PVH Q2 2022 Earnings Report

PVH EPS Results

• Actual EPS: $2.72
• Consensus EPS: $1.20
• Beat/Miss: Beat by +$1.52
• One Year Ago EPS: $0.13

PVH Revenue Results

• Actual Revenue: $2.31 billion
• Expected Revenue: $2.14 billion
• Beat/Miss: Beat by +$171.19 million
• YoY Revenue Growth: +46.30%

PVH Announcement Details

• Quarter: Q2 2022
• Date: 8/30/2021
• Time: After Market Closes
• Conference Call Date: Tuesday, August 31, 2021
• Conference Call Time: 8:00PM ET

PVH (NYSE:PVH) Corp is a leading global apparel company known for its portfolio of iconic brands in the dress shirt, sportswear and lifestyle categories. The company designs, markets and distributes clothing, accessories and fragrances under both owned and licensed brands. PVH’s core brand holdings include Calvin Klein and Tommy Hilfiger, complemented by a range of heritage labels such as Van Heusen, IZOD, ARROW, Warner’s and Olga.

PVH’s operations span the entire value chain from product design and development to manufacturing, marketing and distribution. The company sells through a diversified mix of channels, including wholesale partners, retail stores, e-commerce platforms and franchise operations. Its product offerings cover men’s and women’s apparel, intimate wear, sportswear, footwear, handbags and other consumer accessories.

With roots tracing back to the early 20th century as a shirtmaker, PVH has grown through strategic brand acquisitions and global expansion. In 2002, the company acquired Calvin Klein, and in 2010 it completed the acquisition of Tommy Hilfiger, significantly enhancing its presence in Europe and Asia. Over the decades, PVH has established a global supply chain and distribution network, enabling it to serve consumers in over 40 countries and maintain a leadership position in key markets.

Headquartered in New York City, PVH is led by President and Chief Executive Officer Stefan Larsson, who oversees a management team focused on sustainable growth, brand innovation and digital transformation. Under its senior leadership, the company continues to invest in emerging markets and omnichannel capabilities, while maintaining a commitment to corporate responsibility and ethical manufacturing practices.

PVH Q2 2022 Earnings Call Transcript

Key Takeaways

• PVH reported a 46% increase in Q2 revenue on a non-GAAP basis, surpassing pre-pandemic 2019 levels, with gross margin expanding to 57.7% and EBIT margin hitting 12.7%, prompting an upgrade to full-year guidance.
• Europe delivered another quarter of exceptional performance, posting double-digit growth versus 2019, digital sales up 45%, gross margins above 2019 and spring 2022 order books up double digits.
• Asia, led by China, showed underlying strength despite COVID resurgences through integrated marketing campaigns, lean inventory levels and supercharged e-commerce via platforms like WeChat.
• North America continued to lag pre-pandemic results due to a 30–40% drop in tourism, although the company is focusing on the domestic consumer, boosting e-commerce and improving AURs and margins.
• PVH’s strategic initiatives—prioritizing its two global power brands, executing 20% SKU cuts for fall, driving hero product assortments and enhancing supply chain agility with higher freight investment—are fueling further gross margin and operating expense efficiencies.

Presentation

[Operator]

Good day, everyone, welcome to the PVH Q2 2021 earnings call. Today's call is being recorded. At this time, I would like to turn the conference over to Dana Perlman. Please go ahead, ma'am.

[Dana Perlman, CSO and Treasurer at PVH]

Thank you, operator. Welcome to the PVH Corp. Q2 2021 earnings conference call. This webcast and conference call is being recorded on behalf of PVH and consists of copyrighted material. It may not be recorded, rebroadcast, or otherwise transmitted without PVH's written permission. Your participation in the question and answer session constitutes your consent to having anything you say appear in any transcript or replay of this call. The information to be discussed includes forward-looking statements that reflect PVH's view as of August 31st, 2021 of future events and financial performance. These statements are subject to risks and uncertainties indicated in the company's SEC filings and the safe harbor statement included in the press release that is the subject of this call.

