PVH Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
August 31, 2021

There are 13 speakers on the call.

Operator

Good day, everyone, and welcome to the PVH Second Quarter 2021 Earnings Call. Today's call is being recorded. At this time, I would like to turn the conference over to Dana Pearlman. Please go ahead, ma'am.

Speaker 1

Thank you, operator. Good morning, everyone, and welcome to the PVH

Speaker 2

turn the call over to

Speaker 1

our 2nd quarter 2021 earnings conference call. This webcast and conference call is being recorded on behalf of PVH and consists of copyrighted material. Turn the call over to the operator for questions. Your participation in the question and answer session constitute your consent to having anything you say appear on any transcript or replay of this call. The information to be discussed includes forward looking statements that reflect turn to PVH's view as of August 31, 2021 of future events and financial performance.

Speaker 1

These statements are subject to risks and uncertainties indicated in the company's turn the call over to the 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, turn the call over to our operator for questions. Turn the call over to the operator for questions. Significantly, at this time, the COVID-nineteen pandemic continues to have a significant impact on the company's business, financial condition, cash flow and results of operations. Turn the

Speaker 2

call over to the operator for questions.

Speaker 1

There is significant uncertainty about the duration and extent of the impact of the pandemic. The dynamic nature of these circumstances means what is said on this call turn the call over to the operator for questions. Thank you. Thank you.

Operator

Thank you. Thank you. Thank you. Thank you. Our next question

Speaker 2

turn the call over to Steve.

Speaker 1

Thank you, Steve. Thank you, Steve. Good morning, everyone. I'm very pleased to report that ask will be on a non GAAP basis as defined under SEC rules. Reconciliations to GAAP amounts are included in PBH's Q2 2021 earnings release, turn the call over to Mr.

Speaker 1

Stephane Larson, which can be found on www.pbh.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. Stefan Larson, CEO of PVH.

Speaker 3

Good morning, and thank you for joining. Turn the call over to Mike Schafer, COO and CFO Dana Perlman, EVP, turn the call over to Jim Holmes, our Corporate Controller, who we announced will be Interim CFO turn the call back to the operator for the Q2. Let me start by sharing that we delivered a very strong second quarter performance turn the call over to our operator and our financial results. Thank you.

Speaker 4

Thank you. Our next question

Speaker 3

comes from the line of All despite the ongoing challenges from COVID. We're also taking up our guidance for the year. Turn the call over to Mr. President. I would like to thank our associates around the world for their hard work and critical contributions to the great second quarter turn the call over to our operator to discuss our financial results.

Speaker 3

Our results in the quarter included strong double digit revenue growth against last year, turn the call

Speaker 2

over to the

Speaker 3

operator for questions. Which was relatively in line with pre pandemic levels, and this was led by our international business, specifically Europe. Our performance was underpinned by meaningful gross margin expansion and operating expense efficiencies, which drove significant EBIT margin expansion of several 100 basis points compared to 2019. For several quarters now, we have shown great progress in driving an accelerated recovery turn the call over to the operator to discuss our strategic priorities. These include increasing our focus turn the call over to our 2 iconic global power brands, Calvin Klein and Tommy Hilfiger.

Speaker 3

Building on the strength in international, delivering on product strength, pricing power and gross margin expansion, while winning in the marketplace through superchargedecommercegrowth and at the same time, driving operating efficiencies. Looking ahead, our strong performance in the quarter, combined with the strength of the underlying growth drivers in our business has led us to increase our top and bottom line full year guidance. Our EBIT margin guidance now assumes a return to a margin similar to our 2019 levels. We are confident in our ability to continue to drive an accelerated recovery, while also prudently planning our business for the remainder of the year. Turn the call over to Eric.

Speaker 3

As we navigate pandemic related uncertainties, including market and supply chain disruptions, I will now share some of the key proof points on how we are executing our accelerated recovery priorities. Turn Mike will then share more of the financial details. First, we have continued to supercharge e commerce turn the call over to our financial results, particularly when compared to our outside growth We continue to ramp up turn the call over to our Investor Relations website, our website will be posted on our website at

Speaker 2

the same time, growth in our

Speaker 3

brick and mortar retail stores is accelerating, demonstrate our increasing strength in connecting with the consumer across channels. Next, We are driving product strength across our brands and regions. The trends we saw last quarter have continued. We've consumers excited to come out of COVID restrictions and adopting a hybrid lifestyle towards an increasing mix of wearing occasions. This is still very much grounded in a casual lifestyle that fits both Calvin and Tommy really well.

Speaker 3

In the quarter, We saw continued strength in key essential product categories like underwear, t shirts, polos, hoodies, turn to the next question and answer session. We continue to lean into the strength of our key essentials and hero products, which represent the must have product silhouette

Speaker 4

turn the call

Speaker 2

over to

Speaker 3

our operator to review our financial results. Through this work, we saw an improvement in AURs during the quarter, including double digit increases in some of our biggest investments. We also continue to cut more unproductive SKUs, including a 20% cut on average for fall 2021. Through this work and by taking a more data and demand driven approach, take a look at our financial results across the board are in a very good shape, down 13% versus last year. And as we further improve the way we plan and buy our inventory, And at the same time, we continue to drive efficiencies across our business as part of our work to operate with more speed, turn to more agility to better follow the consumer in this dynamic environment.

