer, by capitalizing on Gigi’s impressive social media following, which includes over 30 million Instagram followers and the reaction has been terrific.

The Gigi partnership has created a halo effect across all women’s categories and has generated double-digit sales growth in our women’s business across all global regions. Moving into the financials, overall revenues for Tommy increased 5% on a constant currency basis for both the fourth quarter and fiscal year ‘16.

And earnings were up over 18% on a constant currency basis, both for the fourth quarter and the year. Our revenues were driven by the outstanding performance of our international business, which generated over 14% constant currency sales growth in the quarter and for the year. Our Tommy Europe performance continues to be a standout for us.

Both fourth quarter and the year highlighted the strength of the brand in our largest region. It is clear that the brand is very healthy across all of the European markets and channels and we have achieved nice market share gains throughout Europe.

All major European markets are performing demonstrated by a 7% comp store increase in the fourth quarter and a 9% increase for the year. As strong as our retail business has been our wholesale performance in 2016 was quite impressive, but I am extremely pleased with our forward order book.

As I told you last quarter, our Spring 2017 [ph] order book was up close to 8% and our Fall 2017 order book has now come in at nearly a 10% increase versus the prior year.

Let me move to Asia, our Tommy Asia business led by China continues to perform well and we believe the investments in marketing and the positive changes we are making to the business model through the integration with the Calvin Klein China business will support the long-term growth of the brand going forward.

Our strong performance in China continues into the first quarter of the year and I believe given this momentum, we are well positioned to outperform our 2017 financial plans. Tommy Hilfiger North America saw a strong men’s wholesale business both in the fourth quarter and really all year.

We are pleased with our outperformance relative to our competitors at wholesale this year. As a reminder, we successfully transitioned the women’s wholesale business to G3, beginning in the fourth quarter. And we look forward to seeing that performance as we move into 2017.

Shifting to retail, during the quarter, we saw some stabilization in international tourist traffic in our outlet stores. However, it was not enough to materially change the pressure on that business, which we have been experienced all year, including the highly promotional U.S.

market as comparable store sales were down 7% for the quarter and 9% for the year. Moving to Calvin Klein, speaking about the brand, creatively Calvin Klein had a tremendous year, as the brand captured compelling brand and cultural relevancy.

With the focus on a digital consumer engagement, the brand continues to drive strong digital advertising campaigns, which have created impactful interactions with consumers.

Additionally from a branding perspective we continue to diversify our distribution through key specialty chains and stores for both our Halo collection product as well as our Calvin Klein jeans and underwear lines.

Since we spoke last, I am pleased to say that Raf Simons first runway show for men’s and women’s in February, received overwhelmingly strong reviews and we believe -- and the brand continues to bring fashion credibility and a [indiscernible] buzz around the collection.

From a product perspective 2016 Calvin Klein also delivered strong performance across its major product categories. Calvin Klein underwear continue to experience strong global momentum, particularly in women’s and we believe that significant wide space still remains.

Calvin Klein jeans continued its growth trajectory, as the brand remains very strong in Asia and Latin America and we have made significant progress in Europe and North America. Notably the launch of Calvin Klein jeans sculpted jeans resonate with consumers across all regions.

These two categories achieved significant market share gains during 2016 demonstrating the power of the brand. From a financial perspective, revenues were flat for the quarter in large part due to the loss of approximately $25 million in sales from Mexico as we formed a Mexico joint venture.

Revenues however were up 9% on a constant currency basis, reflecting strong global trends. Our revenues were driven by strong top-line growth out of Europe, China and North America wholesale across all classifications with all posting strong gross margin improvement.

While EBIT on a constant currency was down for the quarter due to a $30 million planned marketing expense increase, as well as the creative leadership changes we have made that we have previously discussed with you, EBIT for the year was up 11% on a constant currency basis.

Moving to Europe, Calvin Klein Europe results continues to demonstrate the incredible performance that we've seen all year both from a top-line and a bottom-line basis. And I cannot be more pleased with the direction of the business.

We experienced strong performance with fall holiday 2016 wholesale and our fourth quarter retail business saw a strong comps up mid-to-high single digits across all regions and very healthy gross margins across both businesses as we experience lower than planned markdown as a result of strong sell-throughs.

As we have previously discussed with you, our spring 2017 wholesale order book is up about 20% and I'm very pleased to report that our fall 2017 order book is up north of 25%.

