Good morning, everyone, and welcome to the PVH Corporation First Quarter 2016 Earnings Conference Call. This webcast and conference call is being recorded on behalf of PVH and consists of copyrighted material. It may not be recorded, rebroadcast or otherwise used without PVH's written permission. Your participation in the question and answer session constitutes your consent to have anything you say appear on any transcript or replay of this call. The information being made available includes forward looking statements that reflect PVH's view as of May 25, 2016, of future events and financial performance.
These statements are subject to risks and uncertainties indicated in the company's SEC filings and the Safe Harbor statement included in the press release that is the subject of this call. These risks and uncertainties include PVH's right to change its strategies, objectives, expectations and intentions and its need to use significant 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 are included in the referenced earnings release, which can be found on www.pvh.com and in the company's current report on Form 8 ks furnished to the SEC in connection with the release. At this time, I'm pleased to turn the conference over to Mr. Manny Chirico, Chairman and CEO of PVH. Please go ahead, sir.
Thank you, Dana. Good morning and thank you for joining me on the call. With me this morning is Mike Schaeffer, our Chief Financial Officer Dana Perlman, our Treasurer and Head of Investor Relations as well as Ken Duane, who runs our wholesale businesses throughout the United States. We're very pleased with our Q1 results, which exceeded our expectations despite the challenging global environment and a difficult retail market in the U. S.
Overall, we had a terrific quarter with revenues increasing 3% on a constant currency basis, while earnings per share grew 33% on a constant currency basis. The momentum in the quarter was primarily led by the strength of our Calvin Klein and Tommy Hilfiger International businesses. Our European and China businesses continue to be our healthiest markets, while Hong Kong and Brazil are under pressure. From a macro perspective, the U. S.
Market continues to be the most difficult and volatile market we operate in. Despite that, our U. S. Wholesale businesses are running ahead of planned and the prior year actual results. However, our U.
S. Retail businesses are seeing weaker traffic and higher promotional trends. Overall, international tourist traffic and spending continues to weigh on our U. S. Retail business, and we are experiencing a deceleration in sales trends in the U.
S, especially after the early Easter. Our digital commerce businesses saw revenue growth in excess of 20% for the quarter, and this channel continues to be our fastest growing distribution channel. Given our overall strong Q1 financial performance and the momentum we see in our international businesses, we are pleased that we were able to raise our full year earnings guidance and significantly increase the bottom end of our earnings forecast. Let me move into each of our individual brands. Moving to Tommy Hilfiger, overall revenue increased 4% on a constant currency basis and EBIT was up 20% on a constant currency basis.
Our revenues were driven by the outstanding performance of our Tommy International business, which was up 11%. We saw solid performance in all major European markets, demonstrated by our 8% increase in comp store sales for our retail business, with particular strength in the UK, Germany and Central European Markets. Comp trends in the 2nd quarter have continued to be strong, running up high single digits. Moving to wholesale, the Hilfiger brand continues to resonate with the European consumer and we are seeing growth in our fall 2016 order book, which is now up 6% versus our previous indication of +4%. Growth in the order book was generated across all product categories and strong growth is coming out of markets like the UK, Germany, Scandinavia, Spain and even Italy, which we have not seen in many seasons.
Our Tommy Hilfiger China acquisition, which closed in mid April, had a minimal impact in the Q1. This business continues to demonstrate strong results and is tracking to our plan, which will be slightly accretive to our earnings this year. As we have said before, we will be deploying more marketing spend into this business, particularly in the second half of the year, which we believe will help set the foundation for sustainable growth in 2017 and beyond. Moving to North America, our U. S.
Retail business continues to be under pressure, driven by the weakness in traffic and consumer spending. Comp store sales declined 10% in the 1st quarter we have not seen any improvement in 2nd quarter sales trends, and we are not forecasting for this trend to improve for the balance of the year. Moving to wholesale, I'm pleased to say that our Tommy men's wholesale business has performed very well in the Q1, highlighting the design improvements and product quality enhancements we have made to the men's line. We are posting positive retail sales results, strong sell throughs and higher average unit retails. We are seeing this performance continue into the Q2 of the year for wholesale and are excited about the development there.
I want to comment also on some recent news around the Hiltiga brand. From a brand perspective, we continue to be focused on driving brand relevancy and consumer engagement. We are leveraging our Rafael Nadal relationship, which began with Rafa as our brand ambassador for Tommy Underwear and is now expanding to our tailored clothing business. In conjunction with the French Open, we just hosted a great event in Paris with Rafa for TH Flex suits, which are performing very well at retail. In September, we will launch our Gigi Hadid capsule collection with 2 wide reaching e commerce players, Amazon and Revolve.