[Dana Perlman, CSO and Treasurer at PVH]

These risks and uncertainties include PVH's right to change its strategies, objectives, expectations, and intentions, and its need to use significant cash flow to service its debt obligations. Significantly, at this time, the COVID-19 pandemic continues to have a significant impact on the company's business, financial condition, cash flow, and results of operations. 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 could change materially at any time. Therefore, the operation of the company's business and its future results of operations could differ materially from historical practices and results or current descriptions, estimates, and suggestions. PVH does not undertake any obligation to update publicly any forward-looking statement, including, without limitation, any estimates or suggestions regarding revenue or earnings.

[Dana Perlman, CSO and Treasurer at PVH]

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 Q2 2021 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'm pleased to turn the conference over to Mr. Stefan Larsson, CEO of PVH.

[Stefan Larsson, CEO at PVH]

Good morning, and thank you for joining. With me on the call today are Mike Shaffer, COO and CFO, Dana Perlman, EVP, Chief Strategy Officer and Treasurer, and Jim Holmes, our Corporate Controller, who we announced will be interim CFO effective September 10th. Let me start by sharing that we delivered a very strong Q2 performance and significantly outperformed our plans from a revenue, EBIT margin, and EPS perspective, all despite the ongoing challenges from COVID. We're also taking up our guidance for the year. I would like to thank our associates around the world for their hard work and critical contributions to the great Q2 and very strong H1 of the year. Our results in the quarter included strong double-digit revenue growth against last year, which was relatively in line with pre-pandemic levels, and this was led by our international business, specifically Europe.

[Stefan Larsson, CEO at PVH]

Our performance was underpinned by meaningful gross margin expansion and operating expense efficiencies, which drove significant EBIT margin expansion of several hundred basis points compared to 2019. For several quarters now, we have shown great progress in driving an accelerated recovery through the disciplined execution against our strategic priorities. These include increasing our focus on our two iconic global power brands, Calvin Klein and Tommy Hilfiger, building on the strength in international, delivering on product strength, pricing power, and gross margin expansion while winning in the marketplace through supercharged e-commerce growth, 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.

[Stefan Larsson, CEO at PVH]

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 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. Mike will share more of the financial details. First, we have continued to supercharge e-commerce with digital revenue growing approximately 35% in the quarter. A strong result, particularly when compared to our outsized growth last year when stores were closed or under restrictions, which are now open. Importantly, our digital penetration remained consistent at 25%, which is double pre-pandemic levels. We continue to ramp up investment in digital, while at the same time, growth in our brick-and-mortar retail stores is accelerating, demonstrating our increasing strength in connecting with the consumer across channels.

[Stefan Larsson, CEO at PVH]

Next, we are driving product strength across our brands and regions. The trends we saw last quarter have continued, with consumers excited to come out of COVID-19 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. In the quarter, we saw continued strength in key essential product categories like underwear, T-shirts, polos, hoodies, active, sneakers, and a rising demand for denim and categories like dresses. We continue to lean into the strength of our key essentials and hero products, which represent the must-have product silhouettes in key product categories. 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.

[Stefan Larsson, CEO at PVH]

Through this work, by taking a more data and demand-driven approach, we are driving revenue growth with AUR increases and gross margin expansion. Overall, our inventory levels across the board are in a very good shape, down 13% versus last year. As we further improve the way we plan and buy our inventory, we will be able to read and react more quickly to demand. In addition, we continue to invest in our key strategic focus areas. At the same time, we continue to drive efficiencies across our business as part of our work to operate with more speed, more agility, to better follow the consumer in this dynamic environment. Lastly, we successfully sold our Heritage Brands as planned. This has already enabled an increased focus on Calvin and Tommy, which are higher return businesses with global growth potential.

[Stefan Larsson, CEO at PVH]

Turning 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. 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, and it 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 omni-channel capabilities.

[Stefan Larsson, CEO at PVH]

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, driven by pricing power, lower promotions, and higher retail productivity. We also continued to drive operating expense efficiency. We generated strong digital sales growth of 45%, even against a 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 sequentially improving versus 2019 as stores reopened.

[Stefan Larsson, CEO at PVH]

Highlighting the strength of our product in the marketplace, we drove higher conversion, stronger full price sell-throughs, and higher AURs. In addition, the strong consumer demand drove significant core replenishment, and as spring and summer products sold through much faster than expected, we transitioned earlier to pre-fall collections. Demand in our future order books across both brands continued to be very strong, 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 in markets such as Japan, Korea, and most recently, Australia, are making it difficult to see the real underlying strength on how we are improving our execution in the markets. Overall, revenues were relatively in line with pre-pandemic levels and our plans led by China.