The strength of the business across all distribution channels is coming from all major markets across all product categories, with an acceleration in both jeans and the underwear categories. And we have also seen significant growth in our newer product categories of accessories and men's apparel.

Moving to our Asia business, Calvin Klein Asia continues to perform well with China outperforming other markets and that performance is across all product categories. During the quarter we did see a continued improvement in our Hong Kong and Korea businesses relative to the first nine months of the year.

Our intentional comp sales increased 6% for the quarter. In North America, Calvin Klein continues to see healthy growth across our wholesale channels in line with our plans, which reflected lower open to buy dollars from retailers versus the prior year.

As a reminder in the fourth quarter of 2015 we saw large fix to fill programs in particular in underwear that we were up against in the fourth quarter. Despite this and the highly promotional U.S. environment during the quarter, I'm very pleased to report that we continue to see strength across all categories.

In our wholesale business from our dress shirts to sportswear jeans and certainly our underwear business led by the continued momentum in women's intimates. Shifting to retail, our Calvin Klein North America business saw a similar stabilization in international tourist traffic and spend.

And an improvement relative to the first nine months as overall comp store sales were down only 2% for the quarter versus 4% for the year.

Moving to Heritage, finally in our Heritage business the Heritage revenue declined 5% for the quarter and 10% for the quarter, driven by our ongoing program of rationalization some of our brands and businesses, which began in 2015 including the exit of the Izod retail business and the discontinuation of several license brand within its dress furnishing group.

Our Heritage business has trended positively against our full year 2016 financial plan with improving gross margins and operating margins. As a result of the performance through the first nine months of the year, we decided to invest approximately $5 million in additional marketing to help drive the business as we move into 2017.

Specifically we have seen generally steady consistent performance across all of our businesses, including Heritage Retail which comped up 7% for the year. The only business that has experienced pressure has been neckwear business, which has faced soft trends all year.

Overall, I believe our consolidated 2016 results demonstrated our strong execution and continued commitment to execute against our growth strategies which include; first driving consumer engagement by investing in product, marketing and in-store and online experiences.

Second, expanding Calvin Klein and Tommy Hilfiger’s worldwide reach by assuming more direct control over various license businesses around the world. And third, investing in our global operating platforms and digital platforms to support our growth initiatives, while making positive impact in the communities where we live and work.

In 2017, we plan to build on the investments made in 2016 around talent, our global operating platforms and systems, our consumer experience and most importantly our brands. We continue to take a prudent approach to plan our 2017 business in light of the global macro environment and the geopolitical volatility around the world.

The uncertain global retail landscape, as well as the strengthening U.S. dollar have caused us to be very conservative in our estimates. We are looking for reported earnings growth of 7% to 9%, and on a constant currency earnings basis growth of 13% to 15%.

When you look at the business regionally from a planning point of view, in North America the environment continues to be difficult. With the recently announced department store closures and the challenging traffic trends, which continue and we plan on -- and we are projecting those to continue throughout 2017.

Our North American retail stores continue to see traffic pressure. However I can confirm that the stabilizing international traffic experience -- trends we experienced in the fourth quarter continue into the first quarter.

Comps for Calvin Klein North America and Tommy North America are both trending down mid-single digit quarter-to-date with the Easter shift on the comp in April. Our international businesses continue to see great momentum quarter-to-date.

With Tommy and Calvin international comps running up mid to high single digits, with outperformance continuing to come out of Europe and China. And with that I’ll turn it over to Mike Shaffer, who will quantify our results for the quarter and the year..

Thanks, Manny. The comments I am about to make are based on non-GAAP results and are reconciled in our press release. I’m going to briefly touch on the fourth quarter of 2016 and then move on to 2017. Our reported revenues for the fourth quarter were flat for the prior year and exceeded our guidance.

On the constant currency basis fourth quarter revenues increased 1%. Tommy Hilfiger revenues were on plan and up 5% on a constant currency basis inclusive on the move women’s North America wholesale business to G3 in the fourth quarter.

The Tommy Hilfiger revenue increase was driven by strong international performance, including a 7% comp store increase in Europe. Our Calvin Klein revenues were flat to the prior year on a constant currency basis and exceeded guidance.

Negatively impacting revenues versus the prior year was a deconsolidation of our Mexico business, which was worth approximately $25 million as well as a significant one time fixture fill in the prior year due to the expansion of the wholesale North America underwear business.

Calvin Klein international revenues increased 14% on a constant currency basis with the 6% comp store increase, as well as strong wholesale performance. Heritage revenues were down 5% slightly below plan due primarily to the discontinuation of several license product lines in the dress furnishings business.

