Q2 2022 PVH Corp Earnings Call
Good day and welcome to the PVH second quarter. So I just wanted to see the earnings call. Today's conference is being recorded at this time I would like to turn the conference over to shell Cheryl Friedman Senior Vice President of Investor Relations. Please go ahead.
Thank you operator, good morning, everyone and welcome to the PVH Corp, second quarter 2022 earnings conference call, leading the call today will be Stefan Larsson, PVH, as Chief Executive Officer, and <unk> Chief Financial Officer.
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 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 information to be discussed includes forward looking statements that reflect pvh's view as of August 32020 to future events and financial performance. These statements are subject to risks and uncertainties indicated in the company's SEC filings and our Safe Harbor statement included in the press release that is subject of this call. These risks and uncertainties include pvh's right to change its.
<unk> 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 global inflationary pressures and the war in Ukraine continued have impacts on the Companys business cash flow and results of operations.
There is significant uncertainty about the duration and extent of the impact of these events.
Dynamic nature of the circumstances means what is said on this call could change materially at any time.
Therefore, the operation of the company's business and its future results of operations could differ materially from historical practices and results or current descriptions estimates and suggestions.
<unk> does not undertake any obligation to update publicly any forward looking statements, including without limitation any estimates or 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 2022 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 Stefan Larsson.
Thank you Cheryl and good morning, everyone and thank you for joining our call today I want to start by saying that despite the macro challenges. We're all facing we have many strong proof points on the progress we are making in executing the PVH plus cloud.
Starting with the underlying strength of our business in the second quarter on an underlying basis, we delivered solid revenue growth of 6% compared to last year, excluding the impact of currency, Russia and the heritage brands divestiture.
Underlying growth speaks to the effectiveness of our strategy and resilience of our two brands, which are two of the strongest most iconic brands in our sector globally. We also had solid profitability with non-GAAP EPS for the quarter above guidance.
This quarter started strong with the trends we experienced in the first quarter continuing through May the macroeconomic environment, then soften in June as high gas prices and other inflationary pressures began to affect consumer discretionary spending it was most pronounced for us in the middle income and value consumer nor.
America, but we also experienced some pullback youll certain European markets.
Consumer demand has stabilized in July although at reduced levels, we experienced in June and we are now planning prudently for demand to remain at these lower levels for at least the remainder of the year and we have revised our outlook accordingly.
Importantly, we are still projecting underlying high single digit revenue growth for the full year driven by continued strength in our direct to consumer business led by the international regions.
As a management team, we continue to intensify the execution of our PVH plus plants, where we are in the early days of a multiyear journey to outlaw Calvin Klein Tommy Hilfiger as full potential we developed the PVH plus plan to compete to win in the new normal because there is no such thing as normal.
Operating conditions anymore. Our plan is about operating in a way that helps us compete and win long term regardless of macro challenges.
I want to start by thanking our teams around the world for their hard work and dedication through our extraordinary talent that we bring the PVH plus plan to live step by step for the consumer.
Our financial performance.
As we navigate the current business conditions, we have not one but two of the most iconic global brands that resonate deeply with consumers around the world. We have the PVH plus plan to deliver brand D to C and digitally led sustainable growth overtime, we're taking concur.
Steps to further strengthen our financial performance, particularly in North America.
We remain committed to achieving the 2025 targets, we presented at our Investor day four months ago.
More than ever across both our brands. The five key growth drivers of our PVH plus plan provided a clear road map to execute profitable long term growth and value creation.
Our first growth driver is about winning with products and it's about intensifying our focus on the most important product categories for our consumers, where we have the right to play to win and where every season, we will have stronger and more focused hero product offering with the best essential.
Products in the market.
During the quarter, we saw strong performance in key hero product categories in men's polo set Tommy Hilfiger, and our iconic underwear and denim categories of Calvin Klein.
We're also continuing to see positive momentum in refined our smart casual categories like woven shirts dresses and paths as consumers are elevating their apparel more people are returning to the workplace and attending events and we both brands being true lifestyle brands, we are well positioned to.
To deliver on consumer needs ranging from casual to refine.
Our second growth driver is about winning with consumer engagement.
<unk> way, we drive increased customer engagement is by connecting our brands through our hero products with people, who shaped culture in our maturation away.
Two big consumer moments throughout the year you can see the impact of this right now in Calvin Klein through our collaboration with Jenny Kim of the South Korean group Black Pink just 69 million followers on Instagram. She is a big supporter of the brand loves our iconic products and drive big engagement.