[Stefan Larsson, CEO at PVH]

Despite the current COVID-19-related challenges, what excites me the most is the strength we are seeing against our strategic focus areas as we continue to drive increased product strength, pricing power, inventory efficiencies from better inventory management, 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. We are creating unique content and activations to win with the consumer in these key moments. We have also leaned into our most successful hero products, which are delivering strong KPIs, including higher conversion, higher sell-throughs, and higher AURs, and continue to drive comparable store sales increases in retail stores.

[Stefan Larsson, CEO at PVH]

As we supercharge e-commerce, we are leveraging data analytics and utilizing new tools and channels to drive performance. We are focused on developing new creative ways to engage with consumers, including expanding our work with WeChat. Lastly, inventory levels continue to be very lean as we continue to focus on buying closer to demand. Overall, while we are still navigating COVID challenges like others in the region, we remain confident about the long-term strength and growth opportunities for both of our core brands. 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 30%-40% of our total business in the region.

[Stefan Larsson, CEO at PVH]

Our North American teams are leaning into what's within our control, focusing on the domestic consumer, supercharging e-commerce, and driving product strength with AUR and margin improvements. 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 across brands and channels. Some of the proof points of our progress this past quarter include, we drove double-digit growth in our digital business, led by a combination of continuously improving our owned and operated e-commerce sites and strong partnerships with our key wholesale partners, including pure players. In stores, with the domestic consumer, we saw improved traffic with higher AURs. We're also better optimizing inventory across our channels and improving 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.

[Stefan Larsson, CEO at PVH]

Overall, in North America, we have a lot of work still to do, and we are focused on building the business for long-term growth. This work is focused on the same key value drivers that enable our international businesses to perform so strongly, to continuously drive brand relevance through product strength, pricing power, and winning across channels, digitally led. Next, I'll share a few brief global brand highlights, beginning with Calvin Klein. Global brand health remains very strong, with consistent high levels of global awareness. Our Pride campaign this year was successful in further building brand awareness. The campaign celebrated defining moments, connecting to global LGBTQIA+ communities with a diverse international cast. It resulted in global reach that was up over 30% on last year.

[Stefan Larsson, CEO at PVH]

It drove a 300% increase in traffic to our site and delivered strong product sell-through and driven by hero underwear products with limited edition Pride colorways. In the spring, we launched the brand's first designer collaboration with Heron Preston, which has been very well received by the consumer. 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 with creators and brands from around the world to express their unique perspective of the brand. This includes the second installment of our underwear collaboration with premium retailer Kith, which taps into the power of Calvin with a Gen Z audience. Moving on to Tommy Hilfiger. Global brand health KPIs for Tommy also remain very strong.

[Stefan Larsson, CEO at PVH]

The expansion of our purpose-oriented product offer continues to resonate with consumers, with more than 50% of the global summer Pre-Fall collection being sustainable. As we focus on Tommy Jeans' growth potential with younger consumers, we continue to drive brand heat through successful capsules. From our Blast from the Past capsule inspired by pop culture cartoon icons, to our Pastels capsule, which drove very strong engagement and sell-throughs. The brand also launched collaborations that amplified our efforts to increase 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 Indya Moore. The brand also launched a capsule with emerging Brooklyn designer Romeo Hunte, 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.

[Stefan Larsson, CEO at PVH]

These collaborations have increased traffic to our sites in the U.S. and Europe, with more than 40% driven by new consumers and with significantly higher average retail prices. 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 two global power brands, Calvin Klein and Tommy Hilfiger, is driving results. We're still early days in building our next growth chapter, I continue to be very optimistic for the future as we lean further into our accelerated recovery priorities, leveraging our core strength and continuously following the consumer to position PVH for sustainable long-term profitable growth. 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 PVH.

[Stefan Larsson, CEO at PVH]

We are grateful for his guidance and leadership over the years. I'm also pleased to introduce 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, working very closely with Mike Shaffer to build our strong financial foundation. With that, I would like to hand it over to Michael Shaffer.