In addition, we will be offering the product in our Tommy Hilfiger stores and other key wholesale accounts around the world. This underscores the focus we are placing on our women's business for fall 2016 and beyond. We believe that we have a significant future global growth opportunity in women's and we are beginning to see positive momentum in this business. We will also introduce a Tommy Jeans capsule collection in the U. S, which will hit Urban Outfitters stores in August.
This exciting partnership will allow us to further tap into a younger consumer base, which is critical for the brand. This jeans capsule collection has already been a huge success for us throughout Europe and we look forward to leveraging this opportunity in the North America mall market. Last week, we also announced that we entered into an agreement to form a joint venture in Mexico with Grupo Axo, a longtime licensee of the Tommy Hilfiger brand in Mexico. This is an important strategic development for the business as it allows us to maintain a direct ownership interest in our Calvin Klein and Heritage businesses in Mexico, while gaining control over our Tommy Hilfiger business in that region as well. Grupo Axco's Hilfiger business is a larger business in terms of sales and profits than our Mexico business.
However, given the strength of our branch position in the market, we were able to negotiate a favorable fifty-fifty percent ownership split. The closing of this transaction is expected to occur early in Q3 of 2016. As a reminder, we are still on track for the handover of our women's wholesale business to G3 for holiday 2016. Our key department store customers' initial reaction to the G3 III collections have been very positive and we continue to be very optimistic about the future prospects for this business. Moving to Calvin Klein, the Q1 was another solid quarter for Calvin Klein as we generated top line growth of 13% on a constant currency basis.
EBIT was up about 20% on a constant currency basis as well. Let me start with the international businesses for Calvin, which is really driven by the significant momentum in our European business. Europe continued to experience double digit retail comps and very healthy wholesale selling. Our fall 2016 order book has accelerated to high teens growth versus our previous indication of mid teens growth. The strength of the business is coming from all major markets and across all of our product categories beyond just jeans and underwear, including menswear and accessories.
We are seeing our brand presence across the markets continue to improve by the season. Growth is coming from new doors and incremental square footage being dedicated to the brand. In the Q2, comp store sales in Europe continued to post strong double digit sales increases. Our CK Asia businesses continues to perform with China outperforming the other markets. We are seeing strength across jeans, underwear, accessories and our newer CK Performance business.
As we look at the region, Hong Kong and Macau remains under pressure due to the lack of mainland Chinese tourists and Korea continues to be pressured by the macro environment and the department store sector. However, our Taiwan, Singapore and Malaysia businesses are growing significantly. 2nd quarter comp sales in Asia have improved and are now running up about mid single digits. In North America, our revenues are up about 14% on a constant currency basis, driven by growth of over 20% in North America wholesale due to the strong performance across all categories, particularly the men's underwear and the women's intimate businesses. During the quarter, we saw continued strong momentum in our underwear business as our women's business continues to see tremendous growth both in bras and panties with our market share growing to the number 5 position in bras and the number 2 position in panties in the department store sector.
In men's, we continue to hold the number one market share position and we saw our market share in the Q1 grow to over 30%, which is a record performance for the men's business. Our jeans and men's sportswear business saw an improvement from the fall season with better AURs and strong sell throughs, especially on the men's jeans side of the business. Women's continues to see outsized improvement through our specialty store accounts like Urban Outfitters. Moving to retail, the business in the U. S.
Remains challenging with international tourist traffic and spending under the same pressure as we are seeing in our Hilfiger U. S. Business. Retail comp trends continue to decelerate into May, and we are not planning for this sales trend to improve for the balance of the year. Let me take a moment and discuss some of the recent news around the Calvin Klein brand.
In April, we announced a new global creative strategy for the company, which will unify all Calvin Klein brands under one creative vision across all categories of the business. As the company continues to build itself into a $10,000,000,000 global retail sales business, this undertaking will further solidify the brand's positioning worldwide and pave the way for future long term global growth. We look forward to providing an update on this strategy over the next few months. As it relates to the brand's relevancy and the power of the brand globally, we continue to see our awareness levels and willingness to purchase metrics continue to improve in all markets. Consumer engagement across the brand showed an over 35% increase in social media followers globally with a 60% increase in global engagements.
