PVH Q2 2024 Earnings Call Transcript

Presentation

[Operator]

Good morning, everyone, and welcome to today's PVH Second Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note, this call may be recorded and that I will be standing by should you need any assistance.

It is now my pleasure to turn today's program over to Sheryl Freeman, Senior Vice President of Investor Relations. Please go ahead.

[Sheryl Freeman, Senior Vice President, Investor Relations at PVH]

Thank you, operator. Good morning, everyone, and welcome to the PVH Corp. Second Quarter 2024 Earnings Conference Call.

Leading the call today will be Stefan Larsson, Chief Executive Officer; and Zac Coughlin, Chief Financial Officer. 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 transmitted without PVH's written permission. Your participation constitutes 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 PVH's view as of August 27, 2024, of 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 include PVH's right to change its strategies, objectives, expectations and intentions and the company's ability to realize anticipated benefits and savings from divestitures; restructuring and similar plans, such as the planned cost efficiency action announced in August 2022 and completed in 2023; the 2021 sales of assets of and exit from, its Heritage Brands menswear and retail businesses; and in November 2023 sale of the Heritage Brands women's intimate apparel business to focus on its Calvin Klein and Tommy Hilfiger businesses. PVH does not undertake any obligation to update publicly any forward-looking statements, including, without limitation, any estimates regarding revenue or earnings.

Generally, the financial information and projections to be discussed will be on a non-GAAP basis as defined under SEC rules. Reconciliations to GAAP amounts are included in PVH's second quarter 2024 earnings release, which can be found on www.pvh.com and in the company's current report on Form 8-K furnished to the SEC in connection with the release.

At this time, I am pleased to turn the conference over to Stefan Larsson.

[Stefan Larsson, Director & Chief Executive Officer at PVH]

Thank you, Sheryl, and good morning, everyone, and thank you for joining our call today.

Let me start by thanking our teams all around the world as we continue to deliver on our near term commitments while steering towards our long term mission to build Calvin Klein and Tommy Hilfiger into the most desirable lifestyle brands in the world and make PVH one of the leading brand groups in our sector. For the second quarter, we drove revenue in line with our guidance with stronger than expected profitability and EPS. We increased our EBIT margins driven by significant gross margin expansion of 250 basis points and we continue to improve inventory productivity with inventory down 12% year-over-year.

The quarter had two distinctly different chapters to it. The first being the spring and summer full price focused selling parts on May and June and the second part in July being heavily impacted by the end of season summer clearance in the overall market. Our D2C trends were as expected in May and June. And when we came into mid-July as we saw the market shift to heavy end of season clearance and we had less end of season clearance inventory, we decided not to follow the market down. Instead, we saw less clearance and more newness and we drove gross margin rates up.

With this approach, we deliberately walked away from the low quality clearance revenue in the peak clearance period from mid-July to early August where our new season revenue didn't just fully compensate on the total top line, which resulted in our D2C revenue being down 3% on a constant currency basis for the quarter. Since then, coming further into August, we see that our overall D2C trends are coming back up, driven by the new season inventory taking an increasingly bigger share of the total revenue. In wholesale for the quarter, revenue declined slightly, down 1% on a constant currency basis, reflecting our proactive quality of sales actions and excluding the impact of the Heritage Brands sale.

Looking ahead, we are reaffirming our revenue, non-GAAP EBIT margin and EPS guidance for the full year, excluding a one-time tax benefit and we remain well positioned to deliver strong EPS growth for the full year. We continue to lean into the next level of PVH+ Plan execution while remaining prudent given the increasing challenging global macro headwinds. North America continues to be a strong proof point of our PVH+ execution. And in Europe, we are on plan with our targeted quality of sales actions. And in APAC, we drive strong consumer engagement and we win the big customer moments.

And as you will see, quarter-after-quarter we will keep our clarity and consistency in direction staying relentlessly focused on building brand desirability while driving towards long term sustainable growth. We do this in a systematic and repeatable way through our disciplined execution of all five growth drivers of our PVH+ Plan. For this fall in both Calvin and Tommy, we are taking another step up in consumer engagement with even stronger cut through campaigns featuring globally and locally relevant mega talent.

Fall '24 is also the first product season where we have been able to fully influence product execution for both brands globally, leaning further into key growth categories, providing strong transitional products with innovation fueled newness into our best hero products. All of this will be supported through continued improvements in our data and demand driven supply chain, resulting in increased stock freshness, higher quality products and lower AUC. Lastly, we remain focused on driving efficiencies to invest back into growth and we are making important progress to simplify how we work.

Now let me share some highlights from the second quarter on how we executed across our two iconic brands and three regions. Starting with Calvin Klein. During this summer, the brand continued to build on the unprecedented momentum from the spring campaign, showing up in some of the most culturally relevant moments around the world, ranging from Jeremy Allen White wearing custom Calvin for the seasonal premier of the hit TV series The Bear to K-pop group NewJeans wearing the brand for an exclusive performance in Tokyo. Actor Greta Lee and K-pop talent Mingyu were part of the opening celebration of our newest global flagship store on the Charles de Gaulle in Paris. The store captured Calvin's unique DNA in a way that elevates the brand and drives a strong commercial engine.