Our non-GAAP earning per share was $0.05 better than the top end of our previous guidance, the EPS beat was driven by our overall revenue outperformance for approximately $0.03 and favorable interest and taxes for approximately $0.02. Our inventories ended the year very clean and flat for the prior year.

Moving on to 2017, in 2017 we are currently anticipating that we’ll be negatively impacted by $0.40 per share due to foreign currency. The $0.40 impact is approximately 60% driven by translation and 40% driven by transaction. For the full year 2017, we’re projecting non-GAAP earnings per share to be $7.30 to $7.40.

If you exclude the negative impact of FX of $0.40 we have constant currency earnings per share growth of 13% to 15% over the prior year. Overall, we are projecting constant currency revenues to grow approximately 4% excluding the negative impact of 2% relative to foreign currency.

2017 revenues will be negatively impacted by approximately $70 million related to our Mexico deconsolidation, approximately $80 million related to the transfer of the Tommy Hilfiger North America wholesale business to G3.

2017 revenues will be positively impacted by a net amount of approximately $30 related to 2017 being a 53 week year, partially offset by the negative impact of the timing of Chinese New Year.

Overall operating margins are expected to increase approximately 30 to 40 basis points on a constant currency basis and increase approximately 10 to 20 basis points on an as reported basis.

We project Calvin Klein revenues to grow 7% on a constant currency basis, excluding the impact of a negative 2% related to foreign currency and including the negative impact of the Mexico deconsolidation.

We are planning Calvin Klein operating margins to be relatively flat on a constant currency basis and to decrease 30 to 40 points on an as reported basis.

Our Calvin Klein earnings will be negatively impacted in 2017, mostly in the first half of the year by the continuation of the investments made in the later part of 2016 related to brand investments in advertising and creative leadership.

Tommy Hilfiger revenues are planned to increase 4% on a constant currency basis, excluding a negative impact of 3% related to foreign currency and including the negative impact of the transfer of the North American wholesale women’s business.

Tommy Hilfiger operating margins are planned to increase about 100 basis points on a constant currency basis and to increase about 75 basis points on an as reported basis. Our Heritage business is planned to have a revenue decrease of 1%. Operating margins in our Heritage business are planned to increase about 20 to 30 basis points.

The impact of foreign currency on our Heritage business is relatively immaterial. Our corporate segment expenses are planned to increase about 15%. The increase reflects low single-digit growth in our overhead, as well as startup 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 EUR350 million bonds issued in June of 2016.

In 2017, we are planning to pay down at least $250 million of our debt and stock repurchases are planned to be between $200 million and $215 million. Our tax rate for the year is planned at about 18%. First quarter non-GAAP earnings per share is planned at $1.58 to $1.60 and includes $0.10 of estimated negative impact for foreign currency.

Excluding the negative impact, we are expecting earnings per share to increase 12% to 13% for the first quarter. Revenue in the first quarter is projected to increase 4% on a constant currency basis, excluding the negative impact of 2% related to foreign currency.

Negatively impacting revenue in the first quarter of 2017 is a Mexico deconsolidation and transfer of the Tommy Hilfiger North America wholesale women’s business, partially offset by a full quarter of revenue for Tommy Hilfiger China business, which we acquired in the first quarter of 2016.

Calvin Klein revenues are planned at a 5% constant currency increase, excluding the negative impact of 2% related to foreign currency, Tommy Hilfiger revenues are planned at 8% constant currency increase, excluding the negative impact of 4% related to foreign currency. And lastly Heritage brand revenues are projected to decrease 3%.

Interest expense is projected to be about $29 million and taxes to be about 20% in the first quarter. And with that, we will open it for questions..

[Operator Instructions] And we'll take our first question from Bob Drbul with Guggenheim. Please go ahead..

Hi, good morning guys..

Good morning..

I guess Manny the first question is around e-commerce with this acquisition that you recently have completed, can you just talk a little bit about how your relationship with Amazon has developed and how this would change or alter that? Sort of how big is e-commerce for you today?.

Well we don’t disclose the e-commerce overall from a reported point of view. But on a retail sales basis overall we do about $1 billion in sales with all of our brands. The True acquisition is it's a relatively small business today. What it provides us is with the platform and expertise particularly from a data mining point of view with the consumer.