We are connecting our art with commerce through our partnerships with Zalando, Urban Outfitters and key social media platforms. And of course, the brand continues to drive controversy with tremendous industry buzz, be it sponsoring Justin Bieber's worldwide tour, our MyCalvins campaign or many of our digital partnerships. Moving on to our Heritage businesses, the Heritage business revenues declined 12%, driven by the ongoing rationalization of the business, including the exit of the IZOD retail business and the discontinuation of several licensed product lines in the dress furnishing business. Partially offsetting this decline was a 12% comp store sales increase in our Van Nuys and Retail business. Earnings were close to flat versus the prior year as the gross margin rate improvement offset the planned revenue declines in the quarter.
Overall, we have seen the department store channel continue to be under pressure from a traffic perspective, but we believe that our heritage brands are in most cases outperforming their respective categories. During the quarter, we continue to see positive response and sales throughs from our van using flex collar product and we celebrated the launch of Speedo Fit. Speedo Fit is a platform designed to inspire and equip athletes at all levels to explore the power of training in the water. We held major events both in New York City and Los Angeles with our team Speedo athletes to launch the campaigns. We are looking forward to the Olympics of Speedo and have some exciting events planned around the games and around our business.
Just to conclude my remarks, overall, we were quite pleased with our performance in the Q1 and believe that our world class brands, proven business model and best in class management teams are well positioned to navigate through this uncertainty and volatile environment, while continue to deliver strong financial results. And with that, I'll turn it over to Mike Schaeffer, our CFO to quantify some of my comments.
Thanks, Manny. The comments I'm about to make are based on non GAAP results and are reconciled in our press release. 1st quarter revenues were in line with guidance with the 3% constant currency increase over the prior year after excluding a negative impact of 1% from foreign exchange. Our Calvin Klein and Tommy Hilfiger businesses had a strong quarter and both exceeded our guidance. Calvin Klein revenues were up 13% on a constant currency basis, driven by strong growth in Europe and North America wholesale, particularly our underwear business.
Tommy Hilfiger revenues were up 4% on a constant currency basis for the quarter, driven by strong performance in Europe as our Tommy Hilfiger international comp store sales were up 8%. Our Calvin Klein and Tommy Hilfiger U. S. Retail businesses remain under pressure due to continued declines in our stores located in international tourist destinations. Heritage revenues were down 12%, primarily due to the exit of the Izod retail business and the discontinuation of several licensed product lines in the dress furnishings business.
EPS for the quarter was better than the top end of our guidance by $0.05 The beat was driven by a strong Calvin Klein and Tommy performance for $0.03 as well as FX and the timing of taxes for another $0.02 combined. Looking ahead to the remainder of 2016, we are increasing our earnings guidance on a non GAAP basis for the year. While continuing to take a prudent approach to planning our business as foreign currency and global consumer spending remain unpredictable and volatile and the U. S. Retail market is increasingly more promotional.
For the full year 2016, we are anticipating based on current exchange rates that we will be impacted negatively by about $1.55 of earnings per share for foreign exchange. The $1.55 impact is approximately 90% driven by transaction and 10% driven by translation. For the full year 2016, we are projecting earnings per share at $6.45 to $6.55 If we exclude the negative impact of FX of $1.55 we have earnings per share growth of 13% to 15% over the prior year. We have increased our guidance $0.15 from the bottom of our previous range and $0.05 on the top end of our previous range, which reflects a prudent view of our business for the second half of the year. Included in our full year guidance is increased marketing spending versus the prior year, which is mostly second half weighted.
Overall, we are projecting revenue to grow approximately 2% both on a constant currency and GAAP basis. This guidance reflects a revenue reduction of approximately $55,000,000 in the second half of the year related to our proposed joint venture in Mexico, which is expected to close in the early Q3 and would primarily impact our Calvin Klein business. Overall, we expect the Mexico transaction to be earnings neutral for 2016. Overall, operating margins are expected to increase approximately 75 basis points on a constant currency basis and expected to decrease approximately 100 basis points on a reported basis. Our Calvin Klein business is projecting revenues to grow 5% on a constant currency basis with operating margins to increase about 50 basis points, excluding a negative impact of 150 basis points of FX.
Tommy Hilfiger revenues are planned to increase 5% on a constant currency basis, with operating margins planned to increase about 50 basis points, excluding a negative impact of FX of 2 25 basis points. Our heritage business is planned to have a revenue decrease of 8% due mostly to the exiting of our iZOD retail business and several licensed product lines in our dress shirt business. Operating margins in our heritage business are planned to increase about 30 basis points. The impact of foreign currency on our heritage business is relatively immaterial. Interest expense for the year is planned to be between $117,000,000 $120,000,000 compared to the prior year amount of $113,000,000 and reflects a decrease from our previous guidance as a result of our recent amendment to our credit facilities.