Speaker 3

Lastly, we successfully sold our turn heritage brands as planned. This has already enabled an increased focus on Caban and Tommy, which are higher return businesses turn the call over to our regional update. While each of our regions is in varying stages of recovery, We drove performance significantly above plan for both revenue and profitability. Let me start with Europe this time. Our European team delivered another quarter of exceptional performance through very strong execution of our accelerated recovery priorities.

Speaker 3

Both Tommy and Calvin performed significantly above plan, including double digit growth versus pre pandemic levels. The strength in our Europe business is a very good example of the kind of performance we're able to drive when we execute really well. Turn the call over to our operator

Speaker 5

and the presentation. And it

Speaker 3

offers a proof point and a blueprint for what's possible in our other regions as well. Across both brands, we are winning with the consumer, driving brand relevance through leaning into the strength of our hero products, And we continue to supercharge our digital and our omnichannel capabilities. Building on our success in the Q1, As lockdowns were lifted, we saw great demand for our product, both in our own channels as well as in wholesale. We delivered strong revenue trends supported by significant margin expansion, which included gross margins above 2019 levels, to turn the call over to Steve to discuss

Speaker 6

our financial

Speaker 3

results. We generated strong digital sales growth of 45%, Even against the backdrop of stores reopening, driven by our expanded business with digital pure players, Europe represents our highest e commerce penetration, well above the company's overall rate of 25%. In our D2C channel, we continue to accelerate our omni channel capabilities by investing in connected retail technologies. Paired with the e commerce performance, we generated very strong retail store sales with traffic levels We drove higher conversion, stronger full price seltzers and higher AURs. In addition, the strong consumer demand We transitioned earlier to pre fall collections.

Speaker 3

Demand in our future order books across both brands continue to be very strong, turn the call over to our operator for the Q1 of 2019. With spring 2022 planned up double digits, following double digit growth for fall holiday 2021. Moving on to Asia. Our Asia team continues to execute really well. Although COVID resurgences across the region turn the call over to John.

Speaker 3

In markets such as Japan, Korea and most recently Australia are making it difficult to see the real underlying strength turn the call over to our operator for questions. Overall, revenues were relatively in line with pre pandemic levels turn the call over to our questions and our plans led by China. Despite the current COVID related challenges, what excites me the most is the strength we are turn to Slide 5, our Investor Relations and Higher Gross Margins, all driven by the same hero product focus. China remains a significant growth opportunity for both Tommy and Calvin. As we continue to invest in the market, We are driving brand heat and relevance through our integrated marketing and capsules around key shopping moments, including 618 this quarter and most recently, Chinese Valentine's Day.

Speaker 3

We are creating unique turn the call over to our press release, which are delivering strong KPIs, including higher conversion, higher sell throughs and higher AURs And as we Supercharge e Commerce, we are leveraging data analytics including expanding our work with WeChat. Lastly, inventory levels continue to be very lean turn the call over to the operator to discuss our financial results. Thank you, Steve. Thank you, Steve. Thank you, Steve.

Speaker 3

Thank you, Steve. Thank you, Steve. Thank you, Steve. Thank you, Steve. Thank you, Steve.

Speaker 3

Thank you, Steve. Thank you, Steve. Thank you, Steve. Good morning, everyone. Good morning, everyone.

Speaker 3

We remain confident about the long term strength and growth opportunities for both of our core brands. Turn the call over to you. Turning to North America. The region is still under the most pressure with the lack of tourism remaining our biggest challenge. Tourism continues to trend down significantly versus 2019 levels, which in a normal year made up turn to Slide 30 to 40 percent of our total business in the region.

Speaker 3

Our North American teams are leaning in to what's within our control, focusing on the domestic consumer, supercharging e commerce and driving product strength with AUR and margin improvements. And I'm pleased that we saw a number of green shoots during the quarter. Importantly, we drove sequential improvements in top and bottom line performance turn the call over to our operator to discuss our financial results. Some of the proof points of our progress this past quarter include: turn the call over to our operator. We drove double digit growth in our digital business, led by a combination of continuously improving our own and operated e commerce sites With the domestic consumer, we saw improved traffic with higher AURs.

Speaker 3

We're also better optimizing inventory across our channels turn the call over to the operator to review our financial results and improve our ability to react to demand changes. For example, in Canada, where the country's reopening has been slower than other markets, We proactively redirected inventory to the U. S. Overall, in North America, we have a lot of work still to do, to turn the call over to our operator to continuously drive brand relevance through product strength, pricing power turn the call over to Kevin Kline. Next, I'll share a few brief global brand highlights, beginning with Calvin Klein.