Now coming into fall, Calvin is launching another global cut through campaign where Kendall Jenner returned to Calvin to tease the campaign. And features Jeremy Allen White in iconic Fall Essentials, Mingyu in the latest Denim and Greta Lee makes her first campaign appearance styling iconic Calvin underwear. Every week now, you will see new super relevant talent joining the campaign, wearing the most important products across all lifestyle categories. And when they do, the reactions from our consumers on Instagram and TikTok go through the roof. In addition, we are working hard already now to prepare for Calvin's return to the runway in February 2025 where we are looking forward to show the ultimate expression of the brand together with our most important talent and partners.

Turning to Tommy. We brought the Tommy summer to life this quarter through some of the most relevant summer events in iconic locations all around the world, from Mykonos and Taormina, to La Paz in Mexico, combining the Tommy lifestyle with the best and most iconic Tommy summer products and cut through talent, driving the highest average engagement rate ever for the brand on Instagram. In parallel, Tommy continues to build relationships with the most relevant talent and culture. And just coming off the Olympics, I'm thrilled that we have the Olympic gold medalist, a repeat world record setter, pole vaulter and cultural sensation, Armand Duplantis as part of the Tommy family. Staying on the theme of sports.

Tommy, just this past week addressed both Lewis Hamilton and George Russell and other close friends of the brand at the Dutch Formula 1 Grand Prix. These kind of sports partnerships connect straight into the Tommy Hilfiger brand DNA. Tommy was 20 years ahead of most other brands in recognizing the power of building his brand in collaboration with leaders in fashion, art, music, entertainment, the sports, something that's even more relevant today and core to who the brand is.

Coming to this fall season, Tommy just launched another cut through campaign with mega K-pop brand Stray Kids wearing the new Tommy Fall collection set against the New York City skyline. The campaign has had a very strong start with social posts receiving hundreds of thousands of likes. And we are now just a few weeks out from hosting the next Tommy Hilfiger fashion show in New York, showing our spring '25 men's and women's collections at another iconic New York City landmark. As a reminder, the fashion show we just did in spring became the biggest cut through show of all of New York Fashion Week, and made it to the top 10 shows of all fashion shows globally.

Now let me turn to our regional performance, starting with North America. Despite a tougher macro, the region continues to be a great example of our PVH+ Plan execution. In the second quarter, our Calvin and Tommy businesses together delivered an 11.7% EBIT margin, their fourth consecutive quarter of a double digit non-GAAP EBIT margin, up more than 400 basis points compared to last year, marking another quarter of significant margin expansion across both brands. Over the past year, you can really see the progress we have made as we doubled down on our PVH+ execution in the region.

Our teams delivered high quality revenue growth of 1% for our Calvin and Tommy businesses combined while D2C revenue declined modestly, given the July trends I spoke to earlier. This was offset by a low single digit increase in wholesale. In D2C, throughout the quarter across both brands, we focused on advancing our product category offers and bringing newness into our hero products driving increased gross margin. For wholesale, we are driving product strengths and stronger sell throughs as we continue working very closely with our key partners to drive our strong product category offers and optimize the consumer shopping experience. Overall, across all channels in the North America region, we continue to see a strong consumer response to the improvements we make across product, marketing and marketplace execution.

Turning to our international business. In Europe, we continued to successfully execute on our previously communicated quality of sales initiative. While our overall revenue was down 2% year-over-year in euros, it included a 3% impact from our quality of sales actions and we delivered significantly higher gross margins. For the full year, as we position our business in Europe for profitable brand accretive growth over the long term, we continue to expect the revenue impact from our quality of sales initiatives to be approximately 5%. David Savman and our European team are laser focused on driving the next level PVH+ execution across all channels.

In both Calvin and Tommy, we continued to build strength in product where the fall season is off to an early strong start and the inventory composition is much better than last year. We are driving improved buying and planning with a stronger product assortment for fall '24 that drive growth in key growth categories and ad newness. In D2C for the first time, we will have a fully aligned product assortment across the region. And in wholesale, we've improved stock levels of our core bestsellers, enabling us to have more direct sales to our top wholesale partners.

As we highlighted last quarter, our forward wholesale order book shows significant sequential improvement and the full spring '25 season finalized down low single digits. We are working very closely with our key wholesale partners who continue to share positive feedback about the improved product assortment across both brands. I'm also excited to share that we are very far in the search and close to announce our permanent CEO for PVH Europe, a highly experienced leader with a very strong performance track record, and we look forward to sharing more with you shortly.