As a reminder, when compared to the prior year, an interest rate swap converting variable to fixed interest began in February and is the reason for the increase. Our tax rate for the year is planned to be about 20%, which is in line with previous guidance and the prior year. 2nd quarter earnings per share is planned at $1.25 to 1 $0.30 and includes $0.45 of estimated negative impact for foreign exchange. Excluding this negative impact, we are expecting earnings per share to increase 24% to 28% for the 2nd quarter. Revenue in the 2nd quarter is projected to increase 5% on a constant currency basis.
Calvin Klein revenues are planned at a 13% constant currency increase and Tommy Hilfiger is planned at a 7% constant currency increase. Heritage brand revenues are projected to decrease 12%. Interest expense is projected to be $26,000,000 $28,000,000 for the 2nd quarter and taxes 24% to 25%. And with that, we'll open it up for questions.
Thank you. Today's question and answer session will be conducted electronically. You. And we'll go first to Bob Drbul with Nomura.
Hi, guys. Good morning.
Good morning.
Manny, I have two questions. The first one is, when you look at the sales trends domestically with either your own retail business or within the wholesale business and department stores, Can you just talk about how your sales plan for the fall specifically or in the second half of the year has changed given some of the weakness that you're seeing domestically? And then the second part of it is within the U. S, can you just talk a little bit about where you see current inventory levels and if where the pressure is and how you feel positioned both in your retail business but also at the wholesale level?
So I guess, Bobby, when we look at sales trends, I guess there's a couple of stories going on and you can't just generalize, because we're seeing really substantial strength in our Calvin Klein brand. And I think that's really going counter trend to what's going on in the market. So at wholesale, be it our underwear business, our sportswear businesses, the women's business, the G3 is operating, despite the challenges that we've all read about over the last couple of weeks in the department store U. S. Department store channel, that Calvin brand continues to grow across department stores and continues to grow in some of the key specialty store accounts as well as online.
Our retail businesses, the Tommy business, I'd also say, particularly on the men's side of the equation continues to perform very well. And we're planning the 2nd quarter conservatively, but to continue to grow from a top line point of view from us. The challenge when you look at the department store environment, I think one thing you have to take into consideration is that the overall comp trends have been challenging. But I think if you look at the categories that have been stronger, men's clearly have been stronger than women's overall. Apparel has been under pressure, but really where I think they're seeing a much more significant pressure on the business is CentiCore.
The accessory business is under major pressure. We play in that, but to a limited extent compared to the depth of our apparel business. So I think you've got to factor that in when you think about our department store business. Chris, as I said, Calvin continued to grow 20% in the quarter at wholesale. So clearly, there's positive results going on there.
Moving to our own retail business, look, the biggest factor we are dealing with is a lack of traffic, particularly in the international tourist markets. We are continuing to see a downturn in international tourists coming out of South America as well as some the Chinese consumer really taking a step back in the Q1. So I think that has to do with currencies, what's going on with travel into the U. S. And to be honest, I think it's some of the strength that we're seeing both in our European business and in our Asia business as well with tourists staying home in market, meaning European staying within Europe, the Asian consumer traveling either to Europe or into the Asia market as well.
So that's how I would characterize it. Inventories, I'm concerned. I think our inventories are really under good control. We've made a decision to invest in core inventory for the Q2 and beyond because we really see a sales opportunity, particularly in the underwear category, and we wanted to be in a position to fill those sales trends, both in men's and women's. And to remind you, last year, the sales trends were so positive, we were surprised by them.
We were chasing inventory all year last year in that category. So we really have ourselves well positioned to really fulfill at the 100% rate given the current sales trends. So we're making that commitment on our inventories. But given the sales performance, inventories are building as we go into Father's Day. And it's going to be a promotional second quarter.
We are hopeful that, that will that the pain has been factored in at retail and we're hopeful that as we come out of 2nd quarter, inventories going into fall will be well positioned. And I think most retailers are really planning for a turnaround in second half sales performance given the difficult environment that they had to deal with last year's second half. So long winded answer, I really do believe inventories will be under pressure and promotions will be more significant in the Q2 in the U. S.
Great. Thanks very much, Manny.
And we'll take our next question from David Glick with Buckingham Research Group.
Thank you very much. Just a follow-up on the outlet business, Manny. Can you talk about the difference in trends in your local markets versus Taurus? And how much Taurus business do you think really is going to be left after 2016 as we think about what a sort of a normalized trend might look like in that business? And then I have a follow-up on Calvin Klein.
Sure. I think is what we're seeing in our domestic store base is low single digit comp store increases overall. I think that business will that business is healthy, but what you have to take into consideration is international tourists, particularly in the Tommy business had represented to somewhere in the 40% range of business for us. And I think that business over a 2 year period when we complete this year will be cut in half. And I think that's the what we're weathering as we go forward.
