Q2 2021 PVH Corp Earnings Call

[music].

Please standby.

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

Thank you operator, good morning, everyone and welcome to the PVH Corp, second quarter 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 on any transcript or replay of this call the.

The information to be discussed includes forward looking statements that reflect pvh's view as of August 31, 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 these risks and uncertainties.

This 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.

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 Companys 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 estimate their suggestions 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 2020.

<unk> earnings release, which can be found on www dot PVH dot com and in the company's current report on form 8-K furnished to the SEC in connection with the release at this time I am pleased to turn the conference over to Mr. Stefan Larsson CEO of PVH.

Good morning, and thank you for joining with me on the call today are Mike Shaffer, CEO and CFO, Dana Perlman, EVP, Chief strategy Officer, and Treasurer, and Jim homes, our corporate controller, who we announced will be interim CFO.

So effective September 10.

Let me start by sharing that we delivered a very strong second quarter performance.

Ignition cantley outperformed our clients from a revenue EBIT margin and EPS perspective.

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 second quarter, a very strong first half 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.

Our performance was underpinned by meaningful gross margin expansion and operating expense efficiencies, which drove significant to EBIT margin expansion of several 100 basis points compared to 2019.

For several quarters now we have shown great progress in driving an accelerated recovery 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 and 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 were.

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 markets and supply chain disruptions.

I will now share some of the key proof points on how we're executing our accelerated recovery of priorities.

<unk> will then share more of the financial details.

First we have continued to supercharge ecommerce with digital revenue growing approximately 35% in the quarter.

Strong results, particularly when compared to our outside 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. This accelerating demonstrating our increasing strength in connecting with the consumer across channels.

Next we are driving product strengths across all brands and regions.

Trends, we saw last quarter have continued with consumers excited to come out of Covid restrictions and adopting a hybrid lifestyle tourists and increasing mix of wearing locations. This is still very much grounded in our casual lifestyle that fits both Calvin and Tommy really well in the quarter. We saw continued.

<unk> strength in key essential product categories like underwear T shirts polo's hoodies.

<unk> sneakers, and the 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 products silhouette in key product categories. Through this work we saw an improvement in AUR during the quarter, including double digit increases in some of our biggest investment.

We also continued to cut more unproductive skus, including a 20% cut on average for full 2021.

Through this work and 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 and 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.

Turning to our regional update while each of our regions in varying stages of recovery, we drove performance significantly above plan for both revenue and profitability.

Let me start with Europe at 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 were able to drive when we execute really well and its office of proof point in our blueprint for what's possible in our other regions as well.

Across both brands, we are winning with the consumer driving brand relevance through leaning into the strength of our hero products and we continue to supercharge, our digital and our omnichannel capabilities.

Building on our success in the first quarter as Lockdowns are lifted we saw great demand for our products 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 the backdrop of stores reopening driven by our expanded business with digital pure players Europe represents our highest ecommerce penetration well above the company's overall rate of 25% and our D to C.

Channel, we continue to accelerate our omnichannel 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 reopen highlighting the strength of our product in the marketplace, we drove higher conversion stronger full price sell throughs and <unk>.

In addition to strong consumer demand drove significant core replenishment and our spring and summer products sold through much faster than expected, we transitioned earlier to pre for collections.

<unk> in our future order books across both brands continue 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-19 resurgence this 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 in our plants led by China.

Despite the current Covid related challenges what excites me. The most is the strength, we're 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 <unk>.

Same hero product focus.

China remains a significant growth opportunity for both Tommy and Calvin as we continued to invest in the markets. We are driving brand heat and relevance through our integrated marketing and capsules around key shopping moments, including $24.0, 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 AUR and continue to drive comparable store sales increases in retail stores.

And thus, we supercharge ecommerce, we're 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 continues to be a very lean as we continue to focus on buying closer to demand.

Overall, while we are still navigating COVID-19 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.

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 and made up 30% to 40% of our total business in the region.

Our north American teams are leaning into what's within our control.

Focusing on the domestic consumer supercharging ecommerce and driving product strength with AUR and margin improvements.

And I am pleased that we saw a number of green shows 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 AUR as.

We're also better optimizing inventory across our channels and improving our ability to react to demand changes for example, in Canada, where the countries reopening has been slower than other markets, we've proactively redirects that inventory to the U S.

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 enabled 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 campaigns celebrated defining moments connecting to global LGBTQ IAA plus communities with a diverse international cast.

It resulted in global reach that was up over 30% on last year. It drove a 300% increase in traffic to our sites and delivered strong product sell through and driven by hero underwear products with limited edition pride color ways.

In the spring, we launched the brand's first to sign a collaboration with Heron, Preston, which has been very well received by the consumer this quarter. We will release, our second chapter of this collaboration across denim underwear and auto 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 kit, which taps into the power of Calvin with Gen Z audience.

Moving on to Tommy Hilfiger Global brand Health Kpis for Tommy also remained very strong.

The expansion of our purpose oriented product offer continues to resonate with consumers with more than 50% of the global summer pre fall collection 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 Iqos TARP hospitals capsule, which drove very strong engagement of sell throughs.

The brand also launched collaborations that amplified our efforts to increase opportunities and visibility for under represented communities within the fashion and apparel industries.

In July we launched the first collaboration with a non gendered capsule featuring India more.

The brand also launched a capsule with emerging Brooklyn define our role mill hung following his mentorship with Mr. Hilfiger.

The capsule reimagine its iconic Tommy pieces with a focus on outerwear and is available on Tommy Dot com as well as to US an exclusive partnership with Selfridges.

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.

Our increased focus on winning with the consumer through our two global power brands, Calvin Klein and Tommy Hilfiger is driving results.

Early days in building, our next growth chapter and 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.

And before I hand, it over to Mike. Since this is mikes last earnings call I would like to thank him again for his contributions of nearly 30 years to PVH.

We are grateful for his guidance and leadership over the years.

Im also pleased to introduce Jim holds 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 to build our strong financial Foundation.

So with that I would like to hand, it over to Mike.

Thanks, Stefan become income our best to make are based on non-GAAP results and are reconciled in our press release.

Overall revenues for the second quarter 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 second quarter results to the previous year. It is important to remember that during the second quarter of 2020, virtually all of our retail stores and the majority of our wholesale customer stores.

We're closed globally during the first month of the quarter and we're operating at a significantly reduced capacity for the remainder of the quarter as a result of the pandemic.

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.

Tours have reopened and capacity restrictions have lessons.