Moving on to Asia Pacific. Just like we have heard from many others in the sector, mid-quarter, we saw a decline in the consumer backdrop, which resulted in a trajectory change, especially in China, which was down 1% in constant currency. We also saw a slowdown in Australia, while other markets, including Korea and Japan, continued to see growth in the quarter. From a channel perspective, we continue to drive e-commerce growth in the region, although this was offset by declines in stores and wholesale traffic. This resulted in revenue for the region declining 4% in constant currency, including a low single digit decline in D2C.

With the current consumer backdrop, our strong PVH+ execution for both Calvin and Tommy, we continue to make a big difference. We continue to drive strong customer engagement, fueling brand heat for both brands with regionally relevant mega talent, such as Jennie Kim and Stray Kids. We're also laser focused on winning the big consumer moments such as 618 this past quarter, where we delivered double digit GMV growth versus last year. And going forward, we continue to drive strong consumer engagement with cut through brand activations around upcoming key holidays, including 11/11, the biggest customer shopping event of the year. Overall, we're just in the beginning of tapping into our full growth potential in Asia.

In closing, for the second quarter, we again delivered on our plan. We continue to show the strength of our PVH+ execution for both Calvin and Tommy; in the North American market with another quarter of high quality growth and significant margin expansion; in Europe, we successfully delivered on our targeted quality of sales actions, while driving big sequential improvements in our forward looking wholesale orders; and in Asia, we continue to drive strong brand engagement and win the big consumer moments.

And independently of the consumer backdrop through our disciplined PVH+ plan execution, we are step-by-step building our two globally iconic beloved brands into the most desirable lifestyle brands in the world, positioning ourselves to drive sustainable, long term and increasingly profitable growth. I've said it many times before, it's our consistency in direction, the strength of our brands, teams and partners, together with our ability to continuously learn and improve that will make us win.

And with that, I'll turn the call over to Zac to take us through the financials in more detail.

[Zac Coughlin, Chief Financial Officer at PVH]

Thanks, Stefan, and good morning.

My comments are based on non-GAAP results and are reconciled in our press release. As Stefan discussed, our second quarter financial results delivered on expectations, driven by our iconic brands and disciplined execution of the PVH+ Plan. We successfully navigated the increasingly challenging consumer backdrop, leveraging our omnichannel execution to deliver our top line guidance while exceeding our earnings per share guidance, largely due to the favorable settlement of a tax matter. We delivered operating margin of 9.1%, up 80 basis points versus last year, driven by 250 basis points of gross margin expansion as we continue to be laser focused on quality of sales all around the world. Operating margin was better than planned for the quarter as we continue to tightly manage expenses.

Following our solid first half performance, we are reaffirming our full year revenue guidance and operating margin outlook and raising our EPS guidance to $11.55 to $11.80 per share from previously $11 to $11.25 to reflect the second quarter tax benefit I mentioned. We remain on track to deliver our 2024 financial plan. I will now discuss our second quarter results in more detail and then move on to our outlook. Revenue for the second quarter was down 6% versus last year, including a 1% negative impact from exchange and a 3% decline from the sale of the Heritage intimates business and was in line with our guidance.

Starting from a regional perspective, second quarter revenue for our international businesses was down 3% on a constant currency basis. Sales in our European business were down 2% in euros, reflecting an expected sequential improvement as compared to the sales decline in quarter one and better than planned due to a shift in timing of wholesale shipments from the third quarter into the second quarter this year as supply chain delays were less impactful in the quarter than we had anticipated. Our strategic decision to focus on higher quality sales in the region drove the overall decline versus last year but also delivered higher gross margin in the region, which was up over 200 basis points versus last year.

Sales in our Asia Pacific business were down 4% on a constant currency basis as challenging macro conditions in the region, particularly in China and Australia negatively impacted our business in those two countries. Where economic conditions remain strong in Japan and Korea, we continue to deliver strong growth. Sales for Asia Pacific were down 7% on a reported basis. In North America, revenue for our Tommy Hilfiger and Calvin Klein businesses combined increased 1% versus last year with modest growth in wholesale sales and a low single-digit decline in DTC sales. As Stefan mentioned, our DTC trends in North America were largely as expected in May and June, but negatively impacted in July by the end of season clearance period and our relatively lean inventory levels.

With lower prior season inventory and more newness in our assortment, instead of chasing low quality clearance sales we focused on capturing full price sales to drive higher gross margins. And with this quality of sales focus, while our overall DTC revenue was down, gross margins in the region were up nearly 150 basis points in the quarter with significant improvement in both brands. From an overall PVH channel perspective, our direct-to-consumer revenue was impacted by Asia Pacific and the July clearance trends I mentioned previously. As a result, overall revenue in our DTC businesses was down 3% on a constant currency basis, including a 3% decline in sales in our retail stores.

