Good morning, everyone, and welcome to the PVH Corp. Second Quarter 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 to reflect PVH's view as of August 23rd, 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 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 revenue or earnings. Generally, the financial information and guidance provided is on a non-GAAP basis as defined under SEC rules. Reconciliations to GAAP amounts are included in PVH's second quarter 2017 earnings release, 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 Chief Executive Officer of PVH. Please go ahead, sir.
Thank you, Glenn. Good morning, everyone. Thank you for joining us on the call. Joining me on the call is, as usual, Mike Shaffer, our Chief Financial Officer, and Dana Perlman, our Treasurer, Head of Investor Relations. Also, I have two guests that hopefully can answer some specific questions you may have. Daniel Grieder, who runs our Tommy Hilfiger business globally as well as oversees all the operations of our European business is here, and Ken Duane, our Chief Executive Officer of PVH Heritage Brands and our North America wholesale business is also here. Going to the results, I'm pleased to report that our strong second quarter performance exceeded our expectations and demonstrated our continued ability to deliver against our strategic and financial plans, despite the challenging global macro environment.
Tremendous strength continues across all of our businesses, with our international businesses demonstrating outsized performance, particularly China, Europe, and Japan, which are our healthiest markets. Meanwhile, our North America business performed in line with our plans, but the U.S. market continues to be highly competitive and promotional. Overall, in the second quarter, we grew revenue 7%, and our EPS came in at +15%. Importantly, in our second quarter results, we had a planned $25 million increase in brand marketing investments versus last year related to both Calvin Klein and Tommy Hilfiger, which we believe will continue to drive market share gains and allow us to capitalize on each brand's growth opportunities into the second half of this year and over the next few years. When we look at our performance across channels, we generally saw strength across all channels, be it wholesale, retail, or our digital channels.
We continue to focus on diversifying our distribution through our focused efforts around digital and full-price specialty partners. Digital continues to be by far our fastest-growing distribution channel, and we are continuing to invest there both digitally, and we also are focusing on initiatives to drive both our owned e-commerce sites as well as our third-party partners businesses. Moving to our brands, let me start with Tommy Hilfiger. The brand just continues to experience significant demand, and we are seeing broad-based strength across all businesses. I'm excited to report that the Tommy Hilfiger brand relevance continues to improve. From Gigi Hadid as our women's brand ambassador to our newly announced ambassadors, The Chainsmokers, who will appear as the global brand ambassadors for all Tommy Hilfiger men's categories beginning in fall 2017.
The partnership reflects our strategic commitment to continuing the strong global growth of all of our men's businesses and attempting to bring newer, younger fans to the brand. We believe that these brand ambassadors will help us drive performance in our global growth categories, with specific emphasis on women's apparel, accessories, and men's tailored. Moving to the business, we continue to be extremely pleased with the response from consumers and are benefiting from market share gains in each of our major markets. Overall, revenues for Tommy increased 4% in the quarter, and earnings were up over 8% in the quarter. This growth was driven by outstanding performance in our international businesses. International revenues increased 9%, fueled by the continued strong performance in Europe and Asia. International retail comp sales increased 6% in the quarter, with very strong retail performance in China and Japan.
Our Tommy Europe results were outstanding, and they continue to be a standout for us. All major European markets continue to demonstrate outstanding performance. Based on the strength of our spring-summer season sell-throughs, we also saw healthy gross margin improvement during the quarter. As I mentioned last quarter, our fall 2017 order book finalized at a 10% increase versus the prior year. We are pleased to report that our spring 2018 season is projected to increase over 10% as well. The spring order book results continue to exceed our expectations, and we are quite pleased with the broad-based strength across all product divisions and across just about all retail European markets. Tommy Hilfiger Asia, led by China, continues to perform well as we continue to execute the strategic priorities we set in place when we fully acquired this business last year.
We see significant long-term growth opportunities for the Tommy brand in this critically important market. Additionally, our Japan business continues to see positive momentum and excellent results as the brand repositioning in this market is paying huge dividends for us. Moving to North America, Tommy saw another solid quarter, with strong results with our men's and women's department store business in a challenging retail environment. We are pleased that our outperformance relative to our competitors continues through the second quarter and into the third. Shifting to North America Retail, we saw flat comparable store sales for the quarter in North America as we saw an improvement in traffic trends, including the stabilization in international tourist traffic during the quarter. Moving to Calvin Klein.