Our retail stores face some continued pressure during the second quarter, 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.

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 or 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.

Our inventory is lean down 13% as of the ended the quarter compared to the prior year.

Earnings per share was $74.0 on a non-GAAP basis for the second quarter of 2021 compared to <unk> 13 in the prior year period, and $2031.0.

This beat the top end of our previous guidance by a $55.0

The beat was primarily due to the business outperformance largely in Europe for $20.0, as well as the favorable impact of taxes for 35.

Of which 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.

Outlook does not contemplate any significant new store closures, new lockdowns or extensions of current lockdowns beyond what is already known.

In addition, the 2021 outlook contemplates higher freight and other logistic costs in the second half 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 on contemplated 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, we expect North America and North America to continue to face the ongoing challenge of reduced international tourism, which is the source of the significant amount of revenue and not.

<unk> 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% to 28% as reported and approximately 24% to 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 a higher margin international businesses, making up a larger portion of total revenue.

While we continue to manage our cost structure proactively by reducing operating expenses and reallocating resources to support strategic growth areas of the business, we expect higher expenses in the second half of the year than the first at the.

The incremental expenses in the second half include increases in marketing and other investments, which were planned in the second half of the year to coincide with when we expected our stores to be mostly open and to drive momentum as we hopefully exit the pandemic.

We expect our EBIT margin will be nearly flat to 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.

However, as compared to the first half of 2021, our EBIT margin in the second half will be impacted by the incremental expenses I noted previously as well as freight costs were approximately 35 cents to mitigate supply chain delays.

We expect our interest expense decreased in 2021 to approximately $105 million compared to $116 million. In 2020, we have made $200 million of voluntary debt repayments in the second quarter, bringing our total for the first half 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% to 18% with the favorable impact we benefited from in the second quarter largely offset in the second half due to time.

As a reminder, when we think about our tax rate by quarter. The fourth quarter 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 $58.0

Which is an increase compared to our previous guidance of approximately $56.0

And compared to a loss per share of $2118.0.

The beat was primarily due to business outperformance largely in Europe for $86.0, along with an improvement in taxes of 10, and an improvement of <unk> from reduced interest expense.

For the third quarter, our revenue is projected to increase 11% to 13% both as reported and on a constant currency basis.

Third quarter non-GAAP earnings per share is expected to be in the range of $96.0 to $2 compared to $33.0 in the prior year period.

We expect interest expense to be about $25 million and taxes to be in the range of 26% to 28% in the third quarter.

And with that we'll open it up for questions.

Yes.

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 speaker phone. Please. Thank you for giving me an option is turned off to allow your signal to reach our equipment. Once again, everyone that is star one on your telephone will.

We will take our first question from Erinn Murphy with Piper Sandler.

Great. Thank you good morning, and congratulations on the second quarter.

My question Stefan is for you the second quarter operating margin just record level would love to hear a little bit more about the cost discipline that youre seeing in the business across the different work streams and then I recognize in the back half you spoke to added freight and marketing, but if sales were to come in ahead of plan could you just talk about your philosophy around.

Flowing through the upside versus reinvesting.

Yes, Thank you erinn so.

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 start to hit.

AUR and we see that continue this is a multiyear Jeremy where we drive brand relevance through focusing on winning with product and being very focused on the key categories that matters most to the consumers.

And then we'd be able to Europe products around that and then we connect those hero products with consumers increasingly tighter and tighter to where the consumer wants to shop channel wise and Thats, where we have doubled down on E. Commerce. So we see that continue on and operating efficiency.

And thats the other driver of the EBIT improvement in Q2, we see that it's coming from being.

Being increasingly focused on investing in accelerated recovery priorities and looking at efficiencies that we can see that's outside of that so you will see us continue to drive gross margin rate improvements over time, and you will see us continue to drive operating efficiencies over time.

Hi.

Great. Thank you and then I guess Relatedly, if we zoom out and look at 2022. It sounds like you already have some good visibility on European Order book is up double digits. I know there are several puts and takes with just lapping stimulus as well as supply chain that could linger, but how are you thinking big picture about 'twenty two just given those comments on that.

Gross margin as well as your operating efficiencies that you expect to continue.

And 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 ecommerce and Thats when the markets open up does increasingly inc.

Th.

Banco brick and mortar it's about continuing to supercharge e-commerce for 2022 to win in the marketplace across channels, but being digitally led and then continue to drive product strength and continue to drive efficiency.

And Erinn. This is Jim I would just add as implied by our guidance for 'twenty. One we're pretty much in line. Our operating margins are in line with 2019 pre pandemic levels. So we're obviously pleased with different which I sure Jack trajectory that we're on now but as we look to next year, it's really in the early stages of our planning process.

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

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

Thank you Erinn.

We will take our next question from Bob <unk> with Guggenheim.

Hi, good morning.

Mike It's interesting to see you did all the script, but Jimmy answering all the questions. It's definitely a new era for us here, but.

He's got the heavy lifting now.

Jim I just had a question for you.

And then I have a follow up first to farm, but.

Jim can you talk a little bit on inventory levels.

Inventory levels were down at the end of Q2, how youre thinking about inventory in Q3, and Q4 sort of how you are planning it.

Deliveries in <unk> and.

Your ability to actually get the receipts and everything from that perspective that would be helpful. Thanks.

Sure Bob.

Things to point out first is the.

The exit of our heritage business is having a benefit on the inventory line one from exit exiting the heritage retail business, but also just the way the held for sale accounting works.

We closed on selling our heritage wholesale business. So those inventories at the end of Q2.

On the inventory line, so we havent been that benefit from that.

But apart from that our current inventory levels are lean.

I'd mentioned, partly our disciplined.

Inventory management.

Of buying closer demand and cutting the <unk>.

Unproductive skus.

Is really having a benefit.

Also at the end of Q2 as we pulled out we are experiencing supply chain delays four to six weeks, which is also benefiting a little bit up little bit as we move through the second half we called out we're going to be incurring about 35 worth of airfreight expense really to make sure that the inventories are getting.

Keeping in line with our sales forecast and Bob If you just if you look at the inventory this year versus last year last year comparisons get difficult.

Time last year, we really had been canceling a lot of orders. So if we were to compare it to 2019, which is probably a better comparison, we expect our inventory levels pretty much to get back in line with future sales growth projections by the end of the year.

Yes, just a bit involved just to.

And on what Jim was speaking about in terms of inventory levels.