And we're really going to use it as a laboratory to understand that business better. We believe we can grow the True brand globally effectively given our intimate expertise both from a logistics and sourcing point of view. I think they were lacking in those capabilities, but clearly had great capabilities from a digital point of view.

So we're going to have to see how it all plays out, it's a relatively small acquisition for us, but it could be a very exciting acquisition as we go forward..

Got it. Since I sort of got you on that one Manny, I'm going to ask Mike a question.

On the marketing expenses, can you talk a little bit about the plans for '17 Mike, given the increases in '16, how you're thinking about that as an expense for 2017 and how you approach it?.

Yes, Bob, the marketing expense as we look forward for 2017 we’re pretty much flat as a percent of sales with the dollars growing obviously because the revenues are growing.

The timing it's pretty much going to be less, it was heavily weighted to the fourth quarter, it would be a little bit spread out definitely, but for the most part flat as a percent of sales..

Great, thank you very much..

[Operator Instructions]. We'll take our next question from David Glick with Buckingham Research Group. Please go ahead..

Thank you good morning. Manny there is a perception out there that maybe holding back the valuation of your stock that you have high exposure to the U.S. department store sector. With growth in your international business and even within the U.S. in specialty retail, your department store exposure has come down over the years.

Can you walk us through kind of where it's been, where it is and where you see it going just so we can get some clarity just given the challenges that that sector is seeing. Thank you..

Sure, well I guess I'd say a couple of things David. The department store sector in North America, in the United States in particular it's very important to us and it's the highly profitable channel. And those retailers are great strategic partners as we work together.

But I think it's pretty clear that over the last seven years we've done a lot to significantly diversify our business model. Today 50% of our revenues are outside the United States, I think that's larger than just about every other major U.S. apparel maker.

I think it's critical as we go forward to continue to fuel that growth and we're seeing that growth in Europe and Asia really accelerating. As we’ve made the investments over the last two years to really grow that business and those business are by far are highest operating margin businesses.

So from that point of view it's critical we've done a lot over the last few years to grow our digital sales base as well in North America, but also around the world. So I think when I look at us competitively against the major players in the U.S.

market, I think we are significantly more diversified both from a sales and an earnings point of view geographically with 50% of our sales occurring outside the U.S. and more than 50% probably close to 60% of our profits outside the U.S.

So I would just say that I’ve heard this sense as well that because I think because we have such strong partnerships with the retailers here in the United States that I think that there is a sense that we’re overly dependent on that channel, it’s critical and it’s important to us.

But I really feel strongly that we have done tremendous amount to diversify our business model with our own retail, a digital platform and the international investments that we have been making as we go forward.

There is no single retailer that represents close to 10% of our sales from that perspective and I think overall when I look at the valuations as the CEO, I do get frustrated when I consider where we are trading as a price to earnings ratio, against some of the competitor that I tend to agree with you I think it’s just a misalignment at this point..

Is it fair to say the department store penetration is at or below 20%, I mean when you factor in off price and your own retail and Amazon in the U.S. is that a fair characterization..

Okay. But we don’t get into all of that, but you are pretty close, I don’t think it’s over that far off. So I think that’s a reasonable perspective when you look at it..

Thanks. I just had one additional follow-up, the Tommy and Calvin brands have been very strong the last couple of years, there is a lot of fashion momentum, brand momentum; the other push back we get at times is well how can this continue given the department store conversation we just had.

And that you’ve really developed a lot of the category and geographic opportunities. Can you quickly walk us through the biggest most significant Tommy and Calvin geographic and category opportunities still in front of you that could drive say high single digit constant currency growth going forward? Thanks..

Sure, I guess I’d just take a step back more from a more micro and maybe more focusing on the short-term is as you would expect as we’re looking out at the U.S. retail landscape the U.S. market is continues to be almost challenged market.

And because of that we are planning that business conservatively and based on current trends that we’re seeing in the market today. So we are not looking for huge improvements in the second half of the year, we would hope that as things stabilize that we’ll actually see those.

But from a planning point of view and a projecting point of view to the street, we have really taken that third and fourth quarter and we have assumed that the trends we’re seeing right now will just continue as we work through some of the malaise we see in North America.

The growth for us, I mean I’ve tried to cover in my opening comments is really happening internationally. The big opportunity for us and we have touched on in Europe is the Calvin Klein brand.

Just basically given the fact that it’s about 30% the size of the Tommy Hilfiger business in Europe that gives us the opportunity in Europe to really go after that business. We are seeing it materialize both in our retail comps and we are also seeing it materialize in our order books that I have tried to layout to you.