Among consumers in Asia and increasingly globally. Tommy is doing the same type of work with Shawn Mendes with strong results and for both brands. This is just the beginning of building a very strong inflows capability that will leverage and multiply each brand's iconic global strength.
We're also creating our own big brand moments and I'm excited that Tommy Hilfiger is returning to the New York fashion week for the first time in three years with an experiential runway event that we'll unveil the latest see now buy now for 2022 collection, while immersing audiences both basically.
<unk> and digitally in a refreshed brand world.
Our third growth driver is to win in the digital marketplace, where we continue to align our channel mix to where the consumer wants to shop, our brands, we delivered solid underlying growth in our digital channel led by our owned and operated business. In addition, our <unk>.
Third party partnerships continue to provide important platforms for our brands globally.
This was important to mention is that this year's performance will reflect consumers coming back to brick and mortar shopping in most regions. After a multi year apsos, including lockdowns during the height of the Covid. However, we still expect that the digital channel has the strongest long term trajectory.
Growth over the coming years across both owned and operated and third Party E Commerce channels and digital continues to represent approximately 25% of our revenue.
Our fourth growth driver, it's about developing a demand in data driven operating model to enhance the speed and agility of our supply chain. Even though we are early days in this initiative, we already have some significant international proof points, a major portion of our European bestseller.
Our core replenishment with short lead times to match demand in Asia for the first time. This season, we were able to keep 15% open to buy these are just a few important first steps that we will scale and enhanced globally over the coming years.
In North America, we are continuing to work through inventory issues driven by both external factors and internal execution challenges. We've previously shared with you that residual pandemic related supply chain issues were the primary driver of inventory shortages in our North America DTC business.
Particularly in our stores, we are still working through those issues and they are still pressuring retail inventory levels. While we are still experiencing inventory shortages in our North America retail channel, we ended the quarter with excess inventory in certain categories within our wholesale business as consumer.
Spending soft and we have a clear strategy to strategically manage inventory through the remainder of the year effect will give you more details around that.
Our business in North America has also been an overreliance on the international consumer and ethanol sufficiently prioritize the domestic consumer.
These issues have also made crystal clear the need to simplify our execution, especially North America within our supply chain globally.
As such we are evolving our leadership team to the needs of the execution of the PVH plus plan and the changing environment and we have made two significant leadership announcements.
As we recently announced Davis will be joining us as global Chief supply chain Officer, David Joyce PVH from each of them wherever he has served as head of global supply chain and brings a wealth of knowledge and experience in managing best in class Global supply chains. We're excited that David is joining the team.
Later this year and we look forward to have them hit the ground running and helping us make our supply chain our competitive advantage.
We have just announced that Trish Donnelly CEO of PVH America, and Calvin Klein Global will be leaving the company to pursue other opportunities. She will remain in an advisory role through November 30 to assist with the transition we are deeply grateful to Trish for her commitment hard work and dedication.
Leading America and Calvin Klein.
We believe it's critical to strengthen our ability to execute our PVH plus plan for the Americas and continue growing the Calvin Klein brand globally.
We therefore plan to separate Tricia responsibilities and hire two leaders with different skill sets, who will be able to devote our full attention to each of these key roles.
In the Americas, we need a very strong leader, who can help us unlock the full potential of both Calvin and Tommy in the North America market and especially when it comes to winning more with the domestic consumer.
At the same time, we're continuing to expand the Calvin Klein brand around the world. This requires a brand visionary whose singular focus is realizing the brand's significant global growth opportunity.
We have launched a global search process to identify the right leaders for these roles in the interim I will lead PVH Americas, and the global Calvin Klein business working very closely with leadership and teams from both organizations.
Lastly, our fifth growth driver, it's about driving efficiencies and investing in growth.
We are proactively managing what's within our control managing the cost base is critical at Investor Day, We spoke about how we will work differently and more efficiently amount a shower expenses.
This effort includes reducing our people costs in our global offices by approximately 10% on a net basis by the end of 2023 in order to streamline our corporate organization drive efficiencies have fuel strategic investments in line with the PVH plus plus I want to emphasize.
<unk> that our focus on managing expenses is to simplify how we work stopped doing work that doesn't align with the PVH plus plan and better leverage our global scale.
As we generate those savings were committed to reinvest a portion of them in PVH plus growth drivers such as product consumer engagement digital and supply chain capabilities.
Now turning to our regional performance and how we are connecting our PVH plus plan across each region I wanted to start with Europe .
We continue to experience positive brand momentum even ask the European consumer is showing some signs of softening our business across both our brands in Europe remains strong and growing our European business is now 25% larger than pre COVID-19 levels in local currency with <unk>.