One thing I've seen through my career working with finding a systematic repeatable way to 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. So we.

We take this as an opportunity to learn as a team to say, how do we better plan and buy.

Inventory to demand and how can we have an inventory level of an average lower in relation to sales than what we what we historically. So this last this past quarter is a good example.

That we can sell more at a higher pricing power with the lower inventory levels. So that is something again, it's a multiyear journey, but this quarter was a proof point.

How much of a flow through down to EBIT rate, we can have from lower inventory to demand.

Great and if I could just do one more question.

Can you talk a little bit about the expansion and the Kohl's for Tommy and Calvin sort of how thats going how the market's receiving it. Thanks.

Absolutely Bob.

So so far we launched with Calvin underwear of Charles just a few weeks ago.

So it's very early read early days, but so far very strong start.

Both from a consumer demand and pricing power perspective.

Great. Thank you very much Mike Congratulations best of luck thanks for everything.

Thanks, Bob.

We will take our next question from Michael Binetti with 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 group.

Stefan.

Want to ask you.

Europe as you look a little bit beyond 2021, as we look at the margins for the international business, Obviously Europe being the biggest piece we looked at pre Covid. The combined international EBIT margins were in that 13, five almost 14% range.

Again, Europe being the biggest piece they look like Theyre running about 500 basis points above 2019 in the first half.

The order books are positive for spring summer double digits can you talk a little bit about how sustainable are the margins are that we've seen in the international business in the first half of this year as we think about where 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.

Yes, Thank you Michael.

When we look at the second quarter. It is just another proof point on the strength of our European team's execution.

And.

And if the kind of strength that forms and I mentioned it in my prepared remarks.

<unk> 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 that translate into stronger and stronger product assortment and from a channel perspective, David a cheap moving rather consumer it's moving and they do it with increased pricing power across.

The channels, so I'm very confident and we are very confident in their ability to continue to win with the consumer in Europe and continued to expand so we see it as a multiyear growth opportunity.

Asia.

Asia, just just Michael mentioned Asia, as well from an international perspective.

We are very excited by.

The improvement in execution by our Asia team, but we can certainly see that in Q2 because of the COVID-19 disturbances, but under the surface. We can see it. So they have the same focus there in connecting with the consumer is going really starting to supercharge ecommerce and and driving.

They also today, even though the COVID-19 discharges just under the surface drive pricing power lower discount rates higher sell throughs. So.

It's a multi year growth opportunity from strength in both Europe and Asia.

Yes, Mike Michael I, just wanted to add to second quarter did benefit somewhat in Mike's notes. He mentioned, we plan to marketing more second half weighted than first half. So that is benefiting the operating margins as well the first month of the second quarter. In May we did have still a lot of store closures in Europe. So we don't have that expense base.

As well as you know still receiving rent concessions in some government subsidies on payroll did benefit Q2.

Okay.

And then maybe I could just follow up.

North America, I would love to hear 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 where that business goes.

Until we know the pace and timing of tourism coming back. Thank you.

Sure.

Yes, thanks, Michael So yes.

Yes, there is a big and real tourism effect, a normal year as I mentioned, 30% to 40% of the business as tourists are now mostly temporarily gone. So what we're doing there with tricia's leadership is still relatively new coming in but I am excited by seeing hering.

<unk> focus and with the teams on the domestic consumer.

Focus on executing the accelerated recovery priorities across both Tommy and Calvin so.

Proof points this quarter as we see digitally digital e-commerce own and operate it really taking off and and we see Calvin being ahead, there and those learnings we can share and we are sharing with Tommy immediately.

We see that we are starting to lean in even if it's early days.

On the hero product execution. So we see AUR is up we see discounts rates down. So we our focus is on the domestic consumer and the same accelerated recovery priorities as we see in Europe and in Asia, So but from a regional.

Perspective from our three regions, we have the most work to do in in North America, What excites me today, though is that we are starting to lean into the area, that's really matters and starting to connect with that domestic consumer and really leverage the strengths we have in Calvin and Tommy in North America the underlying.

<unk> strength with Calvin and Tommy.

This is for us to improve our execution.

Thanks, a lot guys congrats again.

Thanks.

Our next question comes from Jay sole with UBS.

Great. Thank you so much.

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 two week delays in getting product can you just give us a little bit more information about how you are managing through this because it sounds like youre still able to get the units that you need.

And probably in time for holiday because of airfreight is that the case and how are you managing that because it seems like you're doing a better job and a lot of companies being able to make sure that you get the inventory you need for the key seasons.

Yes, so so.

We have been doing a really good job through our sourcing and supply came some brand teams regional teams to really stay on top of what's happening because it's changing week by week. So today as we mentioned we have four to six weeks.

In average.

The delays and we are able to prioritize our key categories and hero products. So so we have inventory and thats included in our guidance. So the guidance. We are taking up for the rest of the year includes the supply chain disruption we are seeing right now yes.

Just to add you know as getting back to our inventory.

Discipline is 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 were able to airfreight that in <unk>.

Really quickly to sort of keep us in line.

Understood maybe and then we can follow up just on the impact of the Airfreight expense I think you said its going to 35.

Versus it was 19 before.

Just talk about how that what the impact was to the overall margins in Q2 from just airfreight and overall supply chain congestion and maybe what the incremental change will be in Q3, and how that will impact gross margin and SG&A.

Yes, Jay for Q2 with it it's not very I mean, it was very minimal basically.

And if you were to take.

So to speak in Q3, it's probably worth about.

It's probably worth it.

2000, 2030 basis points or so.

It's pretty much spread evenly almost for the second half of the year between the two quarters.

Got it okay. Thank you so much.

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

Good morning, everyone and congratulations Mike terrific.

Terrific to work with you.

Stefan you've mentioned a lot of times about the hero product what percentage of the business is the hero product and I know you are focused on calling Sku's, where are you in that S. Ku journey and I just have a quick follow up.

Thanks, Dan.

So from a hero product perspective share of business. It is increasing and it will increase see somebody stays in because what we are doing is we are translating the aspirational power of our brands into the key categories and then increasingly focus on the products that are.

Are the most essential for their consumer.

And they are year around hero products, there are seasonal and hero products and then we can paint.

Seasonal and year round products through our collaboration so youre going to see an increasing share of focus when it comes to our hero products and then where we are on the SKU rationalization, that's been ongoing work as well, but it starts with the focus the way we effectively cut unprofitable.