And then And then Any other question?
Yes, a follow-up on Seekay, obviously, really strong double digit trends. Your annual sales guidance in constant currency implies a deceleration. I know you have the Mexico joint venture, which impacts your second half growth. You have some tougher comparisons. But just trying to understand why the guidance appears to be at a lower growth rate in the back half on Calvin Klein?
Thanks.
I guess, David, in the U. S, we're taking up a prudent you pick the word, we're taking a prudent posture. We are anticipating that the sales trends that we've seen in the Q1 are going to continue into May, are going to continue for the balance of the year in Calvin Klein. We're not looking for a sequential improvement as we get to the second half of the year. I think most other apparel companies in this market and most of the retailers based on what I've read are looking for a sequential improvement as we start the 3rd Q4.
We're not. But we are we positioned ourselves with core product to be able to capture that sales growth if it were to come. So I think we are sitting in a good position in that given the momentum in our international businesses, we've been able to plan our U. S. Businesses conservatively.
And I think that's partially what you're seeing as pulling down some of the sales growth that we're seeing in the Calvin business. That coupled with the other two factors. I mean, we're coming off of double digit growth in these in the 3rd Q4 of last year. We're growing on top of that, but we're not anticipating it's going to be double digit growth going into the 3rd Q4. You mentioned Mexico, which is worth over $50,000,000 to us for the quarter, but from a profit point of view, it won't have any impact on us for the year.
So I think there's opportunity let me just sum it up by saying, I think there's opportunity to outperform those sales projections if the environment just improves slightly.
Okay. One last question, if I could, on Tommy Hilfiger women's. Obviously, there are a lot of new categories that you could benefit from, from a licensing perspective, which can transition the profitability of the Hilfiger business to an extent more similar to Calvin given higher licensing income. What kind of opportunity do you see in licensing income from the new Tommy Hilfiger women's licenses that you just signed with G3?
Look, over time, I could see licensing revenues increasing over $30,000,000 If you just give a 7 if you think about a 7% royalty and if you think about above what we've got planned in our business over the next 3 years, what that could be worth given G III's expertise just in the North America market and using as a barometer the Calvin Klein business, that doesn't even that doesn't bring that business up to where the Calvin Klein business would be. So I think there's a real opportunity to outperform what we are currently projecting given the positive reaction to the collections, given G III's expertise and given the enthusiasm which retailers seem to be getting on board with the product at Tommy. I also think that if you think about the women's opportunity for us, the opportunity is even bigger internationally. And I think the investments we're making starting in the second half of this year from a marketing focus around the Tommy women's business, I think really positions us to take advantage of some of that momentum we see in the business. So you would expect women's to be bigger than men's.
Obviously, for us, it's not. Men's represents over 60% of the Tommy Hilfiger volume worldwide. So there's a real opportunity to continue to grow men's, but really outperform in women's. And that's not in any of our forward looking projections.
Great. Thanks, Manny. Good luck.
And we'll take our next question from Erinn Murphy with Piper Jaffray.
Great. Thanks. Good morning. I was hoping Manny you could talk a little bit more about the comment you made about driving the global retail size of the Calvin Klein to $10,000,000,000 over time. I think it stands somewhere in that kind of $8,000,000,000 range today.
Could you just talk about what the biggest incremental category or regional drivers are to really bridge that gap as you think about the future?
Sure. I think the growth will really the growth, I think, is easy to understand if we talk about regional. Clearly, the growth will be driven more significantly out of the international markets. Europe can grow dramatically over the next few years. If you think about the European business, this year it will probably approach around $600,000,000 for us.
The Tommy Hilfiger business is well over $1,700,000,000 just to put that into perspective. We haven't even launched any kind of women's sportswear or related classification businesses with Calvin outside of North America. We've got a big jeans business, but very limited sport offerings on the women's side of the business. And our men's sportswear businesses internationally are significantly underdeveloped, as well as tailored clothing, which is big businesses here. So we see dramatic growth for the Calvin Klein brand continuing coming out of Asia and coming out of Europe as those markets really can provide us upside growth as we move forward.
Okay. That's helpful. And then maybe if you could just talk a little bit more about your e commerce, your digital strategy. Just remind us where does e com stand today as a percent of your total? And then if you could just elaborate on some of the initiatives you highlighted earlier about your partnership with Revolve, some of the other platforms you're working with going forward?
And then just if you could add on what you're doing with Amazon right now in the conversation, that'd be great. Thanks.