Significantly higher profitability during the second quarter, we continue to achieve healthy year over year growth on an underlying basis adjusting for the impact of our exit from the Russian market and FX, which have been headwinds to our business for the quarter, we generated mid single digit.
Growth versus last year adjusting for these impacts.
We're seeing continued momentum in consumers returning to stores with traffic up meaningfully compared to last year. There is some bifurcation and the strength of our business between northern and Southern Europe , Our southern European markets continued to show solid business performance, while Germany, our largest market in Europe .
Has been most impacted by macro factors. However, we continue to see underlying growth for the region as I mentioned earlier brand relevance for both Tommy and Calvin remains very high among European consumers, Tommy Hilfiger ranks number two across global lifestyle brands spontaneously.
You mentioned in Europe for both men and women in Calvin Klein continues to be the runaway leader in underwear category that brings huge visibility and constantly engaged as new consumers into the ground. In addition, we're seeing a positive impact on AUR and gross margins from premium positioning two product.
Elevation. This will remain a key priority for both sprouts.
And demand in future order books across brands remained solid with the spring 2023 see some planned up high single digits on top of double digit growth this past year.
Moving on to Asia, we continue to be encouraged by the underlying momentum in our brands across the region and we are pleased with the progress we've made in Asia against the PVH plus plan.
In China, the region demonstrated a 25% year over year growth in the second quarter and this included a 12% headwind for foreign currency.
The resurgence of Covid has continue to pressure sales in greater China, but we are gaining momentum in other markets across the regions such as Australia, New Zealand Southeast Asia also in Japan, and South Korea, we grew at healthy rates compared to last year.
<unk> the region, we build on the strong underlying performance, we have achieved and remain focused on driving the PVH plus plan execution with a very strong focus on regionally relevant hero products talent and focus on the biggest consumer moments our hero product strategy continues to yield strong results.
With sales up over 300% of like for like categories with sales outpacing inventory.
During 618, the largest selling period of the quarter and China sales increased nearly 40% year over year with strength in both Calvin and Tommy here.
Hero product activations, including underwear, Ts Tolos, where key features of our sale events and include a strong marketing support further elevation of interactive content and supplemental live streaming from stores. In addition E Commerce for Asia grew strong double.
Digits with notable strength in China, and Korea, driven by key volume driving platforms, such as Tmall JD and in addition to rapidly expanding do yet.
E. Commerce also remains significantly underpenetrated relative to the sizable growth opportunity, we have which is a big reason for optimism and a key factor in our strategy. We also increased our investment in our supply chain, including Asia for Asia product sourcing getting us closer to the market.
And closer to the consumer by.
By leaning into the initiatives and core tenants of the PVH plus plan in Asia. We continue to have a long runway ahead to grow both our brands in the region.
Lastly for North America as I mentioned earlier, we are seeing the effects of the weaker macroeconomic environment in North America, which is pressuring consumer discretionary spending and we felt the softening consumer environment. Most prominently in our wholesale channel where performance was below.
Our expectations and our partners have taken a more cautious approach to orders and while there are some signs of improvements in foreign tourism. The absence of most international tourists from Asia remains the headwind we remain in the early phase of our multiyear journey to unlock the significant opportunity we have in this <unk>.
Market. However, our focus on winning more with the domestic consumer is already starting to deliver some positive proof points in our DTC channels, we have driven improvements in positive comps for domestic consumers that continue to improve sequentially, we grew our own and operated stores across <unk>.
Calvin and Tommy by 8% in the quarter and traffic trends for our factory stores outpaced the market in July improved inventory levels of hero products and enhanced store experience stronger execution will translate into an even stronger performance over time.
As we focus on improving our product offering we are seeing encouraging results at stores, where we have a full assortment of the most important product essentials for our consumers our hero products in Tommy Hilfiger stores, we have been strategically repositioning inventory to high volume test stores and <unk>.
During our best stores have appropriate inventory of the Reits hero products and as we pursue this strategy sales in these stores have shown a 20 percentage point positive improvements compared to the rest of chain and control doors.
This shows how our brands and product strategy is resonating with consumers when we play and the right product categories with the right hero products in the right stores and the right inventory levels in front of the consumers then will drive profitable sustainable growth. This also provides a roadmap for driving future growth as we resolve supply.
Chain challenges.
Headed into the fall and holiday we are working to scale. The most impactful initiatives. We have tested it is important that over time, we start to accelerate these green shoots we are growing and build them into how we win with the domestic consumer in North America across both brands and all businesses.
Next I'll share a few key global brand highlights on how we are bringing both brands to life for the consumer beginning with Calvin Klein.