[Michael Shaffer, COO and CFO at PVH]

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 and significantly exceeded our prior revenue guidance. Our international businesses significantly exceeded 2019 pre-pandemic levels, driven by Europe. When we compare 2021 Q2 results to the previous year, it's important to remember that during the Q2 of 2020, virtually all of our retail stores and the majority of our wholesale customer stores were closed globally during the first month of the quarter and were operating at a significantly reduced capacity for the remainder of the quarter as a result of the pandemic.

[Michael Shaffer, COO and CFO at PVH]

Our total direct-to-consumer business was up 19% versus the prior year, and owned and operated digital commerce was flat despite exceptionally strong growth in the prior year and significant traffic improvement in brick and mortar this year as stores have reopened and capacity restrictions have lessened. Our retail stores faced some continued pressure during the Q2, although to a much lesser extent 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.

[Michael Shaffer, COO and CFO at PVH]

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. Looking at our segments, Tommy Hilfiger revenues were up 41% as reported and 35% on a constant currency basis, with international up 40% as reported and 32% on a constant currency basis. North America was up 45%. Calvin Klein revenue was up 56% as reported and 50% on a constant currency basis, with international up 47% as reported and 37% on a constant currency basis. North America was up 75%. Our Heritage revenues were up 37%. Gross margin was 57.7% for the quarter as compared to 55.9% in the prior year, which reflected substantial improvements across all regions due to less promotional selling.

[Michael Shaffer, COO and CFO at PVH]

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 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, of which $0.25 is timing. Notably, our EBIT margin continued to be very strong at 12.7% for the quarter, driven by continued strength in our international business. Moving on to our outlook. We are providing our 2021 outlook despite the significant uncertainty due to the pandemic, and as such, it could be subject to material change.

[Michael Shaffer, COO and CFO at PVH]

Our outlook does not contemplate any significant new store closures, new lockdowns, or extensions of current lockdowns beyond what is already known. The 2021 outlook contemplates higher freight and other logistic costs in the H2 of the year to mitigate delays of approximately four to six weeks on average for certain inventory orders, but does not contemplate any greater supply chain disruptions beyond that. Our actual 2021 results could differ materially from our current outlook as a result of the occurrence of any of these or any other uncontemplated events. We continue to be encouraged by our international businesses, which are expected to continue to exceed pre-pandemic levels through the remainder of 2021.

[Michael Shaffer, COO and CFO at PVH]

We expect North America to continue to face the ongoing challenge of reduced international tourism, which is the source of a significant amount of revenue and not expected to return to pre-pandemic levels within the year. Additionally, our full-year outlook includes the sale of certain of our Heritage Brands, which will result in a decrease in revenue of 2% versus 2020 and have a slightly dilutive impact on earnings. For the full year, we are projecting revenue to grow approximately 26%-28% as reported and approximately 24%-26% on a constant currency basis compared to 2020. We expect gross margin will continue to show improvements for the remainder of the year due to less promotional selling and a favorable shift in regional sales mix compared to the prior year with our higher margin international businesses making up a larger portion of total revenue.

[Michael Shaffer, COO and CFO at PVH]

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 H2 of the year than the H1. The incremental expenses in the H2 include increases in marketing and other investments, which were planned in the H2 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 of revenue in 2021 versus 2020 will be relatively similar in magnitude.

[Michael Shaffer, COO and CFO at PVH]

However, as compared to the H1 of 2021, our EBIT margin in the H2 will be impacted by the incremental expenses I noted previously, as well as freight costs were approximately $0.35 to mitigate supply chain delays. We expect our interest expense decrease in 2021 to approximately $105 million compared to $116 million in 2020. We have made $200 million of voluntary debt repayments in the Q2, bringing our total for the H1 of the year to $700 million, which is equivalent to the incremental borrowings we took on in 2020 to manage through the pandemic. Our tax rate for the year is estimated at 17%-18%, with the favorable impact we benefited from in the Q2 largely offset in the H2 due to timing.

[Michael Shaffer, COO and CFO at PVH]

As a reminder, when we think about our tax rate by quarter, the Q4 is expected to benefit from certain discrete items, which bring down the overall rate for the full year. For the full year in 2021, we are projecting non-GAAP earnings per share to be approximately $8.50, which is an increase compared to our previous guidance of approximately $6.50, and compared to a loss per share of $1.97 in 2020. The beat was primarily due to business outperformance, largely in Europe for $1.85, along with an improvement in taxes of $0.10 and an improvement of $0.05 from reduced interest expense. For the Q3, our revenue is projected to increase 11%-13%, both as reported and on a constant currency basis.