Speaking about the brand, Calvin Klein continues to capture compelling brand and cultural relevancy through its focus on digital consumer engagement, elevated brand imagery, and strong advertising campaigns. From a brand and marketing perspective, we announced the launch of our fall 2017 Calvin Klein 205 West 39th Street global advertising campaign and have recently reopened our Madison Avenue flagship store, featuring a floor-to-ceiling installation by the world-renowned artist, Sterling Ruby. The reopening marks the arrival of Chief Creative Officer Raf Simons' debut of the fall 2017 Calvin Klein 205 West 39th collection in the store. This new collection product is also being delivered to key retail partners in over 30 points of sale around the world. As a reminder, some accounts include Barneys, Saks, Galeries Lafayette, Dover Street, Isetan, and Lane Crawford.
Early initial sell-throughs have been positive, and we'll have more results to talk to you here as we go forward in the future. In the fragrance area, we have two new launches. Obsessed just recently launched, and it leverages archived photos and film of Kate Moss and Mario Sorrenti from the original Obsession campaign, which aired over 15 years ago. Additionally, in the fourth quarter, we will be launching a new campaign for our Eternity fragrance, which will be showcasing new celebrity talent. I am pleased to note that we're starting to see our fragrance business begin to rebound around the world. We are also excited to report that we have two international Calvin Klein flagship store openings in the third quarter, one in Shanghai and one in Düsseldorf. These stores will be offering a wide assortment of products, including jeans, sportswear, underwear, tailored clothing, and performance products.
As we move further into fall into holiday, we will continue to roll out our jeans and underwear marketing initiatives with an enhanced direct-to-consumer focus to drive our business as we enter the all-important holiday selling season. From a business perspective, revenues at Calvin increased 8% in the second quarter, reflecting the strong global trends, with 20% increases coming from our international business. In particular, we continue to see strong top-line growth out of Europe and China, with North America performing in line with our plans. International retail comp store sales increased 6% in the quarter. EBIT declined about $10 million for the quarter as a result of a planned $20 million increase in marketing and creative leadership expenses, as we've discussed with you in the past.
As a reminder, we should be lapping these expenses as we move through the second half of the year, particularly in the fourth quarter. Our international business has been strong. Calvin Klein Europe has been an outperformer. I could not be more pleased with the direction of the business as results continue to demonstrate outstanding performance both from a top-line and bottom-line perspective. We saw strong sell-throughs across wholesale and retail and continue to experience healthy comparable store sales growth on top of multiple years of double-digit comp sales increases. As we discussed on last quarter's call, our fall 2017 order book was finalized at north of 25%. I am pleased to report that the momentum continues with our spring 2018 order book, which is projected to be up again over 25%.
The strength in the business continues to be seen across all distribution channels, from all major markets, and across all product categories: jeans, underwear, and accessories for both men's and women's. Moving to Asia, Calvin Klein Asia continues to perform well, with China outperforming other markets across all product categories. We continue to invest in the business here and see continued momentum in our Calvin Klein jeans business as new and improved product is driving strong sales increases. We have also seen performance from our underwear, performance, and accessory business continue to improve across all markets. Overall, that region continues to see strong growth. The one region of underperformance is Korea, which clearly is being pressured by the negative geopolitical news out of North Korea, which has had a negative impact on the overall Korean business.
Calvin in North America continues to see healthy growth across our wholesale business, in line with our plans, despite significantly reduced overall department store open-to-buy plans. Our Calvin Klein North America business experienced a 2% negative comp store sales, which is in line with our plans and slightly ahead of our first quarter sales performance. Finally, in our heritage business, we had a strong quarter. Let me remind you that while heritage revenues increased 13%, it was principally a result of a planned shift in the timing of shipments from the first quarter to second quarter, as well as some sales moving from the third quarter into the second quarter, compared to last year's sales trends. For the year, we expect flat overall revenues from our heritage business, which is in line with our initial plans.
Comparable store sales were up 1% in the heritage business in the second quarter. EBIT increased significantly in the quarter due to the planned shift in shipments and from a general improvement in gross margin experienced both at the retail and wholesale businesses. We feel our heritage business is very well positioned as we move into the second half of the year. Speaking about the full-year guidance, we have raised the full-year earnings guidance outlook and believe that our brands will continue to drive our second half performance, despite the ongoing volatility in the macroeconomic and geopolitical environment.