And there is really a significant amount of white space in Europe, when you think about our sportswear businesses we haven’t launched women’s yet in a meaningful way.

Men’s is in the early stages from a growth point of view and the three categories that are really driving the growth today from just the size point of view are jeans, underwear and accessories. So clearly men’s sportswear, men’s tailored the whole women’s opportunity is all ahead of us there.

Then when you move to Asia that’s been our significant area of growth for us, I think that will only continue, China does not show any slowdown in performance both for the Tommy brand and the Calvin brand.

And I think there an expansion of our retail footprint and an expansion of our offering by product category will continue to drive strong top-line and bottom-line growth throughout Asia.

The last point I’d make about our international business is, it would be disingenuous to me to say I am not -- that we are not pleasantly surprised with the strength of the Tommy Hilfiger business, I mean when you have a business as big as that is that clearly in sportswear is the market leader throughout Europe.

To be putting up in the first and second half of the year high single-digit low double-digit growth on the wholesale side of the business I just thinks -- talks about the momentum that the brand has, the strength of the brand in that market and the opportunities for that to continue as we move forward..

Great. Thank you very much for the color good luck..

Thanks..

And we'll take our next question from Erinn Murphy with Piper Jaffray..

Great, thanks good morning. I wanted to focus Manny a little bit on just the North American landscape at wholesale. You guys have done a really nice job of keeping your inventories clean.

Can you just talk a little bit about how inventory in the channel look right now in North America? And then I guess secondly on this channel, how are retailers approaching open to buy dollars in '17? And then just given the strength of both Calvin and Tommy kind of where do you fit on the packing order relative to your peers?.

Sure, I think there is always pockets, but right now I would say is I think the retailers have done a very good job in department store sector in particular about keeping inventories clear.

We came out of the fourth quarter, I think they reacted strongly to some of the softer sales trends both from a tightening open to buy dollars and moving inventory out in the fourth quarter. So I think -- and the fact that I think that Easter is actually later this year three weeks it's a big timing shift. I think will position us well.

So inventories and carryover is really been cleaned up as we go forward. The other pressure that's coming from that sector is significant pressure is being put on inventory turn. So inventory open to buy dollars have been constructed. Whatever they’re planning be it flat sales or slightly negative comps sales, the buy plan is even lower than that.

So I think that bodes well for gross margin as we go through the first quarter and into the second quarter of this year. And I think even the way they projected to buy third and fourth quarter has been very tight as well given the trends that are in the business.

I think competitively you've heard a number of our key partners talked about the strength of our business in their stores, in their channel of distribution, particularly the Tommy Hilfiger business across the board, Terry have spoken a number of times and Jeff about the strength of the Tommy Hilfiger business at Macy's that's our key account in North America.

So we're clearly getting square footage, we're gaining market share in numerous categories as we go forward. So I think competitively our business is much healthier than most of our competitive side as we move forward. And we know about the momentum behind the Calvin Klein brand it just continues.

So that brand has just been unbelievably strong performer with the buzz and the excitement around Raf Simons and what we've seen in the collection area from the orders and excitement about the placement of our collection product. I think the momentum we've seen in the Calvin Klein brand could accelerate as we go into the second half of the year.

We're really excited about it. And as Mike talked about we're not -- the other advantage I have given our strong performances, we're not cutting back on investments, we're continuing to spend our marketing dollars.

We're not under that kind of pressure that some of our competitive sets are that are really talking about pulling back their expenses restructuring things that maybe are not as efficient and really hitting the marketing dollars we've not backed off at all. We continue to spend as a percentage of sales at least as high as we did last year.

And I think our voice in the marketing area given that as best I can tell competitively most of the key brands have cut back. I think we're going to have a louder voice as we move forward. So I'm enthusiastic and optimistic about how we'll perform against our plans..

Perfect, that's encouraging. And then just maybe philosophically, could you just talk about how you're thinking about acquisitions going forward. I mean should we be anticipating the priorities to be more out that came with the tuck-in acquisition that you did with True&Co.

whether it's adding an expertise or you still thinking kind of over the next 18 to 24 months about rolling up some of the global licenses or could there be a transformation acquisition kind of thought process that still kind of in your mindset.

Would love to just hear how you're thinking about that?.

I guess, as a backdrop given the strength both in Calvin and Tommy I think that's where the focus will continue to be. I think there is continues to be some licensing buybacks that we'd be excited to make some of that always has to be done depends on the timing.