Okay. So our e commerce business in total, when you consider our sales to .coms as well as our own internally managed business is over $800,000,000 in retail sales. Our strategy has been to in North America to utilize our sites as flagship sites, as really to present the best of the brand, to present the brand in a way that we are showing in Calvin, we're showing collection product, we're showing bridge product, and then we also show a white label product. But we don't promote dramatically. We try to keep the site pure.
Our average unit retail selling on that site is significantly higher than what you would see average unit retails in department stores in the United States. And we really are trying to do the business in North America through our wholesale partners and a number of the pure plays here in the United States, particularly Amazon, which is growing dramatically. When you move internationally, it's really a 2 tiered approach for us. We are focused on our own e commerce sites. Tommy Hilfiger is very large in Europe.
It's by itself. Our site is over $100,000,000 there and is nicely profitable as well. And we're also selling to our wholesale.com accounts as well as some of the number of the pure plays like Amazon and Zalando. In Asia, where with the Woneco acquisition, we probably started a little bit later, we're really seeing strong momentum in that business as we move forward. Our key sites that we operate ourselves are doing well, but even more dramatically, Alibaba through Tmall and our JV partnerships are really driving outsized growth for the business there.
So it's a channel that we are really focused on. It's a channel that we're making significant investments in and it's a channel that's our fastest growing channel of distribution for both brands.
Great. Thanks for the
context and congrats on the quarter.
Thank you. We'll take our next question from Great.
Thanks for the context and congrats on the quarter. Thank you. We'll take
our next question from Michael Binetti with UBS. Hey,
guys. Good morning. Congrats on a great quarter. I know it's a very tough environment. Let me I know you've been asked about the guidance for the second half.
I want to ask about the Calvin Klein guidance for 2H a little bit differently. In the North America wholesale business in particular has been such a nice driver and you're seeing good 20% growth rates there now. There's obviously some really strong selling going on, but I think some of the industry data we see shows good sell through as well. So it looks like the growth rates in U. S.
Wholesale that you're baking in for second half are much lower. You start to lap much bigger growth rates a year ago. So obviously that should decelerate and I think that's in your guidance. But maybe you could help us talk about what kind of growth rates in North America wholesale you think we'll be talking about when we have this call with you 90 days from now, just so we can think about where you're headed?
Well, Michael, I guess a couple of things. Let me just take a step back. I know everybody feels that there's opportunity in the second half and we would agree. But we got to look, if this was a different environment, if we were sitting back and sales in the department store channel were flat or slightly positive, a more normal traffic environment, you could be sure we would be much more aggressive in forecasting results and projecting numbers. It's the Q1.
It's most companies that are missing, taking down guidance and going forward, we're really, really just going to try and continue to go long, long, hopefully continue to outperform, raise our guidance as the year goes and see how it moves forward. This doesn't seem like the environment to try to be a hero in. So let's see how the year progresses. The 2nd quarter is projected pretty aggressively. We're looking for double digit sales growth in Calvin Klein.
We'll have better insight as we get into the 3rd quarter how open to buy dollars being planned more specifically at retail department stores. And even though projections might be strong for the Calvin Klein brand, we're being cautious about how much of that is going to materialize as we move into August September of next of this year. So I guess my total message is, let's see how it moves forward and we'll be sure to be as transparent as possible.
Okay. Let me ask you about maybe some of the components that are driving the 20% growth rate that you're seeing today. Can you help us think about how much of that's coming from AUR or just unit velocity to help us kind of think forward in our model as to what rolls off and what seems more sustainable as we do get into the back half of the year?
Yes, I think AUR increases is about 25% of it and I think the balance is really unit growth. We're seeing AUR improvement in those numbers, particularly in the jeans business. The underwear business is very strong on the women's side. Men's has always been a high AUR. So clearly, we're not seeing 25% increases in men's AUR because we were the highest AUR in the category to begin with.
But it's very healthy and holding together. So it's real this is much more driven by units than just AUR. And I think you'd probably see the AUR improvement even more specifically on the gross margin line. And I think there you see the performance in the quarter and I think you'll see it even more so as we get into the second half of the year.
Okay. Thanks. Very helpful.
We'll take our next question from Dana Telsey with Telsey Advisory Group.
Good morning, everyone. As you think about and congratulations, if you think about the underwear business, how big could the underwear business be Manny? And then overall, as you think about revenue by channel for each of the brands, what's the opportunity, whether it's this new specialty channel you're engaging in, department stores, outlets, and what's the margin implications for that? Thank you.
Okay. So first part of the question, the underwear business, how big can it be? The growth opportunity is women's. Women's overall for us is about 40% of our underwear business. The women's market is 5 times the size of the men's market.