In our owned and operated e-commerce business, revenue was down 5% on a constant currency basis, primarily due to the planned reduction in Europe, as we continue to focus on driving in-season product performance while significantly lowering prior season clearance sales through our sites and reducing our own sales on third party platforms. Within wholesale, we remain focused on strong quality of sales and winning with our key wholesale partners. Total wholesale revenue was down 8% versus last year, primarily due to a 7% decline from the sale of the Heritage intimates business. The remain decline reflects the continued strategic reduction in revenue in Europe to drive overall higher quality of sales in the region.

Turning to our global brands. Calvin Klein revenues were flat to the prior year on a constant currency basis and down 1% on a reported basis with growth in North America, while the international business was flat in constant currency. Tommy Hilfiger revenues were down 3% on a constant currency basis and down 4% on a reported basis. In the Tommy business, growth in North America was more than offset by a decline in the international business as the strategic shift to higher quality sales in Europe weighed much more heavily on the Tommy business.

In 2Q, we delivered another quarter of significant gross margin improvement with gross margins of 60.1%, up 250 basis points compared to last year. Approximately half of the increase was due to higher DTC mix and our focus on driving higher quality of sales and half was due to lower product costs as we leveraged our scale with globally aligned product assortments. Our inventory at quarter end was down 12% compared to last year due in part to lower end of season stock levels. As we move through the remainder of the year and inventory levels normalize compared to the leaner levels in the second half of last year, we expect modest growth in inventory to support our plans for the second half of '24 and into '25.

SG&A expense as a percent of revenue was 50.9%, an increase of 160 basis points versus last year and lower than planned as we actively work to drive efficiencies. The increase versus last year is comprised of approximately 150 basis points due to the higher DTC mix and 150 basis points from the deleveraging of expenses on lower revenues, partially offset by an approximately 150 basis point improvement due to cost efficiencies realized from actions we have taken to reduce people cost and prudently manage expenses.

Additionally, as I discussed in previous quarters, work is underway on the next phase of growth driver five of the PVH+ Plan to simplify our operating model and improve our ways of working across the company, which we expect to deliver an incremental 200 to 300 basis points of operating margin improvement once completed. We are making early progress that will become increasingly impactful through 2025. As an example of the types of initiatives we are undertaking, we have recently completed the transition of Tommy Hilfiger North America e-commerce distribution from outsourced to in-house leveraging open capacity, allowing us to both deliver efficiencies and increase service levels to our e-commerce consumers.

In total, EBIT for the quarter was $189 million compared to $182 million in the prior year as the strong gross margin improvement more than offset the impact of the revenue decline. Operating margin expanded 80 points versus last year to 9.1% and marked the fourth straight quarter with a double digit non-GAAP operating margin in our North America business for Tommy Hilfiger and Calvin Klein combined. Earnings per share was $3.01 and included the benefit of approximately $0.55 related to the favorable settlement of a multi-year international tax audit I referenced earlier, which drove our tax rate to 0% for the quarter. Excluding this $0.55 tax benefit, EPS increased 24% versus last year and exceeded our earnings guidance, driven by a modest business improvement compared to expectations.

And now moving on to our outlook, starting with the third quarter. We are projecting third quarter revenue to decline 6% to 7% as reported and 7% to 8% on a constant currency basis compared to the prior year, including a 2% decline due to the sale of the Heritage intimates business. We are projecting DTC revenue nearly flat in constant currency compared to last year as the recent trends are expected to continue into 3Q. In our wholesale business, we are projecting a high single digit revenue decline in the quarter, including a 5% decline from the sale of the Heritage intimates business. The remaining decline is largely due to the continued quality of sales focus in Europe and previously communicated lower fall order books in Europe.

Our third quarter operating margin is projected to be relatively in line with 2Q and down versus last year with higher gross margins more than offset by the loss of leverage due to the decline in revenue. As a reminder, we start to anniversary the improvements in raw material costs and the benefit from cost savings actions that we realized, especially in North America beginning in the second half of last year. Earnings per share is projected to be approximately $2.50 compared to $2.90 in the prior year, primarily due to the decline in revenue. Our tax rate for the third quarter is estimated at approximately 23% and interest expense is projected to be approximately $17 million.

And now moving on to the full year. We remain on track to deliver the overall business outlook we shared at the start of the year. As such, we are reaffirming our full year revenue and operating margin guidance. We continue to project overall revenue to decrease by 6% to 7% on both a reported and constant currency basis compared to last year, including a 2% decline due to the sale of the Heritage intimates business and a 1% decline due to the 53rd week in 2023. Within that, our outlook for Europe is unchanged, planned down high single digits in euros with DTC planned down low single digits. In Asia Pacific, we are now planning full year sales up low single digits in constant currency compared to previously up high single digits.

And for the North America, Calvin Klein and Tommy Hilfiger businesses combined, we are now planning sales to be relatively flat versus last year compared to previously up low single digits. These updates reflect our assumption that current market conditions continue through the rest of the year. We are also reaffirming our projected operating margin for the year will be approximately flat to 10.1% in 2023. However, we have updated our gross margin projection to reflect a lower benefit of favorable mix due to our revised revenue expectations for our higher margin DTC business this year, primarily in Asia Pacific, as well as a slightly more promotional environment. As such, we are now expecting our full year gross margin rate to increase approximately 150 basis points compared to 2023, still reaching an all-time high for us.