Specifically, as a result of the momentum in the business, we continue to make investments in our Calvin Klein and Tommy Hilfiger businesses, and we have added $10 million of marketing into the second half of the year relative to the previous guidance to help fuel the opportunities we see ahead of us in these businesses. I'd like to just touch a little bit on third quarter trends. Our international business continues to see nice momentum quarter to date, with Tommy and Calvin international comps running up mid-single digits, with strong performance continuing to be seen out of China, Japan, and Europe. The environment in North America continues to be challenging, with traffic trends and the department store landscape under pressure, which we believe will continue throughout 2017. As such, we're planning the North America business prudently based on the landscape.
Clearly, it seems to us, based on recent earnings reports, that a number of our major competitors are experiencing significant sales declines, particularly with North America department stores. Contrary to that trend, both Tommy Hilfiger and Calvin Klein are growing with these accounts. As we move into the second half of the year, we will be expanding our square footage and growing our sales with this very important channel of distribution, which we believe will help the momentum of the business into the second half. In our own retail businesses, we are seeing some improvement in sales trends as we headed into late July and into August of 2017. Comps for Calvin Klein North America are trending now flattish, and Tommy Hilfiger North America is trending positively up mid-single digits quarter to date.
We feel quite strongly that we are well positioned for the balance of the year and believe that given the underlying brand momentum and the strength we see in our international businesses, that we can continue to over-deliver against our financial plans. With that, I'd like to turn it over to Mike Shaffer , who will quantify some of our results.
Thanks, Manny. The comments I'm about to make are based on non-GAAP results and are reconciled in our press release. Our revenues for the second quarter were up 7% to the prior year and exceeded our guidance. Tommy Hilfiger revenues were ahead of guidance and up 4%. The Tommy Hilfiger revenue increase was driven by strong international performance, including a 6% comp store increase, partially offset by a decrease of approximately $20 million due to the transfer of the North American women's wholesale business to G-III in the fourth quarter of last year. Our Calvin Klein revenues were ahead of guidance and up 8% to the prior year and included the negative impact of the deconsolidation of our Mexico business, which was worth approximately $15 million. Calvin Klein international revenues increased 20%, with strong performance in Europe and China.
Heritage revenues for the second quarter were up 13%, driven by a shift in the timing of shipments from the first and third quarters to the second quarter. Our non-GAAP earnings per share of $1.69 represents growth of 15% over the prior year and included a planned increase of approximately $25 million of marketing compared to the prior year, related to Calvin Klein and Tommy Hilfiger. The $1.69 was $0.06 better than the top end of our previous guidance, the beat was driven by a $0.07 business beat and favorable FX of $0.02. Partially offsetting that was the timing of tax expenses, which was unfavorable for $0.03 in the quarter. For the full year, we are currently anticipating that we will be negatively impacted by $0.20 per share due to foreign exchange, an improvement of $0.15 when compared to our previous guidance.
For the full year, we're projecting non-GAAP earnings per share to be $7.60-$7.70, or 12%-13% over the prior year, which is $0.20 higher than our previous guidance and reflects a $0.15 increase due to favorable FX, a $0.15 increase due to stronger business, partially offset by an increase in marketing for Tommy Hilfiger and Calvin Klein of approximately $10 million. Overall, we're projecting revenue to grow approximately 6%. 2017 revenues will be negatively impacted by approximately $70 million related to our Mexico deconsolidation and approximately $80 million related to the transfer of the Tommy Hilfiger North America wholesale women's business. 2017 revenues will also be positively impacted by a net amount of approximately $50 million related to 2017 being a 53-week year, offset in part by the negative impact of the timing of Chinese New Year.
Overall operating margins are expected to increase approximately 10-20 basis points on an as-reported basis, and to increase approximately 30-40 basis points on a constant currency basis. We project Calvin Klein revenues to grow 8%, with operating margins down about 50-60 basis points on an as-reported basis, and to decrease about 10-20 basis points on a constant currency basis. Our Calvin Klein earnings are negatively impacted in 2017 by the continuation of the investments made in the latter part of 2016 related to brand investments in advertising and the creative leadership changes. Tommy Hilfiger revenues are planned to increase 6%, with operating margins planned to increase about 90 basis points on an as-reported basis and about 110 basis points on a constant currency basis.