Speaker 3

Global brand health remains very strong with consistent high levels of global awareness. Turn

Speaker 5

the call over to our Q1

Speaker 2

of 2019. Thank you. Our Pride campaign this year

Speaker 3

was successful in further building brand awareness. The campaign celebrated defining moments turn the call over to the operator for the Q1 of 2019. Thank you. Thank you. Thank you.

Speaker 3

Thank you. Thank you. Thank you. Thank you. Thank you.

Speaker 3

It resulted in global reach that was up over 30% on last year. It drove a 300% increase in traffic to our site turn the call over

Speaker 4

to the operator. In the spring,

Speaker 3

we launched the brand's first designer collaboration with Huron Preston, which has been very well received by the consumer. Turn the call over to the operator. This quarter, we will release a second chapter of this collaboration across denim, underwear and other wardrobe essentials. Looking ahead, we will continue to build out our collaboration strategy, connecting the iconic strength of Calvin Klein collaboration with premium retailer Kit, which taps into the power of Calvin with a Gen Z audience. Moving on to Tommy Hilfiger.

Speaker 3

Global brand health KPIs for Tommy also remain very strong. The expansion of our purpose oriented product offer continues to resonate with consumers, with more than 50% of the global summer pre fall collection turn the call back to our Q1 of 2019. From our blast from the past capsule inspired by pop culture cartoon icons to our pastels capsule, turn the call over to our operator for the Q1 of 2019. The brand also launched collaborations that amplified our efforts to introduce opportunities and visibility for underrepresented communities within the fashion and apparel industries. In July, we launched the first collaboration with a non gendered capsule featuring India Moore.

Speaker 3

The brand also launched a capsule with emerging Brooklyn designer, Romeo Hunt, following his mentorship with Mr. Hilfiger. The capsule reimagines iconic Tommy pieces with a focus on outerwear and is available on tommy.com as well as through an exclusive partnership with Selfridges. These collaborations have increased traffic to our sites in the U. S.

Speaker 3

And Europe, In closing, I feel very good about how we came together and drove yet another strong quarter of accelerated recovery. Our increased focus on winning with the consumer through our 2 global power brands, Calvin Klein and Tommy Hilfiger, is driving results. Turn the call over to Steve. We're still early days in building our next growth chapter, and I continue to be very optimistic for the future as we lean further turn into our accelerated recovery priorities, leveraging our core strength and continuously following the consumer to position PVH for sustainable long term profitable growth. And before I hand it over to Mike, Since this is Mike's last earnings call, I would like to thank him again for his contributions of nearly 30 years to PBH.

Speaker 3

Turn the call over to Jim Holmes as our Interim CFO. Jim has been with PVH for over 20 years and has played a critical role on our finance team, turn the call over to Mike. Thank you, Stefan. Thank you, Stefan.

Speaker 5

Turn the call over to Steve. Thanks, Stefan. The comments I'm about to make are based on non GAAP results and are reconciled in our press release. Overall, revenues for the Q2 were up 46% as reported and up 40% on a constant currency basis compared to the prior year turn the call over to our financial results and significantly exceeded 2019 pre pandemic levels, turn

Speaker 2

to Slide 5. Virtually all of our retail stores and

Speaker 5

the majority of our wholesale customer stores were closed globally during the 1st month of the quarter Our total direct to consumer business was up 19% versus the prior year and owned and operated digital commerce was turn the call over to our press release. Our retail stores faced some continued pressure during the Q2,

Speaker 2

turn to Slide 7, although to a much lesser extent

Speaker 5

than in the previous year, with certain stores temporarily closed in Europe, Australia and Japan for various periods of time. Our wholesale revenues were up 77% versus the prior year, driven by strong performance in Europe. In addition, we experienced a significant increase in sales to the digital businesses of our traditional and pure play wholesale customers. Our overall revenue through our digital channels grew approximately 35% versus the prior year, And our digital penetration as a percentage of total revenue continues to be approximately 25%, even as stores have reopened. Turn the call over to John.

Speaker 5

Looking at our segments, Tommy Hilfiger revenues were up 41% as reported and 35% on a constant currency basis, turn the call over to our operator for questions. Thank you, John. Thank you, John. Thank you, John. Thank you, John.

Speaker 5

Thank you, John. Thank you, John. Thank you, John. Thank you, John. Thank you, John.

Speaker 5

Thank you, John. Turn to Slide 11. Calvin Klein revenue was up 56% as reported and 50% on a constant currency basis, turn the call over to our operator for the Q4 with international up 47% as reported and 37% on a constant currency basis. North America was up 75%. Our heritage revenues were up 37%.

Speaker 5

Gross margin was 57.7% for turn the call over to the Q4 as compared to 55.9 percent in the prior year, which reflected substantial improvements across all regions due to less promotional selling. Our inventory is lean, down 13% as of the end of the quarter compared to the prior year. Earnings per share was $2.72 on a non GAAP basis for the Q2 of 2021 compared to $0.13 in the prior year period turn the call over to the operator and $2.10 in 2019. This beat the top end of our previous guidance by $1.54 The beat was primarily due to the business outperformance largely in Europe for $1.19 as well as a favorable impact of taxes for $0.35 turn the call over to the operator for the Q1 of 2019. Notably, our EBIT margin continued to be very strong at 12.7% for the quarter, turn the call over to Mr.