[Michael Shaffer, COO and CFO at PVH]

Q3 non-GAAP earnings per share is expected to be in the range of $1.95-$2.00, compared to $1.32 in the prior year period. We expect interest expense to be about $25 million and taxes to be in a range of 26%-28% in the Q3. With that, we'll open it up to questions.

[Operator]

Thank you. If you would like to ask a question on the phone lines today, you can press star one on your telephone keypad. If you are on a speakerphone, please make sure your mute option is turned off to allow your signal to reach our equipment. Once again, everyone, that is star one on your telephone. We will take our first question from Erinn Murphy with Piper Sandler.

[Erinn Murphy, Analyst at Piper Sandler]

Great. Thank you. Good morning, and congratulations on the Q2. My question, Stefan, is for you. The Q2 operating margins, just record level. Would love to hear a little bit more about the cost discipline that you're seeing in the business across the different work streams. 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?

[Stefan Larsson, CEO at PVH]

Yeah. Thank you, Erinn. When we look at the Q2 performance from an EBIT perspective and an EBIT margin perspective, 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. We see that continue. This is a multi-year 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. We build hero products around that, we connect those hero products with the consumers increasingly.

[Stefan Larsson, CEO at PVH]

Tighter and tighter to where the consumers wants to shop channel-wise, and that's where we have doubled down on e-commerce. 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 the accelerated recovery priorities and looking at efficiencies that we can free up that's outside of that. 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.

[Erinn Murphy, Analyst at Piper Sandler]

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

[Stefan Larsson, CEO at PVH]

Yeah, Erinn, 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. When the markets open up, that increasingly includes the comeback of brick and mortars. It's about continuing to supercharge e-commerce for 2022 to win in the marketplace across channels, but being digitally led. Then continue to drive product strength and continue to drive efficiencies.

[Jim Holmes, Corporate Controller at PVH]

Yeah. 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. We're obviously pleased with the trajectory that we're on. As we look to next year, we're really in the early stages of our planning process, so it's premature to provide more details on that at this time.

[Erinn Murphy, Analyst at Piper Sandler]

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

[Stefan Larsson, CEO at PVH]

Thank you, Erinn.

[Operator]

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

[Bob Drbul, Analyst at Guggenheim]

Hi. Good morning. Mike, it's interesting to see you did all the script, Jim answering all the questions. It's definitely a new era for us here, he's got the heavy lifting now. Jim, I just had a question for you, I have a follow-up for Stefan. Jim, can you talk a little bit on inventory levels? Inventory levels were down at the end of Q2. How you're thinking about inventory in Q3 and Q4, 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.

[Jim Holmes, Corporate Controller at PVH]

Sure, Bob. A couple of things to point out. First is, the exit of our Heritage Brands is having a benefit on the inventory line. One, from exiting the Heritage Brands retail business, also just the way the held for sale accounting works. We closed on selling our Heritage Brands wholesale business. Those inventories at the end of Q2 are not on the inventory line. We have a benefit from that. Apart from that, our current inventory levels are lean. As Stefan mentioned, partly our disciplined inventory management, buying closer to demand and cutting the unproductive SKUs, is really having a benefit. Also at the end of Q2, as we've called out, we are experiencing supply chain delays 4-6 weeks, which is also benefiting a little bit.

[Jim Holmes, Corporate Controller at PVH]

As we move through the H2, we called out we're going to be incurring about $0.35 worth of air freight expense, really to make sure that the inventories are keeping in line with our sales forecasts. Bob Drbul, if you look at the inventory this year versus last year, last year comparisons get difficult. This time last year, we really had been canceling a lot of orders. 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.

[Stefan Larsson, CEO at PVH]

Yeah. Bob Drbul, 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 inventory is that when we have demand above what we expected, we tend to be able to sell more with less inventory. We take this as an opportunity to learn as a team to say, how do we better plan and buy inventory to demand? How can we have an inventory level in average that's lower in relation to sales than what we historically have had? This past quarter is a good example of that we can sell more at a higher pricing power with a lower inventory level.

[Stefan Larsson, CEO at PVH]

That is something, again, it's a multiyear 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.