Our Heritage business is planned to have relatively flat revenues versus the prior year, with operation margins planned to increase about 10-20 basis points. Our corporate segment expenses are planned to increase about 15%. This increase reflects low single-digit growth in our overheads, 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. This increase is primarily the result of the EUR 300 million bond issued in June of 2016. In 2017, we are planning to pay down at least $250 million of our debt and have stock repurchases of about $250 million. Our tax rate for the year is planned at about 17%-17.5%.
Third quarter non-GAAP earnings per share is planned at $2.88-$2.92, or 11%-12% over the prior year, and includes $0.06 of estimated negative impact for foreign currency. Revenue in the third quarter is projected to increase 4% and will be negatively impacted by the deconsolidation and transfer of the Tommy Hilfiger North America wholesale women's business. Calvin Klein revenues are planned at a 5% increase, Tommy Hilfiger revenues at an 8% increase, and Heritage Brands revenues projected to decrease 8%. As a reminder, this was due to the timing of shipments which moved from the third quarter to the second quarter. Interest expense is planned to be about $31 million, and taxes about 12% in the quarter. With that, we'll open it up for questions.
Thank you. If you do have a question at this time, please press *1 on your touchtone phone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, please press *1 if you have a question. We'll take our first question from Erinn Murphy with Piper Jaffray.
Great. Thanks. Good morning. Manny, for you, I was hoping you could address a little bit more about the improving trends that you've seen in back to school. Your tone was still fairly cautious on the environment overall in North America. What are the drivers that have really led to that quarter to date improvement in both Calvin and Tommy here in North America?
Okay. Good morning, Erinn. Directly, we're seeing it in our own retail stores first and foremost. We've seen a significant improvement in the trend in the Tommy Hilfiger business, which went from a flattish comp in the second quarter to the mid-single-digit increase. We're seeing traffic improve as well as we think the consumer is really there. We've also seen in the Calvin business a positive comp store trend as we move forward. Also, from talking to some of our department store partners and what some of them have said on their conference calls, I think both Macy's and Kohl's particularly spoke about back to school getting off to a strong start. Based on our performance also in that channel of distribution, I'm starting to feel a little bit better about it. Now, it's still very early. It's August 24th today.
I think we have got to get through Labor Day. We've got to see the September trend, which really picks up. I think from an inventory positioning point of view, from the gains we're making in square footage at department stores, the best example of that is if you go to Herald Square and you see the improvement in space that both Calvin and Tommy are getting, particularly the new Calvin Klein jean shop, which is almost double their footprint in that store. I think you get a sense of the momentum we're seeing in our own business, despite everything you hear about the environment and some of the reported results.
Okay. That's helpful. Clearly, you're seeing momentum across the board, obviously internationally as well. I guess if the outlook
Well, I guess I'd just say, I didn't mean to cut you off.
Yeah.
What we're seeing internationally is the trends continuing. The trends have been pretty spectacular through the second quarter, both for Calvin and Tommy, and we're not seeing any slowdown at all on those trends. As I talked about the order book, we're actually seeing an acceleration in the order book as we go to spring.
Got it. Yeah, I guess as you sit here now, there's clearly a momentum. If the trends were just to continue, whether it's organic or even strengthen from here, or even you're going to be benefiting from currency now, you've spent a lot of time talking about the reinvestment you've made in the business, both in the second quarter, you've obviously planned more in the third or the back half as well. I guess from here, if the business strengthens, how do you think about that incremental investment? Do you plan to further invest or would you allow any potential upside to flow through? Just trying to understand how you're thinking about what still needs to be an ongoing engine.
I think we would do what we've consistently done in the past and what we've done through the first half of the year, is as the business continues to outperform, we'll continue to invest in the brands, but also at the same time, we'll be looking to raise our financial projections and our goals in balance. We want to continue to fuel the growth, particularly as we look out to 2018 and beyond. I think where other people dealing in this tough environment are pulling back and taking their foot off the gas from a marketing perspective, we think this is a time now to have a louder voice, gain a greater share of voice in the market. I think we'll balance it as we always have done with the real goal to drive momentum.