Speaker 5

President. Thank you, Mr. Chairman. Thank you, Mr. Chairman.

Speaker 5

Thank you, Mr. Chairman.

Speaker 4

Thank you, Mr. Chairman. Thank you, Mr.

Speaker 5

Chairman. Thank you, Mr. Chairman. Thank you, Mr. Chairman.

Speaker 5

Thank you, Mr. Chairman. Thank you, Mr. Chairman. Thank you, Mr.

Speaker 5

Chairman. Our outlook does not contemplate any significant new store closures, new lockdowns or extensions of current lockdowns beyond what is already known. Turn the call over to Eric. In addition, the 2021 outlook contemplates higher freight and other logistic costs in the second half of the year to mitigate delays of approximately turn the call over to the operator to discuss our financial results. Thank you, Steve.

Speaker 5

Thank you, Steve. Thank you, Steve. Thank you, Steve. Thank you, Steve. Thank you, Steve.

Speaker 5

Thank you, Steve. Thank you, Steve. Thank you, Steve. Thank you, Steve. Thank you, Steve.

Speaker 5

Good morning, everyone. Our actual 2021 results could differ materially from our current outlook as a result of the occurrence of any of these or any other turn to the call to questions. We continue to be encouraged by our international businesses, which are expected to continue to exceed pre pandemic levels turn the call over to the remainder of 2021. We expect North America to continue to face the ongoing challenge of reduced international tourism, turn the call over to the operator. Additionally, our full year outlook includes the sale of certain of our heritage brands, which will result in a decrease in revenue take approximately 26% to 28% as reported and approximately 24% to 26% on a constant currency basis compared to 2020.

Speaker 5

We expect gross margin will continue to show improvements for the remainder of the year due to less promotional selling

Speaker 2

turn the call over to the operator and a favorable shift in regional

Speaker 5

sales mix compared to the prior year with our higher margin international businesses making up a larger portion of total revenue. While we continue to manage our cost structure proactively by reducing operating expenses and reallocating resources to support strategic growth areas of the business, We expect higher expenses in the second half of the year than the first half. The incremental expenses in the second half include increases in marketing and other investments, which were planned in the second half of the year to coincide with when we expected our stores to be mostly open And to drive momentum as we hopefully exit the pandemic. We expect our EBIT margin will be nearly flat to our 2019 pre pandemic level. We continue to expect that the increase in gross margin in 2021 versus 2020 and the decrease in operating expenses as a percentage turn the call over to the operator for the Q1 of 2019.

Speaker 5

Thank you, Steve. Thank you. Our next question comes from the line of Chris Turnure. Hi, good morning, everyone. Our EBIT margin in the second half will be impacted by the incremental expenses I noted previously as well as turn the call over to our operator for questions.

Speaker 5

Thank you, operator. Thank you, operator. Thank you, operator. Thank you, operator. Thank you, operator.

Speaker 5

Thank you, operator. Thank you, operator. Thank you, operator. Thank you, operator. Thank you, operator.

Speaker 5

Thank you, operator. Thank you, operator. Thank you, operator. Thank you, operator. Thank you, operator.

Speaker 5

Turn the call over to

Speaker 4

Page 21 to approximately

Speaker 5

$105,000,000 compared to $116,000,000 in 2020. We have made $200,000,000 of voluntary debt repayments turn the call back over to the Q2, bringing our total for the first half of the year to $700,000,000 which is equivalent to the incremental borrowings turn the call back to the call to discuss our financial results. Our tax rate for the year is estimated at 17% to 18% with the favorable impact we benefited from in the second quarter, largely offset in the second half due to time. Turn the call over to John. As a reminder, when we think about our tax rate by quarter, the 4th quarter is expected to benefit from certain discrete items, which bring down the overall rate for the full year.

Speaker 5

For the full year in 2021, we are projecting non GAAP earnings per share to be approximately 8 point turn the call back to the call to approximately $6.50 and compared to a loss per share of $1.97 in 20.20. The beat was primarily due to business outperformance, largely in Europe for $1.85 along with an improvement in taxes of $0.10 turn the call back over to the operator for the Q3, our revenue is projected to increase turn the call over to the operator to discuss our financial results. 3rd quarter non GAAP earnings per share is expect it to be in the range of $1.95 to $2 compared to $1.32 in the prior year period. We expect interest expense to be about $25,000,000 and taxes to be in the range of 26% to 28% in the 3rd quarter. And with that, we'll open it up to questions.

Operator

Turn the call over to Eric. We'll take our first question from

Speaker 4

Erinn Murphy with Piper Sandler.