Some of it with the timing of our licensees, but I think that's what you will in the short-term in the next six to nine months that's what you’ll probably see more off from us as we go forward.

The True acquisition, there are some product categories where we have market leadership and when you think about intimates, men's underwear, the dress furnishings areas, those are areas from a classification point of view that are very profitable businesses.

And if there are opportunities from a digital point of view where we can make investments, gain expertise because it’s very expensive and challenging to go out and get the talent that’s necessary. Sometimes it’s easier and more efficient to buy that talent like we did with the True acquisition.

I think in those areas you will also see us continuing to make those investments as we go forward, which will be strategic for the businesses, the brands and our businesses as we going forward. So, I think that will be the focal point.

And then finally the backdrop on the tax situation, be it the deductibility of interest in a number of things, we have very strong balance sheet.

But it’s hard for a management group to sit back and really try to plan for any major acquisition given the uncertainty around capital structure and what the tax position is going to be here in United States.

So, that does give us a little bit of pause we’re hoping over the next three to six months that that whole situation will become more clear and hopefully we’ll be able to have more clarity in our decisions going forward..

Got it. Thank you guys and congratulations..

Thank you..

[Operator Instructions] And we’ll take our next question from Michael Binetti with UBS. Please go ahead..

Hey guys good morning. Congrats on a great quarter. Two topics I wanted to touch on, first would be the gross margin.

So, can I just get a little clarity, it sound if I add all your comments together like you’re guiding grosses this year to look roughly similar to the same level of year-over-year expansion they you saw last year is that a fair assumption?.

On a reported basis that would be correct, Mike..

Okay. And as I look at that, so in the fourth quarter looks like you had about 320 basis points and then about 400 excluding currency though that's obviously a huge number. And I think most of that would come from the mix shift on the underlying business.

And if I just look at the path that you have laid out for the year, it sounds like you’re planning North America very conservatively, the international order books are accelerating and then I’d assume on our currency model that FX headwinds be diminishing through the year.

So I’m trying to figure out if there is an opportunity for the gross margins to start to accelerate as we move through the year just based on some of the moving parts there?.

So, Michael look from our perspective, there is two things going on, you’re absolutely right mix is a piece of it. Our international businesses have higher gross margins, also higher operating expense, but they are growing at a faster rate, so you are absolutely right.

But when you outperform your models and when you outperform your business you do have higher gross margins you don’t take the markdowns you plan good move out higher AURs. So, at this point the models -- the margin guidance reflects on models, outperformance would diffidently lead to some opportunity for upside..

Okay..

Yes, I think Michael when we look at the business and where we see the opportunity there is always some sales opportunity. But we do see in the business models that we layout that the opportunity really as a gross margin expansion and then leveraging the SG&A on top of that. So, I think that's how we are thinking about it.

Particularly in North America where I think chasing sales by buying more inventory upfront is a [indiscernible] right now. I think there is this opportunity if we outperforms at retail that it really will show itself on the gross margin line..

Okay. And then, I guess the second topic would be some of the comments on the new Li & Fung deal in the press release.

Do you mind just give us a little color on that what it is, how different it is and what do you see as the benefits for you?.

I think is Li & Fung has been a great partner for us. Strategically we’re changing the relationship from a buying commission basis to a strategic partnership putting the business together. We believe they can bring to us some real value added services from a speed, efficiency modal.

And I think they are looking at their business models and as it changes. It does a couple of things for us long-term not in the short-term, long-term it gives us the opportunity to reduce some of our buying commissions as we go forward as we are taking more direct control of the business jointly.

And then secondarily it’s really from a speed point of view the initiatives -- the ability for us to really take advantage of speed to market quicker reaction time from that point of view it’s all very positive. So again I think that changing relationship will be both -- will be good for both companies..

Got it.

If I could sneak one more in there, I just wanted to see if there, do you see any other opportunity as you look across your owned businesses today where you are at maybe the cross roads of low profitability on something that you operate today, but an obvious operator out there like G3 on the women’s business side that could potentially be another licensing opportunity for you, as you look through 2017.

Thanks..

Mike, I just want to make sure, I understand the question. To take businesses that are operating in-house and potentially licensing out..

Yes..

I think that the women’s issue there was the big one particularly with Tommy, G3 is a great partner with amazing operating expertise in the women’s side of the business. I think that opportunity is significant for them to really take the Tommy business and grow it in a similar way the way they have grown our Calvin Klein business.