Global brand aided awareness remains incredibly high with ongoing strength in Casa duration and high visibility in key markets.
From a product perspective for fall, we are building out our hero product franchises in key categories, starting with underwear, where we are expanding our hero modern cotton program with new silhouettes seasonal colors as sustainable fibers. We are doing the same with denim and a number of other key categories, where we are.
Make sure we have the best essentials in the market.
As we move into fall, we have structured a multi month program to strategically strengthen our brand positioning just last week full 22 images. So Jen Kim were revealed on Instagram E Commerce and high visibility placements, including household Street in New York City.
Time to black pinks release of their new single the activation created excitement for the fall campaign further tapped into the brand's connection to culture additional images starring journey as well as accurate Dominic fike accurate Actavis Seuss's random models, Leila Moss and precious Lee.
And more we launched today all executed in an iconic unmistakably Calvin way. In addition to brand announced sung Jong Min as brand Ambassador for Calvin Klein underwear in South Korea Show Me and will be featured in an exclusive campaign in South Korea for this fall season.
During one of Calvin Klein underwear newest styles and boast icon the announcement generated significant excitement on the own social with Sony's pulse driving higher reach engagement and common volume. This is an early example of how we are building out calvin's talent collaborations across regions.
In countries.
Moving on to Tommy Hilfiger, we continue to drive enhanced brand equity with consumers demonstrated by continued strength in brand visibility and relevance across markets.
Driving brand heat and momentum through connections with pop culture collaborations with Shawn Mendes, the MBA and anticipation for our upcoming return to New York fashion week have all increased the visibility of Tommy Hilfiger.
Our collaboration with Shawn Mendes generated a record breaking $1 5 billion impressions and the highest global growth and new followers. Since 2019, our summer 2022 Classics reborn campaign, featuring shown wearing a collection fully made for more sustainable materials.
The meaningful uplift in sales of our full priced 1985 essential business across all regions.
We applaud shows courage to speak openly about mental health and his efforts towards healing and recovery speaking up if an inspiring act assess a positive example for his 100 plus million followers. Following his recovery, we look forward to the next exciting phase of our call.
<unk> ratio.
Turning to Tommy Jeans, the brand launched a global capsule collection with the NBA, continuing our focus on creating unique capsules.
Collection drove hype and quickly sold out.
Supported by strong media placement in key outlets, coupled with the successful influencer push with more than 22 million impressions.
Looking ahead in September through the brand's return to New York Fashion week, we kick off an exciting global brand activation campaign, featuring Kate Moss legendary drummer and produce a Travis Barker and Grammy winning artist and Golden Globe and Emmy nominated actor Anthony Ramos.
In closing.
We are early into the execution of our PVH plus plan to achieve the 2025 targets, we shared at our Investor day, while we are prudently navigating the current macro challenges we remain laser focused on executing our plan to set the PVH up to win in the new normal and drive long.
Long term sustainable growth, we already have proof points of our strong execution in Europe , and Asia and with the actions we have taken to strength in North America, and our global supply chain, how we drive efficiencies and invest in growth initiatives with the current level of macro impact we would still be well.
Positioned to deliver underlying growth for the remainder of this year and deliver on our long term commitments.
With the power of our two iconic brands and quarter by quarter connecting them closer to where the consumer is going driven by the execution of the five value creating initiatives of the PVH plus plan, we're confident in our ability to generate long term sustainable growth and value for shareholders with that.
I'll turn the call over to <unk> to discuss the financials in more detail.
Thanks, Stefan and good morning.
My comments are based on non-GAAP results and are reconciled in our press release.
Our commitment to simple transparent and long term focus communication and engagement with our investors is more important than ever as we continue to navigate a challenging and increasingly complex macroeconomic environment.
We are focused on what is within our control I'm pleased that we delivered underlying revenue growth of 6% and EPS above our guidance for the second quarter, driven by disciplined management of expenses and a lower tax rate and despite a greater negative currency impact and a shortfall in revenue compared to expectations.
While we expect pressure on our results to continue in the second half of 2022, which is reflected in our revised outlook. The PVH plus plan is a multi year strategic growth plan and we remain committed to our long term financial objectives. We are moving ahead quickly to align every area of our company with the PVH plus plan, putting the consumer at.
The center of all we do as we execute our five key growth drivers.
In line with the fifth growth driver of the PVH plus players drive efficiencies and invest in growth, we are taking steps to simplify and streamline how we work reducing spans and layers to shorten the path to the consumer.