Speaker 1

Great. Thank you. Good morning and congratulations on the 2nd quarter. My question, Stephane, is for you. The 2nd quarter operating margins, just record level, would love to hear a little bit more about the cost discipline that you're seeing in the business address the different work streams.

Speaker 1

And then I recognize in the back half you spoke to added freight and marketing, but if sales were to come in ahead of plan. Could you just talk about your philosophy around flowing through the upside versus reinvesting?

Speaker 3

Yes. So thank you, Aaron. So we when we look at the Q2 turn the call back to the operator for the Q1. We see the upside coming from a combination of the gross margin rate going up because of our mainly driven by our key product focus, our hero product focus and that we are able to Sell through our products at a higher AUR, and we see that continue. This is a multiyear journey where We drive brand relevance through focusing on winning with product and being very focused on the key categories that matters the most to the consumers.

Speaker 3

And then we build hero products around that. And then we connect those hero products with the consumers, increasingly tighter and tighter to where the consumers wants to shop channel wise, and that's where we have doubled down on e commerce. So we see that continue. On an operating efficiency perspective, that's the other driver of the EBIT rate improvement in Q2. We see that it's coming from being increasingly focused on investing in turn the call back to the operator for the Q and A session.

Speaker 3

And looking at efficiencies that we can free up that's outside of that. So you will see us continue to drive gross margin rate improvements over time, and you will see us continue to drive operating efficiencies over time.

Speaker 1

Great. Thank you. And then I guess, relatedly, if we zoom out and look at 2022, it sounds like you already have some take good visibility on European order books up double digits. I know there are several puts and takes with just lapping stimulus as well as supply chain that could linger. But How are you thinking big picture about 2022 just given those comments on gross margin as well as your operating efficiencies that you expect to continue?

Speaker 3

Yes. Eren, we continue to lean into our accelerated recovery priorities. And seeing the effect this year of that and continue to see effect when we lean into the first one being supercharging e commerce. And that's When the markets open up, that increasingly includes the comeback of brick and mortar. So it's about continue to supercharge e commerce for 2022 to win in the marketplace across channels, but being digitally led And then continue to drive product strength and continue to drive efficiencies.

Speaker 7

Yes. And Erinn, this is Jim. I would just add, as implied by our guidance for 2021, We're pretty much in line. Our operating margins are in line with 2019 pre pandemic levels. So we're obviously pleased With the trajectory that we're on, but as we look to next year, we're really in the early stages of our planning process.

Speaker 7

So it's premature to provide more details on that at this time.

Speaker 1

Great. Thank you so much. And Mike, all the best.

Speaker 5

Thank you, Eric.

Operator

We will take our next question from Bob Drbul with Guggenheim.

Speaker 4

Turn the

Speaker 8

call over to Eric.

Speaker 4

Hi, good

Speaker 8

morning. Mike, it's interesting to see you did all the script, but Jim answering all the questions, it's definitely A new era for us here, but he's got the heavy lifting now. Jim, I just had a question for you, and then I have a follow-up for Stephane. But Jim, can you talk a little bit on inventory levels? Inventory levels were down at the end of Q2.

Speaker 8

How How you're thinking about inventory in Q3 and Q4, sort of how you're planning it, in terms of deliveries and your ability to actually get the receipts and everything from that perspective. That would be helpful. Thanks.

Speaker 7

Sure, Bob. A couple of things to point out. First is, The exit of our heritage business is having a benefit on the inventory line, one from exiting the heritage retail business, But also just the way the held for sale accounting works, we closed on selling our heritage wholesale business. So those inventories at the end of Q2 are not on the inventory lines. We have a benefit from that.

Speaker 7

But apart from that, our current inventory levels are lean. As Stephane mentioned, partly our disciplined inventory management, buying closer to man and cutting the unproductive is really having a benefit. Also at the end of Q2, as we've called out, we are experiencing supply chain delays 4 to 6 weeks, Which is also benefiting a little bit. As we move through the second half, we called out we're going to be incurring about $0.35 worth of airfreight expense, really to make sure that the inventories are getting are keeping in line with our sales forecast.

Speaker 3

And Bob, if

Speaker 7

you just if you look at the inventory this year versus last year, last year comparisons get difficult. Turn the call back to the operator for questions. This time last year, we really have been canceling a lot of orders. So if we were to compare it to 2019, which is probably a better comparison, We expect our inventory levels pretty much to get back in line with future sales growth projections by the end of the year.

Speaker 3

Yes. And just to build Bob, just to build on what Jim was speaking about in terms of inventory levels. One thing I've seen throughout my career working with finding a systematic repeatable way to create value from product and how we plan and buy inventories that when we have demand above what we We tend to be able to sell more with less inventory. So we take this as an opportunity to learn as a team to say how do we better plan and buy inventory to demand and how can we have an inventory level in average that's lower in relation to sales than what we historically have had. So this past quarter is a good example that we can sell more at a higher pricing power with a lower inventory level.

Speaker 3

So that is something again, it's a multi Your journey, but this quarter was a proof point on how much of a flow through down to EBIT rate we can have from lower inventory to demand.