We continue to proactively manage costs and expect the change in our gross margin projection will be fully offset by an improvement in SG&A, which as a percentage of revenue is now planned to increase approximately 150 basis points versus our previous expectation of an increase of 200 basis points. We continue to plan SG&A expense dollars down for the full year 2024 as compared to 2023 with the expected increase in SG&A as a percentage of revenue more than explained by DTC mix and the impact of lower revenue. Interest expense is now projected to be approximately $70 million versus approximately $75 million previously. And we now expect our tax rate will be approximately 16% versus approximately 20% previously with the change fully explained by the favorable tax settlement in 2Q that I mentioned earlier.

Driven entirely by the improvement in tax, we are raising our non-GAAP EPS guidance by $0.55 to a range of $11.55 to $11.80 compared to $11 to $11.25 previously. Additionally, we remain committed to $400 million of total share buybacks for the year. Before we open up for questions, I want to reiterate that we continue to work relentlessly to drive results and deliver our full year financial commitments even in the increasingly challenging macro environment. We remain laser focused on executing the five key growth drivers of the PVH+ Plan, bringing together the consumer facing value drivers of product, consumer engagement and marketplace with our underlying operating engines to deliver sustainable, long term profitable growth.

And with that, operator, we would like to open it up to questions.

Questions and Answers

[Operator]

Thank you. [Operator Instructions] Our first question will come from Matthew Boss with JPMorgan. Please go ahead.

[Matthew Boss, Analyst at JPMorgan Chase & Co.]

So Stefan, maybe if you could elaborate on current health of your brands and speak to recent demand trends that you've seen across all assortments relative to how you planned back half demand in North America and Europe, I think that would be great. And then, Zac just on the controllables, could you elaborate on cost efficiencies that support operating margin expansion regardless of macro or just is there any change to the mid-teens operating margin target that you cited over the next couple of years?

[Stefan Larsson, Director & Chief Executive Officer at PVH]

Good morning, Matt, and thank you for your questions. Starting with the health of the brand. So we are coming into this fall with all time high consumer engagement from spring in both Calvin and Tommy, and we continue to strengthen that. So I don't know if you saw but yesterday we launched Calvin's fall campaign and the second chapter of Jeremy Allen White, very strong consumer response already. And one thing that strikes me and it's when consumers really take time from their busy day, we all have busy days and right into the common field hundreds of them, thousands of them saying things like where it should be canceled today. I'm screaming stopping the world again. So very powerful start of the fall campaign, building on the all-time high growth in consumer engagement from spring. Every week now, you'll see new talent running the campaign.

You will see Kendall Jenner, Mingyu, Greta Lee. You will see the K-pop band NewJeans, and we'll have more talent coming in. So -- and they will all be wearing the best iconic Calvin Klein products across all lifestyle categories. Tommy also just released its fall campaign, a cut through campaign with the K-pop band Stray Kids, equal positive comments on social from our consumers, saying things like Stray Kids and Tommy is life. I love Tommy. Please keep posting. So very strong customer response to both fall campaigns, the start to both fall campaigns. When it comes to Tommy, also I want to mention that in just a few weeks, we are back in New York Fashion Week with the Tommy Fashion Show. And just as a reminder, this past season when Tommy came back in February, we had the biggest cut through show in New York Fashion Week and the top 10 globally. So feeling really good about the consumer engagement.

Then that consumer engagement drives an interest in the product. Fall '24 was the first product season where we were able to fully impact product globally for Calvin and Tommy. So the improvements you will see during the fall is we have been able to lean in further into key growth categories in both brands. We will have driven more innovation, more newness in the hero products. And then you combine that with having better inventory levels, better inventory composition. And it's still early days for fall but the product, the fall season -- the fall product season is off to a strong start versus fall product season last year. Another area you can see the increased forward-looking product strength already now is in the forward-looking order books for Europe for spring 2025.

So last time we caught up like this, we were still selling in spring '25 and now we have the fall spring '25 London and we have driven significant sequential improvement. So if you recall fall '24 we were down high single digit in sell-in. And for spring '25, we are down only low single digits. And it reflects the belief and the recognition from our partners to see the work of the product improvement. So overall, stronger consumer engagement coming into fall, better product assortment, more full price selling, less clearance, better inventory composition, and of course in the selling with a tougher macro. But based on what we can influence, we feel very good about how we are stepping into fall.