Reductive Skus is that we start to start when we build the assortment to focus on the hero price and then we look at the ongoing demand from the assortment we have in my experience over the years there is that.

We continuously do that in a systematic way we can cut we can keep cutting unproductive skus. So every product needs to have an intent that goes into online and then for fall as I mentioned, we are cutting 20% of the assortment. So.

It sounds a lot, but it's just the beginning because we have a history of over producing skus and 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 those.

<unk>, two skus that really matters to win with the consumer.

Got it and then on the digital side.

Is it all it has been accretive any change to the level of digital accretion as it is maintained at this 25% right now.

Dave I would 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. So we're up against that in Q2. So we're pleased that we're at least we're able to maintain that 25% overall digital penetration.

Even with this year just stores really reopened it a lot more traffic. So we're pleased about that and if we look at Q3 Q4, we see our owned and operated continue to grow we see all the third party commerce continued to grow in E Commerce overall as a.

Penetration over the next few years will continue to grow the fastest.

Thank you.

We will take our next question from Brook Roche with 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 the 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 are seeing industry wide with lower promotions and as you look into the into next year.

How much of the strength do you think will be sustainable into future years.

Yes.

Thank you Brooks, so starting with we have a geographic component with the strength of international for sure and then on top of that in each region. Each brand, we drive pricing power, we drive pricing power up so we drive margin and gross margin expansion through our hero.

Product focus so so it's a combination of there is a geographic effects, but the most important from a long term growth perspective.

Doug.

The gross margin rate improvement in each brand in each region and when we look ahead for 2022, we are facing some headwinds when it comes to cost of goods <unk> AUC.

And from raw material prices going up and affecting us just like everybody else, but.

Even when we include that we are net net positive of continuing to drive margin expansion.

Thank you and just a follow up on.

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 this success is a blueprint for some of the other regions can you talk to maybe the one or two most important.

Bonus and that blueprint that you're translating into North America, and the timeline for France for seeing some of that success materialize.

Yes.

Happy to.

If I were to just highlight.

A few drivers.

Europe obsession on brand and consumer is 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 and that's something that.

They execute really well and thats, what I referred to in that we are seeing.

Similar strength in Asia under the surface because of the Covid effects in Q2, but we are seeing the same type of effects positive performance coming out of Asia, and China and then that's where we have the most work to do in North America, starting with the domestic consumer so we still have this lingering.

Tourism negative tourism effect for a while.

But once 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 and then we have the benefit of the international tourists coming back.

Thank you.

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

Thank you good morning.

I wanted to focus on marketing for a minute you spoke about the increased investment in the second half is there a tale to that toward a particular brand or geography, and then how does your marketing plan changed now that the digital penetration has remained so high.

Yes, so thank you Lorraine so from a marketing perspective.

We are increasing our marketing investments in the back half as Mike mentioned in his remarks.

Both brands and across regions, because we see the cost of it we are now an accelerated recovery phase.

And we see the consumer coming back and the marketing is focused on the key cultural moments. So now we're starting to move into.

Fall and then we are rapidly going to come in to transition into holiday and dose holiday momentum in North America Asia and Europe is what we are backing off with <unk>.

Marketing and it's a mix between digital marketing.

E Commerce and marketing to drive to our brick and mortar sales as well.

One aspect that we see as driving.

Increasing engagement is to collaborations.

As I mentioned in my prepared remarks, and we are just in the beginning of that and when we look at Calvin and Tommy.

Two of the most iconic global power brands in the sector they in themselves.

As a platform for creativity and Thats, what we see with Heron, Preston for Calvin Klein or the latest Romeo hunks.

Mr. Hilfiger connected us two we see that the connection between our iconic brands and external creativity.

It's really powerful to drive engagement with the consumer.

Thank you.

Alright, and we will take our next question.

Yes, and this would be our last question.

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

Okay fantastic. Thanks, so much for squeezing me in.

Stefan I was very interested in your comments on Asia I mean, it's very clear looking at the Europe results that the performance there is just fantastic and well above expectations.

Sounds like Youre, feeling quite hopeful about the improvement in execution in Asia.

And I wanted to know if you could just talk to us a little bit more about what is changing there.

How.

Let's say if we can look through.

The COVID-19 volatility here over the next quarter or two.

What are you thinking about kind of medium term strategy to grow in that geography. Thanks, so much.

Yes. Thank you Kevin So yes. So we are optimistic when it comes to Asia and what we're seeing.

Again below the surface that we're seeing that increased focus and connecting our brands to where the consumer is going in Asia and with a special focus on China.

We are super charge in digital and that is paying off and we are increasing our focus on winning with products through pricing power and that is paying off and then we see.

Further improvements that our management team there is doing successfully which is to plan and buy inventory closer to demand. So they have been able to.

Be much more flexible now given that we have been hit by Covid resurgence in Asia.

Feels like more than any other region over the last quarter and they have been able to navigate that really well. So it's just an increased focus on the accelerated recalibrate priorities and our teams, they're coming together and executing really well and that's where the similarities between the Europe blueprint and the and the <unk>.

And it's getting closer and we see more of that because we can take away the COVID-19 effect and so that gives us the confidence long term.

Fantastic, that's great and just one follow up on the inventory if I could.

Wondering if there is a good way for us to think about how much inventory you.

We'll be able to take out of the system compared to let's say 2019 levels. So if.

If we think about a future year, when you would get back to the.

The nine 4 billion.

And in revenue.

Would you be able to generate that $13.0 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.

Yes.

We won't be able to give you the specific numbers, but what we will be able to give you is that our.

Our our focus is very clear which is to drive.

Inventory decisions, both how we plan inventory and how we buy inventory closer to demand.

And will throughout the quarterly update to give you updates on how what kind of inventory in relation to sales levels, we will receive but it's it's clear to all of us that we have a lot of value to be created from that and we are already on it but it's early days.

Over time, we will be able to share exactly what that will look like.

Thanks, so much.

And with that we.

Well, thank you and look forward to connecting with you next quarter.

And that does conclude todays presentation. Thank you for your participation you may now disconnect.

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

Thank you operator, good morning, everyone and welcome to the PVH Corp, second quarter 2021 earnings conference call. This webcast and conference call is being recorded on behalf of PVH and consist of copyrighted material. It may not be recorded rebroadcast or otherwise transmitted without pvh's written permission.

Our participation in the question and answer session constitutes your consent to having anything you say appear on any transcript or replay of this call.

The information to be discussed includes forward looking statements that reflect pvh's view as of August 31, 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 these risks and uncertainties.