Got it. Thank you. All the best. I'll let someone else hop in.
We'll go next to Bob Drbul with Guggenheim.
Hi, good morning.
Hey, Bob.
Hey, Bobby.
Hey, Manny. On the Calvin Klein, on the 25% order book as you look at it, what's really happening there? Is it by market? Is it just taking massive amounts of share in various markets? Can you sort of peel that back a little bit more for us?
I could do a reasonably good job of it, since Daniel's here, I'm going to just ask Daniel to speak about some specificity. Don't get too specific, Dan.
Okay. There are several issues happening. First of all, I think it starts with the product. We have redone over the past few years, the product in all the divisions. We have improved. We took a lot of consumer insights into the product. Also, the second part is in the distribution. We have cleaned up the distribution. We were repositioning the brand in all the department stores. We gained really a square foot in the department stores. If you add those combination together, we are just outperforming our competitors and are gaining market shares.
Some of the key markets, if you could just touch on where you're really seeing big growth.
Yeah. I have to say that all the markets are growing, even those which we did expect less. If you talk about Russia and even Turkey, even these markets are growing. I would say the main markets in the growth is Germany, is the U.K., is France and Holland. I think, again, all the markets are strong and not one market is down.
The only thing I would add is, I think if we would've been talking about the business momentum the last couple of years in Calvin, in Europe in particular, to a great extent has been driven by apparel, really our underwear business has been off the charts in those markets, and that business continues to be very healthy and grow. What's really satisfying to us is we're really seeing the influence of Raf Simons and Pieter Mulier in the jeans business as we go into spring and the reception in the market. The growth in jeans has just really started to outstrip the growth in underwear. That, I think, is just great for the brand as that opens up broader categories of product and should help our sportswear businesses as we move forward as well. Thanks, Bobby.
Great. Thanks, Manny.
We'll go next to John Kernan with Cowen and Company.
Good morning, everyone. Thanks for taking my question. Manny, can you talk to just the structural differences right now between the apparel markets in North America and Europe? Just big differences, obviously, in sell-through, sell-in, and margin profiles. Just can you help us understand how much healthier these markets are for your brands than North America, where you're obviously outperforming many of your peers in North America, but just the growth in Europe is obviously very impressive.
Asia is virgin territory, and principally Asia, with probably the exception of the Korea market. Even there, Asia is basically a retail direct-to-consumer market. Even where there's major department stores in Asia, it's principally a concession model there. That in and of itself makes it a retail play within a department store environment. There, obviously, there's just growth happening across the board. China has got tremendous growth prospects for the future. Two big fundamental differences between North America and Europe. One is we're clearly over-stored in the United States on every level. Look, you guys are the analysts, you know the statistics and this. On a per capita basis, depending on the category, there's anywhere from three to seven times more square footage in the United States per consumer than you see throughout Europe.
In addition, the department store market is much more fragmented when you consider the European market broadly. In the U.S., there's a couple of major players that dominate the market, while in Europe, there it's much more fragmented, and there you have opportunities to have different strategies with each of those retailers. Fundamentally, from a financial point of view, the big structural difference is, given the consolidation in the U.S., it is a more efficient model from an expense point of view. The European market is a much higher growth margin market with higher margins. In reality, the Europe market is about 1,000 basis points higher gross margin with 1,000 basis points higher expense structure. The U.S. market is 1,000 basis points lower margins with 1,000 basis points more efficiency on the SG&A line.
From a profitability point of view, I'd say Europe is slightly more profitable than the North America market overall, maybe 100 basis points. That gives you some of the dynamic. I hope I answered your question.
No, that's very helpful.
Fundamentally, there's pressure coming from the digital channel in both places. I would say fundamentally it's being managed in both places, the European market is there, just more fragmented as well than what we see in the U.S.
Okay, just a quick follow-up question. Mike Schaefer, you've got a lot of cash flow. You've talked about capital allocation between share buyback and debt paydown, but I'm just wondering how you're viewing some of the international licenses that you have not bought back in-house yet. Which ones are you most focused on at this point?
Look, I guess you said it. The international licenses are profitable for us. We've talked about them as an opportunity for growth. We continue to look at Asia. We continue to look at Brazil. We continue to look at our JVs that we operate today and look to potentially take positions there as well. We are generating cash, and we are always considering these opportunities. As Manny Chirico says all the time, a deal happens when a deal happens. It's on our list. We watch and we navigate with our licensees.