And working more efficiently and collaboratively to leverage our resources and global scale. These actions will enable us to reduce people costs in our global offices by approximately 10% by the end of 2023.
As we resize the organization around our streamline model.
These reductions will be phased in over time and across all regions as we put our new ways of working in place driving cost efficiencies and enabling continued strategic investments to fuel growth.
Including investing in global product excellence, creating customer excitement and engagement through impactful marketing campaigns elevating our digital capabilities and continue industry minded upgrade our commercial enterprise platform globally, we expect these.
These reductions will generate annual cost savings of over $100 million net of continued strategic people investments with a small benefit to 2022 and increased savings as we move through 2023.
I will now discuss our second quarter results in more detail and then we'll move on to our outlook for 2022.
As mentioned previously revenue for the second quarter was up 6% on an underlying basis driven by solid performance in our international businesses.
Revenue was lower than planned primarily due to an increasingly challenging macro environment, which particularly affected our north America wholesale business as inflationary pressures away on consumer demand and our wholesale partners, taking a more cautious approach to their open to buy.
As well as the ongoing supply chain and logistics disruptions globally.
Overall reported revenue was down 8% and flat in constant currency compared to the prior year and reflected a 6% negative impact due to the heritage brands transaction.
The exit from the heritage brands retail business and the war in Ukraine.
We remain focused on driving performance in our direct to consumer business. The channel with the closest connection to our consumer and DTC was up high single digits on an underlying basis.
On a reported basis direct to consumer revenue was down 5% compared to the prior year.
Up 3% on a constant currency basis, and reflected a 3% reduction from the exit of the heritage brands retail business and a 1% reduction due to the war in Ukraine.
From a regional perspective, we saw solid underlying growth in nearly all international markets other than greater China, which remains impacted by Covid restrictions.
Second quarter revenue for our international businesses was up 6% versus last year on a constant currency basis and significantly exceeded 2019 pre pandemic levels.
Within our international business is defined mentioned, our European business is now approximately 25% larger than pre pandemic levels in local currency.
Our Asia Pacific business, excluding China grew approximately 25% compared to last year, even with a negative impact of foreign currency translation of 12%.
In North America revenue in the second quarter was up 2% overall for Tommy Hilfiger, and Calvin Klein.
Though still below 2019 pre pandemic levels impacted by the lack of international tourism from Asia.
Our North America retail store business continues to demonstrate growth in line with our plans up high single digits from the prior year.
Our wholesale business was challenged for the reasons I mentioned, which had an outsized effect on our Calvin Klein business, which has a much larger wholesale component.
We also demonstrated continued underlying growth across global brands with Tommy Hilfiger revenues up 4% on a constant currency basis, and Calvin Klein revenues up 6% on a constant currency basis.
<unk> revenues were down 5% for Tommy Hilfiger, and down 1% for Calvin Klein.
In the second quarter, we delivered gross margin of 57, 2% up approximately 200 basis points compared to pre pandemic levels in nearly in line with the prior year's 57, 7%, excluding the 40 basis point impact of foreign currency translation.
SG&A expense as a percentage of revenue for the second quarter was better than planned at 47, 3% as we prudently manage expenses, while still making targeted investments in areas like marketing and digital to fuel growth.
G&A expense as a percentage of revenue was approximately 240 basis points higher than last year.
In the second quarter of the prior year, we benefited from lower expenses as stores are reopening and we were receiving COVID-19 relief.
In total our EBIT for the quarter was in line with our guidance. Despite the tougher macroeconomic conditions and increased negative impact of foreign currency as we work to offset lower revenue with more controlled spending.
<unk> margin was nine 9% as reported.
Operating margin was 10, 4% for the quarter, excluding the negative impact of approximately 50 basis points due to foreign currency translation.
Earnings per share of $2 eight compared to $2 72 in the prior year period and exceeded our previous guidance by <unk> <unk>, driven by disciplined management of expenses and a lower tax rate.
Earnings per share for the quarter included a 35% negative impact compared to the prior year related to foreign currency translation and a 17 negative impact due to the war Ukraine.
Inventory was up 19% at the end of the quarter compared to the prior year period, but still remains below pre pandemic levels inventory levels at the start of the second quarter were two lean, particularly in North America were delayed receipts of inventory due to supply chain delays negatively impacted revenue.
The increase in ending inventory was due to a combination of three factors first inventory levels were abnormally low last year in all regions normalizing those inventory levels. This year to historical levels was worth about half of the overall inventory increase.
As we discussed previously we continue to increase our inventory investment in core product to mitigate ongoing supply chain and logistics disruptions and ensure that we have the right product at the right time, which was worth about another quarter of the increase.