Z P D. It's just 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 operation. 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 future results of operations could differ materially from historical practices and the bulk of our current descriptions estimates and suggestions.

PVH does not undertake any obligation to update publicly any forward looking statement, including without limitation any estimate their suggestions 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 2012.

One earnings release, which can be found on www dot PVH dot 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.

Good morning, and thank you for joining with me on the call today are Mike Shaffer, CEO and CFO, Dana Perlman, EVP, Chief strategy Officer, and Treasurer, and Jim homes, our corporate controller, who we announced will be interim sees.

Also effective September test.

Let me start by sharing that we delivered a very strong second quarter performance.

Significantly outperformed our clients from a revenue EBIT margin and EPS perspective.

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 second quarter.

Very strong first half 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.

Our performance was underpinned by meaningful gross margin expansion and operating expense efficiencies, which drove significant to EBIT margin expansion of several 100 basis points compared to 2019.

For several quarters now we have shown great progress in driving an accelerated recovery 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 and 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 were.

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 all certainties, including markets and supply chain disruptions.

I will now share some of the key proof points on how we are execute our accelerated recovery priorities.

Mike will then share more of the financial details.

First we have continued to supercharge e-commerce with digital revenue growing approximately 35% in the quarter.

Strong results, particularly when compared to our outside 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. This accelerated demonstrating our increasing strength in connecting with the consumer across channels.

Next we are driving product strengths across all brands and regions the.

The trends we saw last quarter have continued with consumers excited to come out of Covid restrictions and adopting a hybrid lifestyle tourists and increasing mix of wearing occasions. This is still very much grounded in our 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, polo's hoodies active sneakers and the 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 products silhouette in key product categories.

Through this work we saw an improvement in AUR during the quarter, including double digit increases in some of our biggest investments.

We also continued to cut more unproductive skus, including a 20% cost on average for full 2021.

Through this work and 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 and 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.

This has already enabled an increased focus on Calvin and Tommy which are higher return businesses with global growth potential.

So turning to our regional update while each of our regions in varying stages of recovery, we drove performance significantly above plan for both revenue and profitability.

Let me start with Europe at this time.

Our European team delivered another quarter of exceptional performance through very strong execution of our accelerated recalibrate priorities.

Both Tommy and Calvin performed significantly above plan, including double digit growth versus pre pandemic levels.

The strength in our Europe business. It's a very good example of the kind of performance, we were able to drive when we execute really well and its office of proof points and a blueprint for what's possible in our other regions as well.

Across both brands, we are winning with the consumer driving brand relevance through leaning into the strength of our hero products and we continue to supercharge, our digital and our omnichannel capabilities.

Building on our success in the first quarter.

As Lockdowns are lifted we saw great demand for our products both in our own channels as well as in wholesale.

We delivered strong revenue trends supported by significant margin expansion, which included gross margins of Bob 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 the backdrop of stores reopening driven by our expanded business with digital pure players Europe represents our highest ecommerce penetration well above the company's overall rate of 25% in our D to C.

Channel, we continue to accelerate our omnichannel 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 reopen highlighting the strength of our product in the marketplace, we drove higher conversion stronger full price sell throughs and <unk>.

In addition to strong consumer demand drove significant core replenishment and our spring and summer products sold through much faster than expected, we transitioned earlier to pre for collections.

<unk> in our future order books across both brands continue 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-19 resurgence this 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 in our plants led by China.

Despite the current Covid related challenges what excites me. The most is the strength, we're 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 <unk>.

Same hero product focus.

China remains a significant growth opportunity for both Tommy and Calvin as we continue to invest in the markets. We are driving brand heat and relevance through our integrated marketing and capsules around key shopping moments, including $24.0, 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 AUR and continue to drive comparable store sales increases in retail stores.

And thus, we supercharge ecommerce, we're 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 a very lean as we continue to focus on buying closer to demand.

Overall, while we are still navigating COVID-19 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.

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 and made up 30% to 40% of our total business in the region.

Our north American teams are leaning into what's within our control.

Focusing on the domestic consumer supercharging ecommerce and driving product strength with AUR and margin improvements.

And I am pleased that we saw a number of green shows 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 AUR were.

We're also better optimizing inventory across our channels and improving our ability to react to demand changes for.

For example, in Canada, where the countries reopening has been slower than other markets. We proactively re directed inventory to the U S.

Overall in North America, we have a lot of work still to do and we're focused on building the business for long term growth. This work is focused on the same key value drivers that enabled 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 and Carter building brand awareness the campaigns celebrated defining moments connecting to global LGBTQ IAA plus communities with a diverse international cast.

It resulted in global reach that was up over 30% on last year. It drove a 300% increase in traffic to our sites and delivered strong product sell through and driven by hero underwear products with limited edition pride color ways.

In the spring we launched the brand's first this final collaboration with Heron, Preston, which has been very well received by the consumer this quarter. We will release, our 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, we've 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 kit, which taps into the power of Calvin with a gen Z audience.

Moving on to Tommy Hilfiger Global brand Health Kpis for Tommy also remained very strong.

The expansion of our purpose oriented product offer continues to resonate with consumers with more than 50% of the global summer pre fall collection 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 Iqos TARP hospitals capsule, which drove very strong engagement of sell throughs.

The brand also launched collaborations that amplified our efforts to increase opportunities and visibility for under represented communities within the fashion and apparel industries.

In July we launched the first collaboration with a non gendered capsule featuring India more.

The brand also launched a capsule with emerging Brooklyn define our role Neil Hunn following his mentorship with Mr. Hilfiger.

The capsule reimagine its iconic Tommy pieces, we just focus on outerwear and is available on Tommy Dot com as well as to US an exclusive partnership with Selfridges.

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.

Our increased focus on winning with the consumer through our two global power brands, Calvin Klein and Tommy Hilfiger is driving results.

Early days in building, our next growth chapter and I continue to be very optimistic for the future as we lean further into our accelerated recalibrate priorities leveraging our core strength and continuously following the consumer to position PVH for sustainable long term profitable.

Growth.

And before I hand, it over to Mike. Since this is mikes last earnings call I would like to thank him again for his contributions of nearly 30 years to PVH.

We are grateful for his guidance and leadership over the years.

Im also pleased to introduce Jim holds 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 to build our strong financial Foundation.

So with that I would like to hand, it over to Mike.

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 second quarter 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 second quarter results to the previous year. It is important to remember that during the second quarter of 2020, virtually all of our retail stores and the majority of our wholesale customer stores.