Speaker 8

Great. And if I could just do one more question. Can you talk a little bit about the expansion in the coals for Tommy and Calvin, sort of how

Speaker 3

Absolutely, Bob. So far, we launched with Calvin Underwear close just a few weeks ago. So it's very early read, early days, but so far, a very strong start, Both from a consumer demand and pricing power perspective.

Speaker 8

Great. Thank you very much. Mike, congratulations. Best of luck. Thanks for everything.

Speaker 5

Thanks, Bob.

Operator

Turn the call over to Eric.

Speaker 4

We'll take our next question from Michael Binetti with Credit Suisse.

Speaker 9

Hey, guys. Good morning. I'll add my congrats, Mike. It's been really great to work with you. Jim, welcome to the crew.

Speaker 9

Stephane, I want to ask you, Europe, as we look a little bit beyond 2021, as we look at the margins for the international business, obviously, Europe being the turn the call over to the operator for the Q1 of 2019. The combined international EBIT margins were in that 13.5%, almost 14% range. Again, you're being the biggest piece. They look like they're running about 500 basis points above 2019 in the first half. You You said the order books are positive for springsummer double digits.

Speaker 9

Can you talk a little bit about how sustainable the margins are that we've seen in the international business in the first half of this year as we think about what to try next year, which will hopefully be a little bit of more of a normal year that we can try to compare to pre pandemic business levels.

Speaker 4

Turn the call

Speaker 3

over to Michael. Yes. Thank you, Michael. So when we look at the Q2, it's just another proof point on the strength of our European team's execution. And it's a kind of strength that forms, and I mentioned it in my prepared remarks, it forms a blueprint for us for what good looks like when we execute Calvin and Tommy really, really close to the consumer.

Speaker 3

So they are turn the call over to the operator for questions. We are now ready to Stronger and stronger product assortments. And from a channel perspective, they keep moving where the consumer is moving, and they do it with increased turn the call over to the operator for questions. So I'm very confident and we are very confident in their ability to continue to win with the consumer in Europe and continue to So we see it as a multiyear growth opportunity. Asia, just Michael, to mention Asia as well from an international perspective.

Speaker 3

We are very excited by turn the call back to the operator for the Q2. We can't fully see that in Q2 because of the COVID Disturbances, but under the surface, we can see it. So they have the same focus there in connecting where the consumer is going, lower discount rates, higher sell throughs. So it's a multiyear Growth opportunity from strength in both Europe and Asia.

Speaker 7

Yes. Michael, I just want to add, the second quarter turn the call back to the call back to the call. Did benefit somewhat in Mike's notes, he mentioned we planned the marketing more second half weighted than first half, so that is benefiting the operating margins. As well, the 1st month of the Q2 in May, we did have still a lot of store closures in Europe. So we don't have that expense base, As well as still receiving rent concessions and some government subsidies on payroll did benefit Q2.

Speaker 7

Okay.

Speaker 9

And then maybe I could just follow with North America. I would love to hear, Stephan, some of your thoughts on the past recovery for North

Speaker 2

turn the call back to the operator. You've talked to us a lot

Speaker 9

about how impactful tourism is there. That's pretty clear. I'm just more curious where that business goes Until we know the pace and timing of tourism coming back. Thank you.

Speaker 3

Thanks, Michael. So Yes. There is a big and real tourism effect. In the normal year, as I mentioned, 30% to 40% of the business is tourism, now mostly So what we're doing there with Trish's leadership, she's still relatively new coming in, I'm excited by seeing her increased focus and with the teams on the domestic consumer focus on executing the accelerated recovery priorities across both Tommy and Calvin. So Proof points this quarter is we see digital e commerce owned and operated really taking off.

Speaker 3

And we see Calvin being ahead there. And those learnings we can share and we are sharing with Tommy immediately. We see that we are starting to lean in even if it's early days on the hero product execution. So we see AURs up. We see discount rates down.

Speaker 3

So we our focus is on the domestic consumer And the same accelerated recovery priorities as we see in Europe and in Asia. So but turn the call over to John. From a

Speaker 2

regional perspective, from our 3 regions,

Speaker 3

we have the most work to do in North America. What excites me today though is that we are start to lean into the areas that really matters and starting to connect with that domestic consumer and really leverage the strength we have in Calvin and Tommy turn the call back to the operator for questions. The underlying consumer strength with Calvin and Tommy is for us to improve our execution.

Speaker 9

Thanks a lot guys. Congrats again.

Speaker 3

Thanks.

Operator

Our next question comes from Jay Sole with UBS.

Speaker 6

Great. Thank you so much. I wanted to see if we can follow-up a little bit on the sourcing issue, Because there's a lot of talk about factory shutdowns and you mentioned that there's 4 to 6 week delays in getting product. Can you Just give us a little bit more information about how you're managing through this, because it sounds like you're still able to get the units that you need, and probably in time for holiday because of airfreight. Is that the case?