So clearly, there's a huge opportunity for us in women's here in North America. In men's, the opportunity here in North America continues to be the channel diversification that's somewhat going on. Calvin Klein is a department store brand from Nordstrom's to Macy's. Those are our key large accounts, Bloomingdale's. As you think about it with the growth of pure plays, it's opening us up to a newer consumer and we are capturing that market share, be it on Amazon or urbanoutfitters.com.
So really a channel play there in the United States is important for us as we move forward as well. Internationally, it's just all white space. We had huge opportunity in Europe to continue to grow that business as the brand continues to expand there, both in men's and women's. And in Asia, which is a direct retail play for us, we continue to see strong comp store sales performance there. And I think both men's and women's can continue to grow.
So I think the underwear business could continue to grow in the mid to high single digits for an extended period of time.
Thank you.
Okay. The second part of the question, I'm sorry, Dana, could you repeat it? Of course.
As you think of the changes that you're making with entering the specialty channel and obviously online that you mentioned, the overall business, what's the opportunity? How do you think that how did the channels change as a percentage of the penetration of your business and what's the margin implications?
Okay. I think the second part of the question is easier to understand is we are agnostic about where the consumer buys products. By that, I mean is we have a very profitable retail direct to consumer channel. Our wholesale business is highly profitable within 100 basis points of each other. And as e commerce scales, both our own and the pure plays and our wholesale.com business, our profitability in that channel is similar to our profitability in the wholesale channel.
So we are we believe we are from a profitability point of view, we're going to manage the distribution from a brand point of view, but it really doesn't shouldn't dramatically impact our profitability at all. On the distribution channel, what we do find is the specialty store channel and the dotcom channel opens us up to a younger consumer, not only for underwear, but for all of our businesses. And that's exciting for us. And we're connecting with that consumer from a marketing perspective, marketing campaigns, we're trying to engage our digital spend in Calvin and Tommy today is over 65% of our marketing spend is really occurring on a digital basis. And we're really trying to move and connect with that consumer emotionally and they shop differently.
At the same time, we're not looking to alienate our 4 department store customer in North America or around the world. And we're able to we believe able to balance that out through our channels of distribution. So we think we're in a strong position to manage the brick and mortar evolution that's going on at the same time advantage of the growth that's occurring in the e commerce channel.
Thank you.
And we'll take our next question from John Kernan with Cowen and Company.
Good morning. This is Krista Zuber on behalf of John Kernan. Most of my questions have been answered, but as we model out CK and Tommy over the next several years, where do you think their respective margin profiles can recover to? Thanks.
I think that's an excellent question from the point and an interesting question is, clearly there's as the currency situation levels off, there's an opportunity to really get back the margin that we've given up in the business. And I think between both businesses internationally, we've lost about 300 basis points of operating margin, driven by the strengthening U. S. Dollar. I think from a pure if currencies just stayed where they are and more or less leveled here, I believe we can capture back half of that over the next 3 years.
I think if currencies were to start to swing the other way marginally and start to improve, that's how you capture back the other half of it as we move forward. So it's something that we really need to watch. We've got very sophisticated Dana and Mike have very sophisticated hedging strategies to really get us through the next 12 months from a transaction point of view. But as you go long term and since inventory throughout the world, in Europe, throughout Asia is bought in U. S.
Dollars, you can hedge and you can go out probably 15 months. But once those hedges fall off, if currencies remain weak against the U. S. Dollar, you're going to have to deal with that at that point in time. And that's what's happening to us in 2016.
So hopefully, we're optimistic that we'll see some strengthening of some of the currencies against the U. S. Dollar, particularly the euro, given the strengthening of that economy as we move forward. But who knows what it's going to be in the short term. So I hope I answered your question from a profitability point of view.
Yes. Thank you. And we'll take our next question from Eric Tracy with Breen Capital.
Good morning and I'll add my congrats. As we think about the domestic retail business, certainly understood the international tourism is putting pressure, but correct me if I'm wrong, we should start to lap some of those compares starting in 3Q. 3Q. And then just a little bit bigger picture, where is that business in terms of profitability? Just not total DTC, but just the stores and maybe breakdown between CK and Tommy?
Well, our international stores, even with this hit with Tegan top line are by far our most profitable stores. The volumes that you do and I mean, just think about the volumes that we do in Orlando and Miami and Harriman, New York, which are by far the probably and Las Vegas, which are probably the 3 or 4 largest centers in the country. The sales per square foot despite experiencing a comp store decline that's probably over 20% in those stores continues to be our highest performing comp store. So there's not a profitability issue from the point of view of overall profitability, But just given the decline in sales volume and the margin pressure that that caused over the last 12 months, it's taken out of the performance of that business. And we report on North American and our European International businesses, and you can see in North America the margin pressure that we've been under and the top line impacts that it had.