For clothes globally during the first month of the quarter and we're operating at a significantly reduced capacity for the remainder of the quarter as a result of the pandemic.

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 significant traffic improvement in brick and mortar this year.

Tours have reopened capacity restrictions have lessons.

Our retail stores face some continued pressure during the second quarter, 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.

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 or 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.

Our inventory is lean down 13% as of the end of the quarter compared to the prior year.

Earnings per share was $74.0 on a non-GAAP basis for the second quarter of 2021 compared to <unk> 13 in the prior year period and $12.0 in 2019.

This beat the top end of our previous guidance by a $55.0

The beat was primarily due to the business outperformance largely in Europe for $20.0, as well as the favorable impact of taxes for 35.

Of which 25 census 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.

Outlook does not contemplate any significant new store closures, new lockdowns or extensions of current lockdowns beyond what is already known.

In addition, the 2021 outlook contemplates higher freight and other logistic costs in the second half of the year to mitigate delays of approximately four to six weeks on average for certainty 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 on contemplated 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, we expect North America North America to continue to face the ongoing challenge of reduced international tourism, which is the source of the significant amount of revenue and not.

<unk> 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% to 28% as reported and approximately 24% to 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 the higher margin international businesses, making up a larger portion of total revenue.

While we continue to manage our cost structure proactively by reducing operating expenses and reallocating resources to support strategic growth areas of the business, we expect higher expenses in the second half of the year than the first at the.

The incremental expenses in the second half include increases in marketing and other investments, which were planned in the second half of the year to coincide with when we expected our stores to be mostly open and to drive momentum as we hopefully exit the pandemic.

We expect our EBIT margin will be nearly flat to 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.

However, as compared to the first half of 2021, our EBIT margin in the second half will be impacted by the incremental expenses I noted previously as well as freight costs were approximately 35 cents to mitigate supply chain delays.

We expect our interest expense decreased in 2021 to approximately $105 million compared to $116 million. In 2020, we have made $200 million of voluntary debt repayments in the second quarter, bringing our total for the first half 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% to 18% with the favorable impact we benefited from in the second quarter largely offset in the second half due to time.

As a reminder, when we think about our tax rate by quarter. The fourth quarter 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 $58.0

Which is an increase compared to our previous guidance of approximately $56.0

And compared to a loss per share of $2118.0.

The beat was primarily due to business outperformance largely in Europe for $86.0, along with an improvement in taxes of <unk> 10, and an improvement of <unk> from reduced interest expense.

For the third quarter, our revenue is projected to increase 11% to 13% both as reported and on a constant currency basis.

Third quarter non-GAAP earnings per share is expected to be in the range of $96.0 to $2 compared to $33.0 in the prior year period.

We expect interest expense to be about $25 million and taxes to be in the range of 26% to 28% in the third quarter.

And with that we'll open it up for questions.

Thank you I 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 speaker phone. Please. Thank you for giving me an 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.

Great. Thank you good morning, and congratulations on the second quarter.

My question Stefan is for you the second quarter operating margins just record level would love to hear a little bit more about the cost discipline that youre seeing in the business across the different work streams and then I recognize in the back half you spoke to added freight and marketing, but if sales were to come in ahead of plan could you just talk about your philosophy around.

Flowing through the upside versus reinvesting.

Yes, Thank you erinn so.

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 thus we are able to sell through our products start to hit.

AUR and we see that continue this is a multiyear journey.

We drive brand relevance through focusing on winning with the product and being very focused on the key categories such matters to most to the consumers.

And then we'd be able to Europe products around that and then we connect those hero products with their consumers increasingly tighter and tighter to where the consumer wants to shop channel wise and Thats, where we have doubled down on E. Commerce. So we see that continue on and operating efficiency.

The other driver of the EBIT improvement in Q2, we see that it is.

Coming from.

Being increasingly focused on investing in accelerated recovery priorities and looking at efficiencies that we can free up that's outside of that so you will see us continue to drive gross margin rate improvements all the time and you will see us continue to drive operating efficiencies over time.

Hi.

Great. Thank you and then I guess Relatedly, if we zoom out and look at 2022. It sounds like you already have some good visibility on European Order book is up double digits. I know there are several puts and takes with just lapping stimulus as well as supply chain that could linger, but how are you thinking big picture about 'twenty two just given those comments on that.

Gross margin as well as your operating efficiencies that you expect to continue.

Yes.

We continue to lean into our accelerated recovery priorities and seeing the effect this year above that and continue to see effect when we lean into the first one being supercharging ecommerce and thats when the markets open up does increasingly encouraged.

Come back to a brick and mortar states about super continuing to Supercharge E Commerce for 2022 to win in the market today, it's across channels, but being digitally and then continue to drive product strength and continued to drive efficiencies.

Erinn. This is Jim I would just add as implied by our guidance for 'twenty. One we're pretty much in line. Our operating margins are in line with 2019 pre pandemic levels. So we're obviously pleased with the with <unk>.

Sure Jack trajectory that we're on now, but as we look to next year, it's really in the early stages of our planning process. So it's premature to provide more details on that at this time.

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

Thank you Erinn.

Yes.

We will take our next question from Bob <unk> with Guggenheim.

Hi, good morning.

Mike It's interesting to see you did all the script, but Jimmy answering all the questions. It's definitely a new era for us here, but.

He's got the heavy lifting now.

Jim I just had a question for you.

And then I have a follow up first to farm, but.

Jim can you talk a little bit on inventory levels.

Inventory levels were down at the end of Q2, how youre thinking about inventory in Q3, and Q4 sort of how you are planning it.

Deliveries in <unk> and.

Your ability to actually get the receipts and everything from that perspective that would be helpful. Thanks.

Sure Bob a couple of things to point out first is the.

The exit of our heritage business is having a benefit on the inventory line one from exit exiting the heritage retail business, but also just the way the held for sale accounting works.

We closed on selling our heritage wholesale business. So those inventories at the end of Q2.

On the inventory line, so we havent been that benefit from that.

But apart from that our current inventory levels are lean.

I'd mentioned, partly our disciplined.

Inventory management.

Of buying closer demand and cutting deals.

Reductive skus.

Having a benefit.

So at the end of Q2 as we've called out we are experiencing supply chain delays four to six weeks, which is also benefiting a little bit up little bit as we move through the second half.

We call that we're going to be incurring about 35 cents worth.