So -- but as I look at the other categories, no I don’t see big opportunities to take businesses out and outsource them at this point in time and that was the big opportunity..

Thanks a lot guys..

And moving on, we’ll take our next question from John Kernan with Cowen. Please go ahead..

Good morning everyone, congrats..

Good morning..

Manny you talked a lot about China, can you help us size the Tommy Hilfiger and Calvin China businesses right now? In terms of where they are from a sales standpoint and where they are from a profitability standpoint, relative to the rest of your international businesses?.

Well, I guess look I don’t want to -- we give a lot of breakout of the businesses and the brands, and I don’t want to micro it down to it. I guess to give you a sense of scale, the Calvin business is three times the size of the Tommy business in China.

And as we look at those two businesses, we believe we can double the size of both businesses in China over the next five years. And the China business model for us is our highest operating income business as a percentage of sales.

So the more growth there net of some of the investments we have to make to scale up, but as we look at the business scaling up over the next three years we see the profitability in that business continuing to grow..

Okay.

So shifting gears a bit, Mike I think you talked about Tommy Hilfiger operating margin up 75 basis points for the year, Calvin down 30 to 40, can you talk about what’s pushing Tommy margins higher for the year? And then I think it’s mostly investments that’s bringing Calvin down, but can you just give us a little bit more detail on those two line items?.

Yes, look I think it’s two fold, one is the revenue increase on the Tommy side, as a driver. The gross margins is clearly the biggest component that’s we are seeing improvement and expansion in gross margin, both businesses, but Tommy very healthy.

And then lastly as you said, the investments in Calvin Klein for the first three quarters are going to be a little bit of a drag..

So I think Mike you laid it out just right, I think the big driver of the Tommy expansion is the international businesses significantly more profitable as a percentage of sales and the North America business. As that growth accelerates and we’re planning our U.S business relatively flat that will drive profitability.

The other piece I guess just to add-on is obviously the royalty income from G3 where we’re taking about $100 million annual basis in women’s that was marginally profitable and replacing that limit adding $100 million in sales and replacing that with the normal royalty rate for that business that just also enhances the overall profitability of this segment..

And then just one more housekeeping question, the business obviously spinning off a lot of free cash flow, can you just Mike give us what your CapEx number is for the year and where you expect free cash flow to shake out this year?.

So we haven't guided towards free cash flow but last year's free cash flow was about $700 million.

And when you think about CapEx this year I guess we've got about $400 million of CapEx, but the way to think about that as we've shifted about $65 million to $70 million from '16 into '17 just projects that didn't get paid and didn't get done in '16 moved into '17.

And then two other call outs in terms of an increase in CapEx one is we are moving our Tommy offices in New York new facility there is some significant CapEx there. And two as we are making some nice investments on the digital side of the business. When you add that all up it comes out to about $400 million.

Just to remind you $250 million in debt pay down and then we talked about stock buyback between $200 million to $230 million..

Got it, thanks everybody..

And moving on, we'll take our next question from Ike Boruchow with Wells Fargo. Please go ahead..

Hi good morning everyone and congrats on a really nice quarter. I guess just to go back to David's question on Calvin International.

Manny is it possible to update us just on the current size and maybe profitability of Calvin Klein Europe today and maybe where you think the opportunity is from here?.

Yes I think everybody has got a sense that the Tommy business is a $2 billion business and I called out the Calvin was about 30% of that that gives you a pretty -- if you could do the math that will give you a pretty good idea of how big the Calvin business is and the opportunity for growth that we see there..

And on the margins relative to Tommy in Europe?.

The margins are healthy they're close to 10% and they're probably 300 to 400 basis points lower than Tommy just given sale of the business. And we would expect that overtime that they would equate to the Tommy business..

Great, thanks. And then just a follow-up, in the U.S. I think you have about 200 to 250 retail stores in North America for both Calvin and Tommy.

Has anything you've seen over the past 12 or 18 months led you to think about your store strategy? Just curious if there are certain locations that maybe are no longer hitting your hurdle rates or maybe don't make sense as leases come up over the next year or so?.

Sure look. I guess the nice thing about our retail portfolio with the exception of a few flagship stores is it's what I would describe is a very liquid portfolio meaning that renewals come up every some two years some three to four years. In the A centers we have much longer leases and those you wouldn’t be looking to get out of.

So I guess a couple of things that we are looking at is we've had what I would call some real megastores in some key centers that are highly profitable and continue to be highly profitable.