[Bob Drbul, Analyst at Guggenheim]

Great. If I could just do one more question. Can you talk a little bit about the expansion in the Kohl's for Tommy and Calvin, how that's going, how the market's receiving it? Thanks.

[Stefan Larsson, CEO at PVH]

Absolutely, Bob. So far we launched with Calvin underwear at Kohl's just a few weeks ago. It's very early read, early days, but so far a very strong start, both from a consumer demand and pricing power perspective.

[Bob Drbul, Analyst at Guggenheim]

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

[Stefan Larsson, CEO at PVH]

Thanks, Bob.

[Operator]

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

[Michael Binetti, Analyst at Credit Suisse]

Hey, guys. Good morning. I'll add my congrats. Mike, it's been really great to work with you. Jim, welcome to the crew. Stefan, 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 biggest piece, when we looked at pre-COVID-19, the combined international EBIT margins were in that 13.5%, almost 14% range. Again, Europe being the biggest piece, they look like they're running about 500 basis points above 2019 in the H1. You said the order books are positive for spring, summer, double digits.

[Michael Binetti, Analyst at Credit Suisse]

Can you talk a little bit about how sustainable the margins are that we've seen in the international business in the H1 of this year as we think about what to apply 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?

[Stefan Larsson, CEO at PVH]

Yes. Thank you, Michael. When we look at the Q2, it's just another proof point on the strength of our European team's execution. 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. They are operating with a very strong consumer focus, very strong brand focus that they translate into stronger and stronger product assortments. From a channel perspective, they keep moving where the consumer is moving, and they do it with increased pricing power across the channels. I'm very confident, and we are very confident in their ability to continue to win with the consumer in Europe and continue to expand. We see it as a multi-year growth opportunity.

[Stefan Larsson, CEO at PVH]

Asia, just, Michael, to mention Asia as well from an international perspective. We are very excited by the improvement in execution by our Asia team. We can't fully see that in Q2 because of the COVID disturbances, but under the surface, we can see it. They have the same focus there in connecting where the consumer is going, really starting to supercharge e-commerce and driving. They also, today, even though the COVID disturbance is under the surface, drive pricing power, lower discount rates, higher sell-throughs. It's a multi-year growth opportunity from strength in both Europe and Asia.

[Jim Holmes, Corporate Controller at PVH]

Michael, I just want to add, the Q2 did benefit somewhat. In Michael Shaffer's notes, he mentioned we planned the marketing more H2 weighted than H1, that is benefiting the operating margins as well. The first month of the Q2 in May, we did have still a lot of store closures in Europe, we don't have that expense base, as well as, still receiving rent concessions and some government subsidies on payroll did benefit 2Q.

[Michael Binetti, Analyst at Credit Suisse]

Okay. Maybe I could just follow with North America. I would love to hear, Stefan, some of your thoughts on the path to recovery for North America retail. You've talked to us a lot 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.

[Stefan Larsson, CEO at PVH]

Yes. Thanks, Michael. Yes, there is a big and real tourism effect. In the normal year, as I mentioned, 30%-40% of the business is tourism, now mostly temporarily gone. What we're doing there with Trish's leadership, she's still relatively new coming in, but 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. Proof points this quarter is we see digital e-commerce owned and operated really taking off. We see Calvin being ahead there. 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. We see AURs up, we see discount rates down.

[Stefan Larsson, CEO at PVH]

Our focus is on the domestic consumer and the same accelerated recovery priorities as we see in Europe and in Asia. From a regional perspective, from our three regions, we have the most work to do in North America. What excites me today, though, is that we are starting 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 in North America. The underlying consumer strength with Calvin and Tommy is for us to improve our execution.

[Michael Binetti, Analyst at Credit Suisse]

Thanks a lot, guys. Congrats again.

[Stefan Larsson, CEO at PVH]

Thank you.

[Operator]

Our next question comes from Jay Sole with UBS.

[Jay Sole, Managing Director at UBS]

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 4-6 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 air freight. Is that the case, and how are you managing that? Because it seems like you're doing a better job than a lot of companies being able to make sure that you get the inventory you need for the key seasons.

[Stefan Larsson, CEO at PVH]

Yeah. 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. Today, as we mentioned, we are 4-6 weeks, in average, on the delays, and we are able to prioritize our key categories and hero products. We have inventory, and that's included in our guidance. The guidance we're taking up for the rest of the year includes the supply chain disruption we're seeing right now.