Speaker 6

And how are you managing that? Because it seems like you're doing a better job in a lot of companies being able to make sure that you get the inventory you need for the key seasons.

Speaker 3

Yes. So we have been doing a really good job through our sourcing and supply teams and brand teams, regional teams to really stay on top of what's happening because it's changing week by week. So today, As we mentioned, we are 4 to 6 weeks in average on the delays, and we are able to prioritize take our key categories and hero products. So we have inventory and that's included in our guidance. So with the guidance we're taking up for the rest of the year includes the supply chain disruption we're seeing right now.

Speaker 7

Yes. And just to add, getting back to our inventory disciplines, really cutting some of the unproductive SKUs is helping because Our focus on more basic and core product is allowing us to fill back in perhaps a little quicker, particularly in the underwear category, we're able to air freight that in fairly quickly to sort of keep us in line.

Speaker 6

Understood. Maybe and then we can follow-up just on the impact of the airfreight expense. I think you said it's going to $0.35 versus it was $0.19 before. Can you just talk about how that what the impact was to the overall margins in Q2 from just airfreight and overall supply chain congestion and maybe what the incremental Change will be in Q3, and how that will impact sort of gross margin and SG and A.

Speaker 7

Yes, Jade, for Q2, It's not very I mean, it was very minimal basically.

Speaker 6

And then

Speaker 7

if you were to take, so to speak, in Q3, it's probably worth about to It's probably worth 20, 30 basis points or so. It's pretty much spread evenly almost for the second half

Operator

take our next question from Dana Telsey with Telsey Advisory Group.

Speaker 10

Good morning, everyone, and congratulations, Mike. Very terrific to work with you. Stephane, you've mentioned a lot of times about the hero product. Turn the call over to the operator. What percentage of the business is the hero product?

Speaker 10

And I know you were focused on calling SKUs. Where are you in that SKU journey? And I just have a quick follow-up.

Speaker 3

Turn the call over to the operator. Thanks, Dana. So from a hero product perspective, share of business, it's increasing And it will increase season by season because what we are doing is that we are translating the aspirational power of our brands into turn the call over to the operator to review the key categories and then increasingly focus on the products that are the most essential for the consumer. And they are year round hero products, they are seasonal hero products, and then we can paint those Seasonal and year round products through our collaboration. So you're going to see an increasing share turn the call back over to our hero products.

Speaker 3

And then where we are on the SKU rationalization, that's an ongoing work as well. But it starts with The focus the way we effectively cut unproductive SKUs is that we start to we start when we build assortment to focus on the hero products. And then we look at the ongoing demand from the assortment we have. And my experience over the years there is that When we continuously do that in a systematic way, we can cut we can keep cutting unproductive So every product needs to have an intent that goes into our line. And for fall, as I mentioned, we are cutting 20% of the assortment.

Speaker 3

So It sounds a lot, but it's just the beginning because we have a history of overproducing And now when we focus in on what really matters to the consumer, then we will have over the next a few years, we will have a continuous opportunity to tighten the assortment to the SKUs that really matters to win with the consumer.

Speaker 10

Got it. And then on the digital side, digital has been accretive. Any change to the level of digital accretion as it's maintained at this 25% rate now?

Speaker 7

Dave, I just point out last year Q2 when we've had significant store closures, we had really had a spike And our owned and operated e commerce. So we're up against that in Q2. So we're pleased that we're at least we're able to maintain turn the call back to the operator for questions. Thank you. Thank you.

Speaker 7

Thank you. Thank you. Thank you. Thank you. Thank you.

Speaker 8

Thank you.

Speaker 3

And if we look at Q3, Q4, we see our owned and operated continue to grow. We see our 3rd party e commerce continue to grow. And e commerce

Operator

take our next question from Brooke Roach with Goldman Sachs.

Speaker 11

Thank you. Good morning. I wanted to dig in a little bit more on the gross margin. The company has been showing some strong gross margin momentum, turn the call back to the operator for questions. Thank you.

Speaker 11

Thank you. Thank you. Thank you. Thank you. Thank you.

Speaker 11

Thank you. Our next question comes from the line of How much of the benefit are you seeing between geographic channel and product mix shift on that hero product category momentum versus what you're seeing industry wide with lower promotions? And as you look into next year, how much of the strength do you think will be sustainable into future years?

Speaker 3

Thank you, Brooks. So starting with, we have a geographic component with the strength of international, for sure. And then on top of that, in each region, each brand, we drive pricing power we drive pricing power up. So we drive Margin, gross margin expansion up through our hero product focus. So it's a combination of There is a geographic effect, but under the most important from a long term growth perspective is The gross margin rate improvement in each brand in each region.

Speaker 3

And when we look ahead for 2022, We are facing some headwinds when it comes to cost of goods, AUC, and from raw material prices going up and affecting us Just like everybody else. But even when we include that, we are net net positive of continuing to drive margin expansion.