[Zac Coughlin, Chief Financial Officer at PVH]

Yes. And hi Matt, I think on the control -- the most controllable element of our business is really how we go about investing those SG&A dollars. And I think we're happy with the cost work we've accomplished over the last couple of years. Looking forward, we expect to follow the same path with two important pillars. First is, I suppose we called performance management, that's really the hundreds of small actions we take continue to match spending to current trends. That's the work we've leaned into over the last couple of months as some macros that Stefan has talked about has started to change, and it's helped us to continue to hold our profit commitments in the year in spite of that tougher backdrop.

And I think second are the larger changes we're working on to really greatly simplify our ways of working all around the world. This will deliver the incremental 200 to 300 basis points of SG&A savings, which really allows us to make that step change in profitability, helping us to deliver the 15% profit commitment we've made and importantly, I think, create capacity to continue to invest in growth as well.

[Operator]

Thank you. Our next question will come from Michael Binetti with Evercore ISI. Please go ahead.

[Michael Binetti, Analyst at Evercore ISI]

Thanks for taking our question. So Stefan, I know you went through a little bit of this, but you did mention some positive indicators in North America as you moved past the end of season clearance. Maybe just some actual -- just some -- unpack that a little bit on the actual business, what's resonating better with the consumer. And Zac, maybe you help us connect that a little more near term to what's embedded for the guidance in North America, D2C and third quarter relative to 2Q. I think it sounded like North America comps slowed in July as the exit rate was a little compressed or below the quarter the average. Has the business returned to the run rate that you were seeing before the July's low?

[Stefan Larsson, Director & Chief Executive Officer at PVH]

Yes. Thank you, Michael. So let me start there. So yes, let's start with unpacking what we saw playing out in the second quarter. So we were on plan for D2C in the company across both brands for May and June, and those are the more full price focused months. Then when we came into mid-July with peak summer clearance we came in with less clearance inventory than last year and more new season products, but the market took a turn to be more aggressive with clearance, we decided proactively not to follow that. During the peak clearance period of July, therefore, the new season didn't fully match up on the total revenue.

But when we go further into August, we see that the new season, the benefit of having less clearance more new season is resonating with the customer. And what drives is the continued focus we have on the key growth categories on leaning into Calvin, as an example, in underwear, denim, transitional outerwear and having less clearance and more newness, more innovation in that and we see that resonating. Same with Tommy when it comes to polo, shirts, chinos, denim, transitional outerwear. So a big improvement this start of the fall season versus last year is that we are much more transitional in our offering versus last year when we went too fast from summer all the way to fall.

[Zac Coughlin, Chief Financial Officer at PVH]

Yes. Michael, thanks for the question. We've been really consistent over the couple of years that we don't get ahead of macros or market conditions, and that holds absolutely true for this outlook. So for North America, DTC and really for that matter Asia and Europe as well, our current outlooks that we provided match the recent trends that we've been experiencing. So that's true for 3Q and actually true for 4Q as well as we carry that DTC outlook for the rest of the year.

[Michael Binetti, Analyst at Evercore ISI]

Thanks, guys.

[Operator]

Thank you. Our next question will come from Jay Sole with UBS. Please go ahead.

[Jay Sole, Analyst at UBS Group]

Great. Thank you so much. Stefan, wondering if you can just talk a little bit more about Europe and how you're feeling about the region as you've been executing the quality of sales initiatives? Thank you.

[Stefan Larsson, Director & Chief Executive Officer at PVH]

Yes. Thanks, Jay. Absolutely. So we feel really good about how we are executing the quality of sales initiative and how that's resonating in the market. So we see it in the here and how we drive the business and how we came into the end of season with less clearance and more newness and how that newness is selling more than last year. We see it also as I referenced in the forward-looking order books. So feeling really good about that. In addition, I flagged in my prepared remarks, we are very close to announce a permanent CEO for Europe, a high performance leader with highly relevant experience. So coming up shortly. But overall, feeling good about -- very good about how we execute on the quality of sales and how it plays out in the market.

[Jay Sole, Analyst at UBS Group]

Got it. Thank you so much.

[Operator]

Thank you. Our next question will come from Bob Drbul with Guggenheim. Please go ahead.

[Bob Drbul, Analyst at Guggenheim]

Hi, good morning. Just wanted to circle back on North America. Can you talk about sort of where you feel you are with the progress that you're making and specifically with the profitability targets that you've talked about within the North American market, how you think that's going? Thanks.

[Stefan Larsson, Director & Chief Executive Officer at PVH]

Absolutely. Thank you, Bob. So for North America, it continues to be a great proof point on the PVH+ execution. So if you look at the business, in the second quarter, we delivered high quality growth 1% combined for Calvin and Tommy at an 11.7% EBIT margin. So it's another quarter with 400 basis points operating margin improvements and driven by a combination of gross margin improvement and SG&A improvement. But most importantly, what drives the business in North America is our focus on executing in PVH+, meaning an improved product category offers and we see how that drives growth.

We drive newness into the hero products and we continue to build them out and they work. And we see the marketplace execution in e-commerce stores partners improving, very close partnership with our wholesale -- with our key wholesale partners, where we continue to the brands come to life stronger, product, presentation, inventory. So we just keep at it in North America, but kudos to our teams there doing a very good job.