[Jim Holmes, Corporate Controller at PVH]

Yeah, 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.

[Jay Sole, Managing Director at UBS]

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

[Jim Holmes, Corporate Controller at PVH]

Yeah, Jay, for Q2, it was very minimal, basically. Then if you were to take, so to speak, in Q3, it's probably worth 20, 30 basis points or so. It's pretty much spread evenly almost for the H2 of the year between the two quarters.

[Jay Sole, Managing Director at UBS]

Got it. Okay. Thank you so much.

[Operator]

We'll take our next question from Dana Telsey with Telsey Advisory Group.

[Dana Telsey, CEO snd CRO at Telsey Advisory Group]

Good morning, everyone. Congratulations, Mike. Very terrific to work with you. Stefan, you've mentioned a lot of times about the hero product. What % of the business is the hero product? I know you were focused on culling SKUs. Where are you in that SKU journey? I just have a quick follow-up.

[Stefan Larsson, CEO at PVH]

Well, thanks, Dana. 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 the key categories, and then increasingly focus on the products that are the most essential for the consumer. There are year-round hero products, there are seasonal hero products, and then we can paint those seasonal and year-round products through our collaboration. You're going to see an increasing share of focus when it comes to our hero products. Where we are on the SKU rationalization, that's an ongoing work as well. It starts with the focus.

[Stefan Larsson, CEO at PVH]

The way we effectively cut unproductive SKUs is that 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. My experience over the years there is that when we continuously do that in a systematic way, we can keep cutting unproductive SKUs. Every product needs to have an intent that goes into our line. For fall, as I mentioned, we are cutting 20% of the assortment. It sounds a lot, but it's just the beginning, because we have a history of overproducing SKUs. Now when we focus in on what really matters to the consumer, then we will have over the next few years, we will have a continuous opportunity to tighten the assortment to the SKUs that really matters to win with the consumer.

[Dana Telsey, CEO snd CRO at Telsey Advisory Group]

Got it. 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?

[Jim Holmes, Corporate Controller at PVH]

Dana, I'll just point out last year, Q2, when we had significant store closures, we had really had a spike in our owned and operated e-commerce. We're up against that in Q2, so we're pleased that we're at least able to maintain that 25% overall digital penetration, even with this year. The stores really reopened with a lot more traffic, we're pleased about that.

[Stefan Larsson, CEO at PVH]

If we look at Q3, Q4, we see our owned and operated continue to grow. We see our third-party e-commerce continue to grow. E-commerce overall, as a penetration over the next few years, will continue to grow the fastest.

[Dana Telsey, CEO snd CRO at Telsey Advisory Group]

Thank you.

[Operator]

We'll take our next question from Brooke Roach with Goldman Sachs.

[Brooke Roach, Analyst at Goldman Sachs]

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, fueled by AUR. Can you provide some additional color on the components of this strength? 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? As you look into next year, how much of this strength do you think will be sustainable into future years?

[Stefan Larsson, CEO at PVH]

Yeah. Thank you, Brooke. Starting with, we have a geographic component with the strength of international, for sure. Then on top of that, in each region, each brand, we drive pricing power up. We drive gross margin expansion up through our hero product focus. It's a combination of, there is a geographic effect, but the most important from a long-term growth perspective is the gross margin rate improvement in each brand, in each region. 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. Even when we include that, we are net positive of continuing to drive margin expansion.

[Brooke Roach, Analyst at Goldman Sachs]

Thank you. Just to 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 one or two most important components of that blueprint that you're translating into North America and the timeline for seeing some of that success materialize?

[Stefan Larsson, CEO at PVH]

Yes, happy to, Brooke. If I were to just highlight a few drivers 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 channel mix and driving pricing power and high-quality sales growth. That's something that they execute really well, 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. We are seeing the same type of effects, positive performance coming out of Asia and China. That's where we have the most work to do in North America, starting with the domestic consumer. We still have this lingering negative tourism effect for a while.

[Stefan Larsson, CEO at PVH]

Once we have that coming back, it's about winning more with the domestic consumer in the same way as we do in Europe and Asia. Then we have the benefit of the international tourist coming back.

[Brooke Roach, Analyst at Goldman Sachs]

Thank you.