And lastly, the balance of the increase approximately $65 million was due to elevated inventory levels in North America wholesale due to lower than expected demand.
We're executing a plan to mitigate this amount by reducing future purchases and redirecting product through our own stores.
In transit inventory levels were up over 50% versus last year and reflect the extended lead times, we continue to experience.
Additionally, we delivered on our commitment under the PVH plus plan to return excess cash to shareholders returning over $125 million to shareholders through the repurchase of 2 million PVH shares and our dividend.
Moving onto our outlook.
We have updated our full year 2020 to revenue and EPS outlook to reflect our current expectations for the second half of 2022.
Our outlook reflects the challenging macroeconomic environment and trends within the retail industry, including lower consumer demand as a result of inflationary pressures as consumers reduced discretionary spend and certain wholesale customers take a more cautious approach.
These trends are particularly noticeable in North America, where there has been a change in how our U S consumer spending due to inflationary pressures.
And we anticipate a more promotional environment in our wholesale channel in the back half of 2022 as a result of elevated inventory levels industry wide.
To a lesser extent inflationary pressures are also impacting consumers in Europe , particularly in northern Europe , where inflation rates had been the highest despite these pressures our business in Europe is strong.
Our revised outlook continues to reflect the underlying revenue growth in the high single digits for our Europe business for the second half of the year.
In Asia Pacific, We continue to see strength in markets that are not currently impacted by Covid.
Our full year outlook also reflects an increased negative impact of foreign currency translation.
Along with an improvement in our effective income tax rate as a result of a favorable change in the mix of earnings between tax jurisdictions and recognition of certain tax credits for.
For the full year, we are projecting underlying high single digit revenue growth driven by our continued strength in our DTC business our international.
Businesses continued to demonstrate strength and we expect to continue to build on strong growth from 2021 through systemic execution of our strategic priorities.
North America, while we're working our way back to pre pandemic revenue levels. We are still facing a lack of international tourism, particularly from Asia and ongoing supply chain pressures.
The pressures in our wholesale business, which are expected to negatively impact the second half.
Our overall revenue is projected to be up 3% to 4% on a constant currency basis and down 3% to 4% as reported compared to 2021 and reflects a 4% reduction resulting from the heritage brands transaction the exit from heritage brands retail business and the war in Ukraine.
We expect digital penetration as a percentage of revenue to be approximately 25%.
We expect our full year gross margin rate to remain above pre pandemic levels, approximately 70 basis points below record levels in 2021, which includes the negative impact of foreign currency translation of approximately 25 basis points.
We expect the gross margin in our international business will hold while in North America, we expect the elevated inventory levels industry wide will create a more promotional environment.
With higher inventory levels in North America wholesale we are also lowering inventory purchases and redirecting on hand inventory to our outlet stores.
SG&A expense as a percent of revenue for the full year is expected to be approximately 100 basis points higher compared to 2021.
While we continue to prudently invest in the core pillars of the PVH plus plan, we have accelerated cost efficiencies across the business in light of increased macro pressures.
Our full year operating margin is now projected at approximately 9%. This reflects a negative impact compared to prior year of approximately 50 basis points due to foreign currency translation.
We expect our interest expense to decrease in 2022, approximately $85 million compared to $104 million in 2021.
We also have continued the important work to reduce our corporate tax rate versus previous guidance.
With the Finalization of the inflation reduction act in the United States.
Now of improved clarity on future legislation and combined with adjustments in our global tax planning, we are more able to take advantage of foreign tax credits than previously assumed. Additionally, we continue to evolve our transfer pricing structure to better align with our PVH plus planned value drivers the.
The result is an outlook for 2022, 24% for our corporate tax rate, which we believe is sustainable over the medium term.
For the full year in 2022, we project earnings per share of approximately $8.
<unk> now reflects a negative impact of foreign currency translation of approximately $1 25 per share.
Our planned stock repurchases in 2020 to remain at approximately $400 million for.
For the third quarter, we are projecting our overall revenue to increase by 4% to 5% on a constant currency basis compared to the prior year into.
And to decrease by 4% to 5% as reported.
This reflects mid to high single digit revenue growth in our underlying business and a 2% reduction from the war in Ukraine.
Third quarter earnings per share is expected to be in the range of $2 10 to $2 15.
Which reflects a negative impacts of approximately 35 due to foreign currency translation and approximately <unk> 18 from the war in Ukraine compared to the prior year.
We expect our interest expense for the third quarter to be approximately $20 million and our tax rate to be approximately 18%.