Yeah, the only thing I would add, over the last three years, I think we've clearly demonstrated an ability to bring those businesses in-house, integrate them very profitably, get the benefits out of it, both from a top-line point of view by having greater control, and at the same time, getting the synergies that come with the acquisitions from an expense point of view.
Okay, thank you.
Next question.
We'll go next to Michael Binetti with UBS.
Hey, guys. Good morning. Thanks for taking my question. Just two items in the model to help us out, maybe. If I look at the revenue guidance for Tommy Hilfiger in the third quarter, it looks like it's a pretty big acceleration, then I think you're implying a slowdown in the fourth quarter. I know in general, at a high level, you've got order books in Europe that have accelerated. I can understand a bit of an acceleration. I don't understand why it would slow, I guess, in the fourth quarter, especially with the extra week. Then I think we see the opposite for Calvin Klein, where it's guided to accelerate a little bit in the third quarter, then slow in the fourth quarter. Is there anything that you can help us just understand directionally what's going on there?
Look, I'll give you a couple of factoids. We have one, on the Calvin Klein side of the business, the Mexico deconsolidation laps itself predominantly for most of the fourth quarter. We're not up against that as we were in the first, second, third. The 53rd week is definitely an add-on, that's a good guy for us, and that's partially offset by the G3 year. Currency last year, the strongest quarter for the U.S. dollar, or to say it differently, the weakest quarter for the EUR and our other currencies, was the fourth quarter. That's a benefit for us on a reported basis. Lastly, for Tommy in the fourth quarter, we did experience some sell-off as we handed the business off to G3 on the women's side. We actually are up against some of that sell-off.
Yeah, the balance of what was left of the product we sold off, but those sales they weren't unprofitable, but they weren't profitable sales either. I think when you take it all in, and I guess the only thing I'd add is I think the fourth quarter clearly could have upside sales opportunity as we get closer to it.
Okay. That actually helps a lot. Then, I guess I'll ask Erinn's question a little bit differently. As we look at the back half, the SG&A, you guys really started making some of the big investments last year, and the compares get very easy. Is there a point on the horizon you can talk to us about? Maybe it's not in the back half, but where you could actually start to see some SG&A leverage? We're talking pretty consistently about some good top-line numbers at this point. The order books internationally are pretty consistent. I think that you've got a lot of believability in that outlook. Maybe you could just help us think about if we can feel more comfortable there. When do you see the SG&A leverage in the business as a likely thing we'll see?
I think where you'll really see it is starting in the fourth quarter and into 2018. I think we've talked about the China acquisition across the board, where we've really made major investments in infrastructure and people in order to continue to get the top line. In Asia, particularly on the Calvin business, we're not getting the bottom-line flow through as we've consistently gotten, because it was a moment in time with a big acquisition like we've made, that we had to make an investment in infrastructure. We lap that starting in the fourth quarter of this year. As we put on the type of sales growth that we are getting throughout this year, that leverage on that SG&A line should continue.
The only place where we're not going to get leverage is marketing, because we are committed to consistently spending a percentage of our sales on that marketing investment, we don't want to take the foot off the gas because we see the dividends that it's paying for us. Secondarily, I'll be honest, I think what you've seen in the past, if we did run into a rough patch, we know how to manage expenses in that type of environment as well. This, for us, clearly is not that kind of an environment.
If you add that up, I guess just to finally, if you add all that up, that offsets that pretty meaningful mix shift of the 1,000 basis points higher SG&A international. You've got enough there that rolls off to offset the natural mix shift in your business on the SG&A line.
Michael, you're a smart guy. That's what you get paid for. You run the numbers. You figure out how it goes that way. We'll report them.
Thanks, guys. Have a good one.
We'll go next to Kate McShane with Citi.
Thank you for taking my question. With regards to CK International and the momentum there, if you had to highlight one or two areas that might need more work, what would that be, and how meaningful would it be to contributing to this existing business momentum?