[Operator]

We'll take our next question from Lorraine Hutchinson with Bank of America.

[Lorraine Hutchinson, Analyst at Bank of America]

Thank you. Good morning. I wanted to focus on marketing for a minute. You spoke about the increased investment in the H2. Is there a tilt to that toward a particular brand or geography? How has your marketing plan changed now that the digital penetration has remained so high?

[Stefan Larsson, CEO at PVH]

Yes. Thank you, Lorraine. 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 are now in a accelerated recovery phase, and we see the consumer coming back, and the marketing is focused on the key consumer moments. Now we're starting to move into fall, and then we are rapidly going to come into transition into holiday, and those holiday moments in North America, Asia, and Europe is what we are backing up with marketing. 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.

[Stefan Larsson, CEO at PVH]

When we look at Calvin and Tommy as two of the most iconic global power brands in the sector, they in themselves work as a platform for creativity. That's what we see with Heron Preston for Calvin Klein or the latest, Romeo Hunte, that Tommy Hilfiger connected us to. We see that the connection between our iconic brands and external creativity, that it's really powerful to drive engagement with the consumer.

[Lorraine Hutchinson, Analyst at Bank of America]

Thank you.

[Operator]

All right, we'll take our next question.

[Stefan Larsson, CEO at PVH]

Yes, this will be our last question.

[Operator]

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

[Kimberly Greenberger, Retail, Consumer, and Multi-Channel Commerce Expert at Morgan Stanley]

Okay, fantastic. Thanks so much for squeezing me in. Stefan, I was very interested in your comments on Asia. It's very clear looking at the Europe results that the performance there is just fantastic and well above expectations. It sounds like you're feeling quite hopeful about the improvement in execution in Asia. 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 two, what are you thinking about medium-term strategies to grow in that geography? Thanks so much.

[Stefan Larsson, CEO at PVH]

Yes. Thank you, Kimberly. Yes, we are optimistic when it comes to Asia, and what we're seeing, again, below the surface is that we're seeing that the increased focus in connecting our brands to where the consumer is going in Asia, with a special focus on China, is we are supercharging digital, and that is paying off. We are increasing our focus on winning with product through pricing power, and that is paying off. We see further improvements that our management team there is doing successfully, which is to plan and buy inventory closer to demand. They have been able to be much more flexible now, given that we have been hit by COVID-19 resurgence in Asia, it feels like more than in any other region over the last quarter, and they have been able to navigate that really well.

[Stefan Larsson, CEO at PVH]

It's just an increased focus on the accelerated recovery priorities, and our teams there are coming together and executing really well. That's where the similarities between the Europe blueprint and the Asia execution is getting closer. We see more of that because we can take away the COVID effect. That gives us the confidence long term.

[Kimberly Greenberger, Retail, Consumer, and Multi-Channel Commerce Expert at Morgan Stanley]

Fantastic. That's great. 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. If we think about a future year when you would get back to the $9.4 billion in revenue, would you be able to generate that $9.4 billion on 5% less inventory, 10% less inventory? 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.

[Stefan Larsson, CEO at PVH]

Yeah. 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. We'll, throughout the quarterly updates, give you updates on what kind of inventory in relation to sales levels we will receive. 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. It's early days, so over time, we'll be able to share exactly what that will look like.

[Kimberly Greenberger, Retail, Consumer, and Multi-Channel Commerce Expert at Morgan Stanley]

Thanks so much.

[Stefan Larsson, CEO at PVH]

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

[Operator]

That does conclude today's presentation. Thank you for your participation. You may now disconnect.

Participants

Executives

• Dana Perlman, CSO and Treasurer
• Jim Holmes, Corporate Controller
• Michael Shaffer, COO and CFO
• Stefan Larsson, CEO

Analysts

• Bob Drbul, Analyst at Guggenheim
• Brooke Roach, Analyst at Goldman Sachs
• Dana Telsey, CEO snd CRO at Telsey Advisory Group
• Erinn Murphy, Analyst at Piper Sandler
• Jay Sole, Managing Director at UBS
• Kimberly Greenberger, Retail, Consumer, and Multi-Channel Commerce Expert at Morgan Stanley
• Lorraine Hutchinson, Analyst at Bank of America
• Michael Binetti, Analyst at Credit Suisse