Before we open it up for questions I want to reiterate that despite the increasing macro pressures we remain focused on driving our strategic priorities and are committed to delivering strong financial performance over time.
<unk> plus plan, our global brands and businesses are well positioned to drive long term value creation and deliver sustainable profitable growth and shareholder returns.
And with that operator, we would like to open it up to questions.
Thank you Sir as a reminder to ask a question. Please signal by pressing star one.
Our first question comes from Bob <unk>.
Please go ahead.
Hi, good morning.
Two questions for you I guess the first one is when you.
When you look at the underlying performance of the business.
Wondering if you could just help us tie the underlying performance with what you have now stated as the second half expectations are with a lot of the macro issues that you're facing foreign exchange et cetera, and then the second question is.
Can you just talk more broadly about digital as a channel and the growth opportunities that you have invested in and that you are seeing as part of the PVH plus plan. Thanks.
Thank you Bob.
Yes. This is an unprecedented amount of exchange rate and macro impact we see this quarter and the difference between reported and underlying growth of the business.
Leading.
Over 20 years, and I haven't seen that.
It's kind of.
Exchange rates Metro Jefferies. What's important here is that underneath of all that.
We are laser focused on the execution of our PVH plus plan and what's exciting to share S to your point the difference between reported and underlying this quarter, we have an underlying growth of the business with 6% and four.
For the full year, we're projecting an underlying growth of 8% so strong underlying growth.
Even though we are navigating through this more tougher macro challenge so breaking that down.
To the PVH plus cloud focus which is continue to build out that accelerate as strength in Europe and Asia. So when we look at Europe , we drove a 6% underlying growth in Europe , we're at 25% bigger as I mentioned.
25% bigger than pre pandemic significantly more profitable. So we are building a real strength in Europe .
In Asia, we drove 15% underlying growth.
Despite COVID-19 shutdowns and if we if we look at Asia outside of greater China, because we have so much COVID-19 restrictions to navigate through we drove.
As Sam mentioned, we drove on a constant currency drove a 37% growth.
Very well executed PVH, plus driving strong underlying growth in international both Europe and Asia.
And even if we have much work to do in North America, what's exciting this quarter.
We're starting to gain traction with the domestic consumer in cab in both Calvin and Tommy and our own stores. So in our D to C channel, which we control the outcome. The most we are driving an 8% growth in the quarter and we see it for Calvin stores, we see that we're starting to come up and beat 2000.
19 levels.
When it comes to.
The domestic consumer so, but when you add all that up.
I am very encouraged by.
Our ability across the company to execute on the PVH plus plan.
Switching gears to your digital question.
The third growth driver in our five of our five growth drivers of the PVH plus cloud digital list of third winning in the digital AD marketplace. We continue to do that so I mentioned in my prepared remarks, Bob we.
See the consumer coming back to brick and mortar.
Very much from a Colgate disturbed globally for the last two years. So we see consumer really coming strongly back to brick and mortar we're still able to hold the digital penetration of 25% more importantly medium to long term, we see digital continue to grow the fastest.
So that's why we are investing.
In our owned and operated e-commerce, making those to flagship across the world, but also in third party for myself, China. Good example, there even though we navigated really tough.
Covid impact in China, we were able to execute 618 digitally led.
40% growth across all platforms. So.
Very encouraged by.
The investment and the focus our teams have on digital and and over time, you will see that shallow grow the most.
Great. Thank you.
Jay sole.
From UBS. Please go ahead.
Great. Thank you. So much my question is just on foreign exchange.
Wondering how should we think about next year I know youre, not giving guidance for next year, yet, but how might gross margin next year would be impacted.
When exchange rates don't change and the hedges reset thank you.
Okay.
Yes, Thank you Jay.
Again, our main focus when it comes to leading with our management team through this.
Again unprecedented exchange rate fluctuations on the underlying strength of diversity and in parallel with the SEC do you want to share more yes, good morning, Jay.
In general as we take a look moving forward to next year.
See the gross impact of around 100 basis points of that transaction effect for exchange based on where we're sitting in now using a euro at about parity as an example, I think the focus of the teams is to fund had mentioned is controlling what is it that we can control.
First off things like adjusting our sourcing footprint to better match.
<unk> and buying currencies. So for example, taking a look in Europe about leveraging Turkey.
In the Euro based costs there as an example.
Timing, our fall 'twenty three by to be as late as possible to take advantage of decreasing raw material prices in the markets there.
Obviously, we will continue to watch to be able to take advantage of anywhere that there are pricing opportunities.
We would expect that the competitive set us well to face similar pressures, but for right now our eyes are laser focused on what we can control, which is driving those mitigation actions against AUC.