I think the biggest opportunity for Europe, which we are basically not even touching to speak of, is the men's and women's sportswear opportunity. Included in that, you have to think about tailored clothing. The footwear business is at its infancy. The accessory business is a nice, healthy business, but comparatively speaking, very small. We've talked about that we think, when we made this acquisition, we thought that the Calvin Klein Europe business first opportunity was to get to $1 billion, but there was really no reason over time that we shouldn't be as big as the Tommy business, which is basically $2 billion. We're talking about our reported sales. That's the opportunity. Look, those businesses, particularly the women's business, will require some investment, but you will not see any slowdown in the overall operating margins of that business.
Building that infrastructure out and building to take advantage of that growth, we will continue to make investments. Clearly, we're investing digitally across the board. We're investing in our supply chain. That's not just a Calvin issue. That is across the board. We need to do all the things because the bar keeps getting raised from a competitive set. We see the benefits of doing that. I think there'll be benefits, particularly on the gross margin line, with some of those investments.
That's helpful. Thank you. In the shorter term, I just wondered if you could make any comment about impact to gross margins when it comes to holiday and what you're anticipating from the environment with regards to promotions.
Erinn, it's going to be promotional. It's always promotional. I don't think it'll be worse than last year. I think in some respects, it should be better. Inventory is in good shape, particularly our inventory. We've positioned ourselves, as you can imagine, if you look at where our inventory on the balance sheet is, we're up about 6%, and our sales guidance for the third quarter is 4%. Clearly, we think we've been smart about taking that additional inventory position to try to capture the opportunities that are ahead of us. I think, who knows what, I don't have a crystal ball, but relatively speaking, we're planning, particularly in North America, that it's going to continue to be promotional, and we're going to have to be competitive in that market.
I think you'll also see us continuing to see improvements on the gross margin line because of all the initiatives and because of the momentum of the brands.
Thank you.
Thanks, Kate.
We'll go next to Christian Buss with Credit Suisse.
Yes. I was wondering if you could talk a little bit about the marketing strategy going forward for Calvin and for Tommy, also wondering in more detail how Raf Simons' successes on the collection side are being filtered through the rest of the collection.
I'm going to talk about Calvin, then I'm going to turn it over to Daniel to speak about Tommy, because I think you should hear it from the guy who's driving the business. On the Calvin side, look, I think you can't help but be here and be involved with the brand to not see the impact that Raf Simons has had on the business. You see it from the press and the excitement around the brand and really getting placement. At the same point, his first collection is being delivered as we speak. There's some early reaction to it that's been positive at point of sale.
The windows that you're going to see that I think is going to help second half of the business when you go by Barneys and see Calvin Klein in those windows, when you go to Saks and see similar things like that halo effect is just beginning to be felt. I think the excitement is building. I think clearly that excitement is throughout the retail community with our partners and our department store accounts as we talk about it. How much of that is really filtered to the consumer directly and the excitement associated with that, we'll have to see how that all works. We really feel like our next show will be early September, which we think will be the second show under Raf. Based on what we see coming out from last year's show, the response has been unbelievably positive.
We feel really good about it. We think it's going to be a major halo effect for us. I'm going to turn it over to Daniel to talk about some of the initiatives at Tommy.
Thank you. We continue in what we have started already last year, this great momentum in TommyNow, together with Gigi Hadid, as Manny mentioned already, as our ambassador. That has materialized significantly into our business. What we also mentioned, Manny, before is the next part. We're going to continue with Gigi on the womenswear part, but we also integrate now The Chainsmokers in a similar way as we have done with Gigi for the next season. For next year, there is more in the pipeline that we yet not can talk about. In the combination of this TommyNow and with all our ambassadors we have in place, we continue with our strategy that has really boost the brand over the past 24 months in an incredible way, and this is our vision to continue also going forward.
Thank you so much, best of luck.
Thank you.
We'll go next to Ike Boruchow with Wells Fargo.
Hi, good morning, everyone. Congrats on the quarter. Just wanted to go back to Michael's question on Calvin. I'm sure there's conservatism built into your plans. The guide for Q3 for constant currency growth is around 4% versus the 8% you did in Q2. I apologize, but all else equal, where would the decel come from? Is there something in North America or timing from shipments overseas? Just want to understand the dynamic a little bit better.