Airfreight expense really to make sure that the inventories are getting or keeping in line with our sales forecast and Bob can you. Just 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. So if you 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.

Yeah.

Yes, just a bit Bob just two.

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 to create value from products 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. So we.

We take this as an opportunity to learn as a team to say, how do we better plan and buy inventory to demand and how can we have an inventory level at an average thats lower in relation to sales than what we what we historically have so this last this past quarter.

A good example.

That we can sell more at a higher pricing power with the lower inventory levels. So that is something again, it's a multiyear journey, but this quarter was a proof point.

How much of a flow through down to EBIT rates, we can have from lower inventory to develop.

Great and if I could just one more question.

Can you talk a little bit about the expansion and the Kohl's for Tommy and Calvin sort of how thats going how the market's receiving it.

Absolutely Bob.

So so far we launched with Calvin underwear of calls just a few weeks ago.

So it's very early read early days, but so far very strong start.

Both from a consumer demand and pricing power perspective.

Great. Thank you very much Mike Congratulations best of luck thanks for everything.

Thanks, Bob.

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

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

Jim welcome to the group.

Just fine.

Wanted 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 we looked at pre Covid. The combined international EBIT margins were in that 13, five almost 14% range.

Again, Europe being the biggest piece they look like Theyre running about 500 basis points above 2019 in the first half.

You said the order books are positive for spring summer double digits can you talk a little bit about how sustainable margins are that we've seen in the international business in the first half of this year as we think about where 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.

Yes, Thank you Michael.

When we look at the second quarter. It is just another proof point on the strength of our European team's execution and.

And it's the kind of strength that forms and I mentioned it in my prepared remarks.

So blueprint for us for what good looks like when we execute Calvin and Tommy really really close to the consumer.

They are operating with.

Very strong consumer focus very strong brand focus that that translate into stronger and stronger product assortment and from a channel perspective, David dye chief moving rather consumer it's moving and they do it with increased pricing power across the channels. So I am very confident and we are very confident.

And their ability to continue to win with the consumer in Europe and continued to expand so we see it.

As a multiyear growth opportunity.

Asia.

Asia, just just Mike mentioned as well from an international perspective.

We are very excited by.

The improvement in execution by our Asia team, but we can't fully see that in Q2 because of the COVID-19 disturbances, but under the surface. We can see it. So they have the same focus there in connecting with the consumer is going really starting to supercharge ecommerce.

And driving they also today, even though the COVID-19 discharges just under the surface drive pricing power lower discount rates higher sell throughs. So.

So it's a multi year growth opportunity from strength in both Europe and Asia.

Yes, Mike Michael I, just wanted to add to the second quarter did benefit somewhat in Mike's notes. He mentioned, we plan to marketing more second half weighted than first half. So that is benefiting the operating margins as well the first month of the second quarter. In May we did have a lot of store closures in Europe. So we don't have that expense base.

As well as you know still receiving rent concessions in some government subsidies on payroll did benefit Q2.

Okay.

And then maybe I could just follow North America, I would love to hear 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.

Just more curious where that where that business goes.

Until we know the pace and timing of tourism coming back.

<unk>.

Yes, thanks, Michael So yeah.

Yes, there is a big and real tourism effect in a normal year as I mentioned, 30% to 40% of the business as tourists are now mostly temporarily gone. So what we're doing there with tricia's leadership. She is still relatively new coming in but I am excited by seeing her income.

<unk> focus and with the teams on the domestic consumer.

Focus on executing the accelerated recovery priorities across both Tommy and Calvin so.

Proof points this quarter as we see digitally digital e-commerce owned and operate it really taking off and we see Calvin being ahead, there and those learnings we can share and we are sharing with Tommy immediately.

We see that we are starting to lean in even if it's early days.

On the hero product execution. So we see AUR is up we see discount rates down. So we our focus is on the domestic consumer and at the same accelerated recovery priorities as we see in Europe and in Asia, So but from a regional.

Perspective from our three regions, we have the most work to do in in North America, What excites me today, though is that we're starting to lean into the area that really matters and starting to connect with that domestic consumer and really leverage the strengths we have in Calvin and Tommy in North America the underlying.

<unk> strength with Calvin and Tommy.

Is for us to improve our execution.

Thanks, a lot guys congrats again.

Thanks.

Our next question comes from Jay sole with UBS.

Great. Thank you so much.

Let's 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 is four to six week delays in getting product can you just give us a little bit more information about how you are managing through this because it sounds like youre still able to get the units that you need.

And probably in time for holiday because of airfreight is that the case and how are you managing that because it seems like you're doing a better job and a lot of companies being able to make sure that you get the inventory you need for the key seasons.

Yes, so so.

We have been doing a really good job through our sourcing and supply chain. Some Brian <unk> regional teams to really stay on top of what's happening because it's changing week by week. So today as we mentioned we have four to six weeks.

Rich.

The delays and we are able to prioritize our key categories and hero products. So we have inventory and thats included in our guidance. So the guidance. We are taking up for the rest of the year includes the supply chain disruption we are seeing right now yes.

Just to add you know as 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 were able to airfreight that in.

Fairly quickly to sort of keep us in line.

Understood maybe and then we can follow up just on the impact of the Airfreight expense I think you said its going to 35.

Versus it was <unk> 19 cents before.

Can you just talk about how that what the impact was to the overall margins in Q2 from just airfreight and overall supply chain congestion and maybe what the incremental change will be in Q3, and how that will impact gross margin and SG&A.

Yes, Jay through Q2 with it it's not very I mean, it was very minimal basically.

And then if you were to take.

So to speak in Q3, it's probably worth about.

It's probably worth it.

2000, 2030 basis points or so.

It's pretty much spread evenly on loss for the second half of the year between the two quarters.

Got it okay. Thank you so much.

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

Good morning, everyone and congratulations Mike.

Perfect to work with you.

Stefan you've mentioned a lot of times about the hero product what percentage of the business as the hero product and I know you are focused on calling Sku's where are you in that SK. Your journey and then I just have a quick follow up.

Thanks, Dan.

So from a hero product perspective share of business.

Increasing and it will increase see somebody stays in because what we are doing is translating the aspirational power of our brands into their key categories and then increasingly focus on the products.

Are the most essential for their consumer.

And they are year around hero products, there are seasonal and hero products and then we can paint.

Seasonal in Europe around products through our collaboration so youre going to see an increasing share of focus when it comes to our hero products and then where we are on the SKU rationalization, that's been ongoing work as well, but it starts with the focus the way we effectively cut <unk>.