Speaker 11

Thank you. And just a follow-up on more of a strategic question here. The Europe business strength has been a key standout for a few quarters in a row now. And in your prepared remarks, you talked to utilizing the success as a blueprint for some of the other regions. Can you talk to maybe the 1 or 2 most important turn the components of that blueprint that you're translating into North America and the timeline for seeing some of that success materialize?

Speaker 3

Yes. Happy to, Bruce. So if I were to just highlight turn the call over to Steve. This is Europe's obsession on brand and consumer. And starting with the consumer And then unlocking the power of the brand through product and through the right And that's what I refer to in that we are seeing similar strength in Asia under the surface because of the COVID effects in Q2, but we are seeing the same type of effects, positive performance coming out of Asia and China.

Speaker 3

And then that's where we have the most work to do in North America, starting with the domestic consumers. So we still have this lingering tourism, Negative tourism effect for a while. But once we have that coming back, it's about winning more with the domestic consumer turn the call back to the operator for questions. Thank you. Thank you.

Speaker 4

Turn the call over to the operator.

Speaker 3

Thank you. We'll take

Operator

our next question from Lorraine Hutchinson with Bank of America.

Speaker 11

Thank you. Good morning. I wanted

Speaker 12

to focus on marketing for a minute. You spoke about the increased investment in the second half. Is there a tilt to that toward a particular brand or geography? And then how has your marketing plan changed now that the digital penetration has remained so high?

Speaker 3

Yes. So thank you, Laurent. So from a marketing perspective, We are increasing our marketing investments in the back half, as Mike mentioned in his remarks, Across both brands and across regions because we see the consumer we are now in an accelerated recovery phase And we see the consumer coming back. And the marketing is focused on the key consumer moments. So now we're starting to move into fall, and then we are rapidly going to come into transition into holiday.

Speaker 3

And those holiday moments in North America, Asia and Europe is what we are backing up with marketing. And it's a mix between digital marketing for e commerce and marketing to drive to our brick and mortar sales as well. One aspect that we see is driving increasing engagement is the collaborations, As I mentioned in my prepared remarks, and we are just in the beginning of that. And when we look at Calvin and Tommy And that's what we see with Huron Preston for Calvin Klein or the latest Romeo Hunt with that Mr. Hilfiger connected us to we see that the connection between our iconic brands and external creativity, It's really powerful to drive engagement with the consumer.

Speaker 11

Thank you.

Operator

All right. And we'll take our next question.

Speaker 3

Yes. And this will be our last question.

Operator

Okay. Thank you. We'll take our last question from Kimberly Greenberger with Morgan Stanley.

Speaker 12

Okay, fantastic. Thanks so much for squeezing me in. Stefan, I was very interested in your comment on Asia. I mean, it's very clear looking at the Europe results that the performance there is just fantastic and well above expectations. But But it sounds like you're feeling quite hopeful about the improvement in execution in Asia.

Speaker 12

And I wanted to know if you could just talk to us a little bit more about what is Changing there and how, let's say, if we can look through the COVID volatility here over the next quarter or 2, what are you thinking about kind of medium term strategies to grow in that geography? Thanks so much.

Speaker 3

Thank you, Kimberly. So yes, so we are optimistic when it comes to Asia. And what we are seeing, Again, below the surface is that we are seeing that the increased focus in connecting our brands to where the consumer is going in Asia and With a special focus on China is we are supercharging digital, and that is paying off. And we are increasing Our management team there is doing successfully, which is to plan and buy inventory closer to demand. So they have been able to be much more flexible now given that we have been hit by COVID resurgence in Asia.

Speaker 3

It feels like more than in any other region over the last quarter, and they have been able to navigate that really well. So it's just an increased focus on the accelerated recovery priorities and our teams there coming together and executing really well. And That's where the similarities between the Europe Blueprint and the Asia execution is getting closer. And We see more of that because we can take away the COVID effect. And so that gives us the confidence long term.

Speaker 12

Fantastic. That's great. And just one follow-up on the inventory, if I could. I'm wondering if there is a good way for us to think about How much inventory you will be able to take out of the system compared to, let's say, 2019 levels? So If we think about a future year when you would get back to the $9,400,000,000 in revenue, Would you be able to generate that $9,400,000,000 on 5% less inventory, 10% less inventory?

Speaker 12

I'm just wondering how we should think about the magnitude of inventory efficiency that you expect to achieve over the next couple of years. Thanks so much.

Speaker 3

Yes. And that's we won't be able to give you the specific numbers, but what we will be able to give you is that our focus is very clear, which is to drive inventory decisions, both how we plan inventory and how we buy inventory closer to demand. And we'll throughout the quarterly updates, give you updates on how what kind of inventory in relation to sales levels We will receive, but it's clear to all of us that we have a lot of value to be created from that and we are already on it, But it's early days. So you'll over time, we'll be able to share exactly what that will look like.

Speaker 12

Turn the

Speaker 4

call over to you.

Speaker 3

And with that, we want to thank you and look forward to connecting with you next quarter.

Operator

Turn the call over to you. Thank you.

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Earnings Conference Call
PVH Q2 2022
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