But even with that, we continue to report double digit operating margins in those businesses. And I think once that starts to level out, and as you said, the comparisons do start to get easier as you get into September October. So we are all hopeful that on a stacked 2 year comp basis that we can start to see better trend in our retail comp performance in the second half, but we're not counting on it to significantly improve.
Okay. Then switching gears a little bit to the Gigi Hadid collaboration with Tommy. Again, I believe you said sort of kicks in, in August. Maybe just talk about sort of distribution and marketing campaign around that?
Sure. Look, it's an exciting campaign. Gigi is so hot and she's such a great ambassador for the brand. We're investing significant dollars in that campaign. And as Mike said in our comments, we're planning marketing expenditure increases throughout the second half and that focus really will be on Calvin and Tommy and Gigi is a key part of that marketing investment.
I think the opportunity is not so much just the Gigi collection. I think that creates buzz with the consumer. I think you're going to you'll see it all over and you'll see it in key retailers and you'll also see it really advertised significantly globally. But I think it really provides a platform and a foundation to really move the Tommy Women's business as we go forward.
And then lastly, if I could just squeeze in one more. As you think about you said you're channel agnostic and clearly wholesale distribution domestically is challenged sort of secularly here. Talk about sort of the level of investment you feel like you need to continue to make or what's incremental to support the digital kind of migration, be it your own sites and or a third party player like an Amazon?
Look, I think as we for the last 3 years, we've been making significant investments in our e commerce platform. That's not going to slow down, but I think that's all factored into where we are between capital spending for us is between $250,000,000 $300,000,000 in a given year. I can assure you that systems are a big piece of that. Platforms are a big piece. If we made a decision that the commerce business is growing so strongly that we need a separate warehouse for e com, that would be a major capital investment, but you could be sure that there would be a significant expense benefit associated with making that investment based on the efficiencies that would come out of a standalone warehouse facility here in North America or Europe or Asia.
So I think we're very comfortable with the investments we have made, which we continue to make, and I think the business will continue to evolve. And our business and our investments will evolve along where we see those growth initiatives.
Perfect. Thanks guys. Best of luck.
Okay. If I could, we're going to take one more question, so we can all get back to work and for the Q2. Operator?
Thank you. Yes. And we'll take our final question from Kate McShane with Citi Research.
Hi. Thanks for taking my question. Manny, I was just wondering with the success that you've seen at Calvin Klein at wholesale and all the opportunities that you mentioned during the Q and A and on the call about opportunities for incremental distribution, do you think your conversations and relationship with the department stores have changed at all? And how do you manage this going forward?
I think they strengthened. I think one of the things we listen to our customers and one of the things that we talked about 3, 4 years ago is they wanted us from an e commerce point of view, from a dotcom point of view, they wanted us to help drive traffic to their sites. So we made decision in North America not to compete directly with them online. And by that I mean is, I think competitors, whoever they are, have much bigger direct e commerce sites than we have. We've made the strategic decision to partner with the with our department store customers to really expand their e commerce businesses, to make investments on their platforms that our brands are well positioned not only in their brick and mortar stores, but also in their e commerce sites.
And obviously, we're seeing outsized growth with that channel of distribution, be it macy's.comorlawdantaylor.com. So really making the investments along with them to drive that business. So I don't feel a constant growing there. I think the Amazon situation, it's an opportunity. We try to have different merchandising strategies for both players with not the same performance.
Obviously, the fashion quotient at Macy's is much stronger, much deeper. Amazon really knows how to sell core product. They're trying to get into the fashion world, but they haven't proved that yet. And we'll see how that all plays out. But clearly for us, comparative was it hasn't been a major discussion point.
Calvin and Tommy, depending on the retailer in North America, we are 2 of the top 4 brands in every major retailer in North America where it's appropriate for us to sell our goods. So the relationships have really never been better. And the channel conflict that we manage every day has been going on for the last 20 years, whether it was concerns about our own retail stores, whatever. And that's being a global brand, that's what we do, that's what we get paid for. So I have not seen that intensify significantly.
Thank you so much.
Thanks, Kate. Thank you so much, everyone. I wish everyone a happy, safe Memorial Day weekend, kickoff the summer and hopefully some better selling at retail here in the United States. And we look forward to speaking to you in August about the Q2 performance. Have a good day everyone.
Thank you. And that does conclude today's conference.