Active skus is that we start to we start when we build our assortments to focus on the hero price and then we'll look at.

Ongoing demand from the assortment we have in my experience over the years. There is that when we continuously do that in a systematic way. We can cut we can keep cutting unproductive skus. So every product needs to have an intent that goes into online and then for fall as I mentioned, we are cutting <unk>.

2% of the assortment so.

It sounds a lot, but it is just the beginning because we have a history of over producing skus and 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 skus that really matters to win with the consumer.

Got it and then on the digital side digital it has been accretive any change to the level of digital accretion as it is maintained at this 25% right now.

No Dave I'd, 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. So we're up against that in Q2. So we're pleased that we're at least we're able to maintain that 25% overall digital penetration.

Even with this year the stores really reopened it a lot more traffic. So we're pleased about that and if we look at Q3 Q4, we see our own and operated continue to grow we see all the third party E. Commerce continued to grow in E Commerce overall.

Penetration over the next few years will continue to grow the fastest.

Thank you.

We will take our next question from Brook Roche with Goldman Sachs.

Thank you good morning.

Wanted to dig in a little bit more on the gross margin. The company has been showing some strong gross margin momentum.

Fueled by.

By AUR can you provide some additional color on the components of the strength how much of a benefit are you seeing between geographic channel and product mix shift on that hero product category momentum versus what you are seeing industrywide with lower promotions and as you look into the into next year.

How much of the strength do you think will be sustainable into future years.

Thank you Brooks, so starting with we have a geographic component with the strength of international for sure and then on top of that in each region. Each brand, we drive pricing power, we drive pricing power up so we drive margin and gross margin expansion.

Through our hero product focus so so it's a combination of there is some geographic effects.

Most important from a long term growth perspective.

Sure.

The gross margin rate improvement in each brand in each region and when we look ahead for 2022, we are facing some headwinds when it comes to cost of goods.

We'll see.

And from raw material prices going up and affecting us just like everybody else, but.

Even when we include that we are net net positive of continuing to drive margin expansion.

Thank you and just a follow up on 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 this success is 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 France for seeing some of that success materialize.

Yes.

Happy to Bruce so.

If I were to just highlight.

A few drivers.

Europe obsession on brand and consumer is 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 and thats something that they.

Execute really well and thats, what I referred to in that we are seeing.

Similar strength in Asia.

Surface because of the Covid effects in Q2, but we are seeing the same type of FX positive performance coming out of Asia, and China, and then that's where we have the most work to do in North America, starting with the domestic consumer. So we still have this lingering tourism negative tourism effect for a while.

But once 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 and then we have the benefit of the international tourists coming back.

Thank you.

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

Thank you good morning.

I wanted to focus on marketing for a minute you spoke about the increased investment in the second half is there a tilt to that toward a particular brand or geography, and then how has your marketing plan changed now that the digital penetration has remained so high.

Yes, so thank you Lorraine so from a marketing perspective.

We are increasing our marketing investments in the back half as Mike mentioned in his remarks.

Across both brands and across regions, because we see the cost. So we are now an accelerated recovery phase.

And we see the consumer coming back and the marketing is focused on the key cultural moments. So now.

Starting to move into.

Fall and then we are rapidly going to come in to transition into holiday and those holiday moments in North America Asia and Europe is what we are backing off.

Marketing and it's a mix between digital marketing for.

<unk> e-commerce, and marketing to drive to our brick and mortar sales as well.

One aspect that we see as driving.

Increasing engagement is to collaborations.

As I mentioned in my prepared remarks, and we are just in the beginning of that and when we look at Calvin and Tommy as two of the most iconic global power brands in the sector. They in themselves work as a platform for creativity and Thats, what we see with Heron, Preston for Calvin Klein or delay.

Romeo Hunt.

Mr. Hilfiger connected us two we see that the connection between our iconic brands and external creativity.

And it's really powerful to drive engagement with the consumer.

Thank you.

Alright, and we will take our next question.

Yes. So this would be our last question.

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

Okay fantastic. Thanks, so much for squeezing me in.

Stefan I was very interested in your comments on Asia I mean, it's very clear looking at the Europe results that the performance varies.

Fantastic well.

Hi, Brian.

The expectation, but it sounds like youre feeling quite hopeful.

The improvement in execution in Asia, and I wanted to know if you could just talk to us a little bit more about what is changing there.

How.

Let's see if we can look through the.

The COVID-19 volatility here over the next quarter or two.

What are you thinking about kind of medium term strategy to grow in that geography. Thanks, so much.

Yes. Thank you Kevin So yes. So we are optimistic when it comes to Asia and what we're seeing.

Again below the surface is that we're seeing that increased focus and connecting our brands to where the consumer is going in Asia and with a special focus on China.

We are supercharging and digital and that is paying off and we are increasing our focus on winning with products through pricing power and that is paying off and then we see.

Further improvements that our management team there is doing successfully which is to plan and buy inventory closer to demand. So they have been able to.

Would be much more flexible now given that we have been hit by Covid resurgence in Asia.

Feels like more than any other region over the last quarter and they have been able to navigate that really well. So it's just an increased focus on the accelerated recovery of priorities and our teams there are coming together and executing really well.

And that's where the similarities between the Europe blueprint.

And the Asia execution is getting closer and we see more of that because we can take away the COVID-19 effect and so that gives us the confidence long term.

Fantastic, that's great and just one follow up on the inventory if I could.

I'm wondering if there is a good way for us to think about how much inventory.

<unk>.

We'll be able to take out of the system compared to let's say 2019 levels. So.

If we think about future year, when you would get back to the nine 4 billion.

And in revenue.

Would you be able to generate that $13.0 billion on 5% less inventory, 10% less inventory I'm. Just wondering how we should think about the magnitude of inventory efficiencies you expect to achieve.

Over the next couple of years. Thanks, so much.

Yes.

We won't be able to give you the specific numbers, but what we will be able to give you is that our.

Our our focus is very clear which is to drive.

Inventory decisions, both how we plan inventory and how we buy inventory closer to demand.

And will <unk>.

The quarterly updates give you updates on how what kind of inventory in relation to sales levels, we will receive but it's clear to all of us that we have a lot of value to be created from that and we are already on it but it's early days.

Over time, we will be able to share exactly what that will look like.

Thanks, so much.

And with that we.

Well, thank you and look forward to connecting with you next quarter.

And that does conclude todays presentation. Thank you for your participation you may now disconnect.