[Zac Coughlin, Chief Financial Officer at PVH]

Okay. And then I think, Bob, I think North America is an amazing example of the financial power of the PVH+ Plan as well. I think it's worth reminding ourselves that our operating margin has now improved by hundreds of basis points in North America for four straight quarters. And I think what's exciting for us is that it comes from both hundreds of basis points of gross margin improvement and hundreds of basis points of SG&A improvement over that time period in a backdrop that I think we would all describe as sort of a low growth external environment. And so I think as we apply the main pillars that PVH+ Plan as Stefan said, I think it's a great example as well of the financial benefit that comes out from there.

[Bob Drbul, Analyst at Guggenheim]

Thank you, guys.

[Operator]

Thank you. Our next question will come from Ike Boruchow with Wells Fargo. Please go ahead.

[Bobby, Analyst at Wells Fargo & Company]

Hey, thanks for taking our question. This is Bobby on for Ike. I was wondering if you can talk a little bit more on your G-III licensing agreement. I don't know if there's any update to that, because as you know, G-III has been scaling it down. So are you able to give a sense of how much of your recapture on that yet?

[Stefan Larsson, Director & Chief Executive Officer at PVH]

Yes. So thanks, Ike. So we continue to be on a good path to take our business back over a multi-year period, really good partnerships with our key wholesale accounts. And we now have the sourcing engine, the product engine to start to build out and deliver according to our multi-year plan, Calvin Klein sportswear coming in first spring '25.

[Bobby, Analyst at Wells Fargo & Company]

Thank you.

[Operator]

Thank you. Our next question will come from Chris Nardone with Bank of America. Please go ahead.

[Chris Nardone, Analyst at Bank of America]

Great. Thanks, guys. Good morning. Zac, I was wondering for the total PVH business, can you walk us through the drivers by region that are contributing to the sequential improvement embedded in your implied 4Q guidance compared to 3Q for both sales and operating margins? And then just as a quick follow-up on the increased promotions embedded in your full year margin guidance. Can you just tie that into your comments that you've pulled back from promos in North America in July versus your peer set? Thanks.

[Stefan Larsson, Director & Chief Executive Officer at PVH]

Let me just start from an overall business perspective. If we look at the business regionally and from an outlook perspective, we see North America continue to be a great proof point of the PVH+ execution with a tougher -- within a tougher consumer backdrop. In Europe, we see the backdrop, as of now, we see it holding. We see continued to deliver sales -- quality of sales initiatives and you also saw the forward-looking improvements in wholesale order books. And in Asia where we saw this quarter the biggest trajectory change, we continue to drive strong customer engagement and we continue to be very focused on winning the big customer moments.

[Zac Coughlin, Chief Financial Officer at PVH]

Yes. Thanks, Chris. I think we feel really good about our 4Q plans, and maybe I'll go through them in pieces to explain. For revenue, our 4Q outlook actually assumes the same carry through of the DTC trends that we've talked about over the last hour or so here in both North America and Asia Pacific. So no improvements planned as we really stay true to that strategy of featuring off of current conditions. There's always a little bit of noise around wholesale timing. And so any sort of numerical changes really comes down to that. On gross margin, we see the quarter playing out very consistent, 4Q playing very consistent to last year.

Other than, as you said, a little bit more, modestly more promotional environment that we think is reflective of some of the tougher macros that we've talked about as well here. Where we do have some changes in 4Q in our outlook is in SG&A. So once we saw the DTC backdrop getting tougher in 2Q, we turned towards really managing the rest of the P&L. So that's resulted in some incremental SG&A efficiencies that we've identified. We'll see a little bit of that in 3Q, but more really in 4Q as some of those take some time to implement. So I would say in general from a revenue and gross margin perspective, we see 3Q, 4Q being pretty similar and it really comes down to work around SG&A and those ideas that we've already identified.

[Chris Nardone, Analyst at Bank of America]

Thanks. Good luck.

[Stefan Larsson, Director & Chief Executive Officer at PVH]

Thank you.

[Operator]

Thank you. Our next question will come from John Kernan with TD Cowen. Please go ahead.

[John Kernan, Analyst at TD Cowen]

Good morning. Thanks, guys.

[Stefan Larsson, Director & Chief Executive Officer at PVH]

Hi, John.

[John Kernan, Analyst at TD Cowen]

Zac, when you think about the long term targets, how does the wholesale DTC split play into that? The wholesale business now around $4 billion on a reported basis, how do we think about that business long term and your plans for managing the DTC wholesale split?