I think as we talked about, some of it is just retailers accelerating planned third-quarter shipments into second quarter. It's a bit of a timing issue. Whenever you get into the quarters, as we've seen, goods move forward and be accelerated into the second quarter, particularly in North America, as we've seen that business really start to take off. I think that if you do the math, I think you see a pretty significant increase planned for fourth quarter. You always get into this, where does the sale sit? Does it go out the last week of October, the first week in November? There's a lot of that built in. You really got to take those two quarters together.
I think the implied growth rate, based on what Mike said, is a double-digit increase, I don't want to get too specific, in the fourth quarter. There's clearly not any kind of deceleration going on. Month by month, quarter by quarter, there's always movements going on. There's nothing happening at the Calvin Klein brand level or business that would indicate any kind of deceleration.
Perfect. Thank you, Manny.
We'll go next to Heather Balsky with Bank of America.
Hi. Thank you for taking my question. I was wondering, can you talk about how your online-only pure-play partners manage inventory and how that compares to how your department store partners manage inventory? Is there any real difference between the two channels?
Okay. Couple of things. I think our classic department store customers are experts. They know how to run businesses, and they've been doing it for years. Their methodologies, particularly as it centers around selling core fashion and fashion product, is much stronger than our online players. The online players, when you think about it, they're tech companies. What they do really well is they sell core product really well. They sell product that continues season to season. We are working with a number of those players to try to develop their analytics that selling apparel, especially fashion apparel, is not the same as selling dishwash soap. You can't just move it from one season to the next. Your best seller in season one, fall, which might be turtlenecks, when you go to spring, it clearly is not gonna be turtlenecks again.
That dynamic and that learning curve has a long way to go when you think about the tech players. Besides that, the profitability that we see selling both channels is as good with both as the other. We're agnostic to where the sales go. Hopefully, I answered some of your questions. We don't see any more pressure coming from department stores or from tech company or some of these tech players about holding more inventory or doing certain things. We're pretty much experts with the how to run core replenishment businesses. We understand how to really manage that inventory when the business is going well, how to take inventory position to continue the momentum.
Where some of our partners might not have bought enough, we're behind them to try and fill that business, particularly in low-risk categories, like basics in underwear, dress shirts, core replenishment sportswear, and to really continue to drive that business. I hope I put some color on that.
Yeah, that's very helpful. Thank you very much.
Operator, we're gonna take one more question before we close. We can all get back to business.
We'll take our last question from Eric Tracy with Buckingham.
Hey, guys. Thanks for squeezing me in, and I'll add my congrats. Hey, Manny, if I could just follow up on the digital business. You guys are clearly taking share in North America within the existing wholesale, but we know there are secular long-term challenges to that overall business. As you think about evolving, be it your own digital or partnering with these online pure plays, maybe just speak to, again, a little bit more in depth strategically as you think about that price transparency, product segmentation, where both Calvin and Tommy stand and what needs to take place.
We continue to be a multi-channel player. We have our own retail stores. We have our online direct-to-consumer business. We've got our most important channel of distribution, which is our department store accounts and their dot-com business. We have this infancy business with a couple of pure plays, including Amazon in North America, which is the big player. Our job is to create demand for our product. Our job is to create desire for our product in each of those channels of distribution. Also, our job is to manage the channel conflicts that come up with each of those channels of distribution. There's no cookie cutter answer for this is what you do. Some brands, rightfully so, and we do it with our brand portfolio.
We have some exclusivity that we really focus on exclusivity because we think that's right for that particular brand and what's driving. Other brands, we decide that, no, we don't want to be exclusive. The brand has got the strength and the demand to play across all channels of distribution. The challenge you face when you're non-exclusive is, there's a great responsibility on you to drive traffic, to drive sales, and you take on a bigger burden, both from a direct-to-consumer interface, but also financially. You take on a bigger risk profile because we have a responsibility to our partners to deliver them a certain gross margin, which we've always historically done. Those are the levers that we play and what's necessary. Each brand has got its own strategy, and distribution is not a mirror image across each one by each geographic market.
That's about all I guess I really want to talk about it.
Okay, fair enough. Thanks, guys. All the best.
Okay, thank you. Okay, with that, I'd like to thank everyone. I hope everyone enjoys the balance of their summer over the next couple of weeks. We look forward to speaking to you in November with our beginning of holiday results. Have a great day. Enjoy the rest of the summer. Thank you.
Thank you, everyone. That does conclude today's conference. We thank you for your participation