But the general square footage and the footprint as we go forward for stores we're opening in general across the globe not just in North America using digital technology. The stores can be smaller and more efficient from that point of view.

So we're looking at the footprints, we're looking as we open new stores and as leases come due does it make sense to downsize some of the portfolio the store size as we go forward.

With the exceptions of some of our flagship stores, which are really marketing drivers not business drivers, we don't have stores that are four wall lawsuits particularly specifically in Calvin and Tommy. So we don't have that burden that we really need to deal with, our retail stores and our store contributions are very, very healthy.

They’ve' been challenged given the -- what's happened with the strength of the dollar and some of the international tourism, but even after that these stores are wildly profitable for us. So it's -- we monitor them we stay on top of it.

We have great flexibility there and I think if you're modeling that business moving forward, I think I wouldn't be planning it for a significant growth over the next two years..

Thank you..

And moving on, we'll take our next question from Kate McShane with Citi..

Hi, thank you for taking my question. Just curious just with the strength in Europe, I know a lot is being driven by your initiative behind both brands.

But I wondered if you could maybe walk us through just the wholesale environment in Europe particularly in some of the bigger countries that you’re in? Just what you are seeing from a traffic standpoint at those locations and what you see going forward?.

I think you know brick and mortar in general is under pressure, but I think one of the benefits that exist in Europe and in Asia even to a greater extent is the level of retail square footage on a per capita basis is just significantly lower, 50% lower than it is in the United States.

So I think some of the challenges with -- the challenges that we’re facing in brick and mortar in the United States has to do with there is too many stores. I don’t believe that issue to the level that it exist in the United States exist in Europe and in Asia.

So that’s point one, point two is the retail landscape particularly on the department store side and specialty multi-brand stores, it’s just much more fragmented than in the United States, the United States has gone through a tremendous consolidation in the department store sector where Europe have had minimal consolidation.

There is no Pan European department store, it’s really regional department stores most times country specific, but sometimes regionally specific.

So from that perspective it’s our top 20 retailers in Europe represent about 30% of the business, our top 10 retailers in the United States represent 90% of the business just to give you a frame of reference. So I think that’s the dynamic that changes, I think traffic trends are healthier obviously there.

I think the currency situation particularly in the UK is very favorable and they are benefiting from a significant amount of European tourism into the UK as well as Asia and U.S. tourism into the UK.

And I can say the same thing about Continental Europe where we are seeing from the credit card data that we look at every month that particularly Chinese stores given the euro’s lack of strength is also a place that there is a lot of tourism going on and a lot of shopping going on, so really benefiting from that.

I also think, when you look at it we are clearly outperforming our peer set, we are gaining market share in department stores, we are gaining square footage growth in department stores.

And as much as I think a number of competitors have talked about that their European businesses are healthy I don’t think anybody is putting up the kind of wholesale order book increases that Calvin and Tommy are. Operator, we’d like to take one last question, so we can get back to work..

Certainly. And we’ll take our last question from Jay Sole with Morgan Stanley..

Great, thanks so much. Just want to follow-up on the last point you are talking about.

Obviously consumers are migrating outline and it’s causing a shift in where people buy, but is there some aspect of the channel shift that’s causing overall industry growth rates to slow? In other words has it changed consumer behavior in some way?.

That is a really broad question and I don’t think it’s really been answered yet.

Just trying to understand all that and one thing you are concerned as a retail or wholesale the one thing that I do get concerned about is that there has always been a significant amount of impulse shopping that the consumer does when they are in-store and in the hot zone where they purchase.

And if traffic is down I am not sure the impulse nature of online is as significant as it is in a brick and mortar store where you are able to romance the consumer more.

So I think that is a challenge, I think some of it has to do with -- we need to be better and by we, I mean us and our partners need to be better about making the online shopping experience not only efficient and effective, but we also -- we are in the fashion industry and we need to romance that consumer much more than we do today.

I think some players do it well and some players don’t do it all it’s just, it’s like buying a bar or soap. So we really need to make that experience much better..

Got it.

And then if I can ask one more on CapEx, is there a piece of the CapEx number for this year that’s carved out for stores is it possible to give us the detail on that?.

No, but there is no general change, I’d say that the usual remodeling and rehab nothing out of the ordinary at all this year..

Okay, thank you so much..

Well thank you everyone. Thank you for joining us for the call, thank you for your support and we will speak to you in May. Take care, bye-bye..

Once again, that does conclude today’s conference. Thank you for your participation. You may now disconnect..