[Stefan Larsson, Director & Chief Executive Officer at PVH]

So let me start, John, by giving you the overall -- just connecting back to what we have set out to do overall. So we have set out to build Calvin and Tommy in to their full potential. Tommy and Calvin, two of the most iconic globally beloved brands and through the systematic approach we take through PVH+, we build them into their full potential. From a wholesale D2C split, we're going to follow the consumer on the highest level. And we feel really good about how closely we work with our wholesale partners to grow the business increasingly profitable there together with them and we feel very good about the D2C approach we have and the connection between both, because that's how the consumer shops. So that's from an overall perspective.

And Zac, I don't know if you want to add.

[Zac Coughlin, Chief Financial Officer at PVH]

No, I think it's important to make that our commitment to the 15% EBIT margin over time is independent of channel mix as that goes. I think we do best financially when, as Stefan just said, we satisfy the consumer in whatever channel that they're choosing to go to that ultimately is the most successful route for us. And I think what that does mean for us is that we need to build an omnichannel marketplace that delivers successful levels of financial outcomes across the channels as they go. And I think as we've seen over the last couple of years, there's been a good amount of movement across the channel. So we would expect that to continue. And we've been able to continue to push forward on our improvements in profitability in spite of that, I think, is a sign of the progress that we're doing across all of our channels to make them profitable.

[John Kernan, Analyst at TD Cowen]

Got it. And maybe just a quick follow-up to Ike's prior question on the G-III transition. Is there anything in the next 12 months from a financial model perspective that would be material that we should think about in terms of licenses coming over and revenues being transferring from royalty to reported revenues?

[Zac Coughlin, Chief Financial Officer at PVH]

No, I mean as you said there at the end, there will be some P&L composition perspective as you change. But what's most important is that we have laid out the plan to return the licenses back phased in over a long period of time. That gives us the time period to be able to adapt, to build out the capabilities, as Stefan talked about earlier, but also to manage the full P&L impact behind there. So we wouldn't expect to be calling in anything significant across that particular change because of that factor.

[John Kernan, Analyst at TD Cowen]

That's great. Thank you.

[Operator]

Thank you. We have time for one more question. That will come from Brooke Roach with Goldman Sachs. Please go ahead.

[Brooke Roach, Analyst at The Goldman Sachs Group]

Hi, good morning, and thank you for taking our questions. Stefan, as you invest in product assortment cut through marketing campaigns and full price selling, I'm hoping you can share your latest thoughts on brand pricing strategy. Are you seeing any signs of increased price sensitivity of your customer? And can you elaborate on your expectations for PVH specific promotions versus what you're seeing in the broader macro backdrop? Perhaps for Zac, you could give a little color on the size of the promotional headwind that you're embedding into your guidance in the back half. Thank you.

[Stefan Larsson, Director & Chief Executive Officer at PVH]

Thank you, Brooke, and good morning. And going into your question about promotions and pricing, both Calvin and Tommy are really well positioned from a pricing perspective to the consumer relative to our best and biggest competitors. So the biggest opportunity we have from a pricing improving AUR, decreasing discount rate is very much tying back to how we build assortment to start with in terms of leaning into the key growth categories, planning, closing and -- planning inventory buys closer into demand, how we replenish, how we react to the demand versus when we historically were buying very much upfront.

So it's the combination with strengthening the product assortment through the key growth categories, the innovation in the hero products, the right level of newness, the better and better composition for seasonal transition between outgoing inventory and newness. We see that we have opportunities still there. So it's that we're connecting to the build out of demand and data driven supply chain. And we see improvements already there in less inventory, better composition, lower AUC, but tying it all the way back to the consumer's perspective on that, more relevancy in product and a great product value offering for the consumer and relative to the competition. So I feel very good about it.

[Zac Coughlin, Chief Financial Officer at PVH]

Yes. And I think from the quantification that the market is moving around a bit and so we're not looking to fully quantify that impact. We've said modest increase, which I think picks up the general magnitude of what we're looking for. I think what's important for us is our inventory is in good shape. And so we're going to be able to make the choices of when it works for us and our consumers or when to be more promotional and when it doesn't versus having to worry about that combined with inventory pressure. So I think that we feel we're well positioned as we head into the second half of the year.

[Stefan Larsson, Director & Chief Executive Officer at PVH]

All right. So with that, we just want to close by saying thank you for following along on the journey.

We are in the business of building Calvin and Tommy into their full potential. It's a multi-year journey where we stay independently of macro as now getting tougher and stay laser focused on executing to deliver here and now, and making sure that everything we do now connects to the longer term vision and that's where the real value creation will come from.

So thank you very much and looking forward to connect shortly.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Sheryl Freeman, Senior Vice President, Investor Relations
• Stefan Larsson, Director & Chief Executive Officer
• Zac Coughlin, Chief Financial Officer

Analysts

• Matthew Boss, JPMorgan Chase & Co.
• Michael Binetti, Evercore ISI
• Jay Sole, UBS Group AG
• Bob Drbul, Guggenheim
• Bobby, Wells Fargo & Company
• Chris Nardone, Bank of America Co.
• John Kernan, TD Cowen
• Brooke Roach, The Goldman Sachs Group, Inc.