Got it thank you so much.
Michael Binetti from Credit Suisse. Please go ahead.
Hey, guys. Thanks for all the detail here and now for the questions I guess, maybe as we as we look out multi year for the analyst day targets I think the plan was for high single digit to low double digit growth CAGR.
Through 'twenty five.
Obviously, you've got a lot of nonoperational headwinds this year as we start thinking about the inputs that we can look at today to bridge to 2023 is that still a relevant range given the 8% underlying growth rate this year.
Excluding any impact from currency next year is that still.
Trying to look at what indicators you might be looking at to triangulate.
To a number for next year early on at this point Admittedly and then and then the same question I guess on EPS growth rates as you look at the the operations and the analysts who need and the algorithm for the analyst day I'm wondering if given the inputs we know about today with currency the cost savings from the freight cost recapture the order books, you pointed to Ken can they reported EPS number.
So next year again, the big macros like effects that are out of your control way on that ability.
Yes, Thank you Mike.
As you mentioned the.
PVH plus plan, it's a multiyear plan 2025 targets.
We are very focused on making sure that.
We execute on the PVH plus drivers to five plus drivers on winning more with product winning even more with customer engagement winning into digitally led marketplace and getting to that demand driven supply chain and investing behind that growth and driving efficiency. So when.
The way, we track that internally.
Based on what's within our control the underlying performance of the business. So as you see this year will drive in a tough macro and the 8% underlying growth and then looking into next year, but just continue to unlock more and more value of those five drivers.
Yes, I think micro to put some numbers around that obviously, we're not giving specific guidance for next year at this point, but as <unk> mentioned it was macroeconomic headwinds we're facing this year, which is defined as started with almost unprecedented and we're still driving underlying growth.
In line with where algorithm we had talked about as I think as we look forward, whether it be 23 or beyond from there I think that's what gives us the confidence that as we keep our heads down and laser focused on the PVH plus planned deliverables that the ability to continue to drive.
Growth in the things that we can control we still remain confident about so lots of work still to do on the plan for next year, but I think we still see significant opportunities to drive the business forward through each of the five pillars that we had discussed previously and to give you some more texture Michael on the five growth drivers. So when we look at product.
We see that the underlying growth that we are driving strong underlying growth driving especially in international and in D. C stores in North America is coming through the focus increased focus on playing in the big category of stuff matters. The most to the customer, but we have the right to play to win at exit.
<unk> on those most essential products silhouette true to our brand DNA and creating those hero products and and have them in stock. So a demand driven supply chain. It's the fourth value driver, but it connects directly to the product focus so we see in Asia.
Already this season that are <unk>.
Concrete way that they have managed their inventory situation in a very volatile market very well list that they were able to keep 15% open to buy and in Europe . As an example, many of our best selling hero products are on core replenishment with short lead times. So there is.
What I'm excited about this that I'm seeing that the underlying growth we are driving tons from the execution of these drivers and yet we as a management team see overtime, so much more value to unlock when it comes to the consumer engagement piece.
We are starting to tap into.
Maturational talent, that's why our guests an amplifier to our price. So when we put our brands together with maturation of talent, whether it's Shawn Mendes orogenic Cam two really strong examples and they were our iconic hero products and we have them in stock.
In the channels that the consumer wants to engage and digitally led.
That's where we are in Asia for example drive the underlying 37% growth. So we're early early days in unlocking what's within our control and it's going to be what's my focus with my team with my management team is to focus on lean in on a.
A few drivers underlay underneath the five growth drivers that really makes a difference and double down and execute so thats, what we stay focused on thanks.
Thanks, a lot guys I appreciate the detail.
Yes.
Thanks, Mike.
<unk> <unk> from Bank of America. Please go ahead.
Hey, good morning, guys.
Underlying assumptions for your European wholesale business over the next several quarters can you talk about why you think this business can fare better relative to the headwinds you're facing in your U S South business in the back half of the year.
Thank you.
Yes so.
We have in Europe strong forward looking order books, so low double digits for the fall and we continue for spring 'twenty three to have strong demand. So.
And the reason we have that and the reason we.
We have been able to execute so well in Europe and drive this kind of growth in the wholesale channel is the brand focus for both Tommy and Calvin and the product focus and staying really close to the customer so.
Even though we see macro.
Challenge shifts impact part of Europe , our ability to pivot with the consumer and work with our wholesale partners to make sure that we have the best hero products.
At the best perceived value.
And that is very much the product value a combination and we're able to sell through with higher AUR. So.
Demand is there and we see the forward looking to buy them to continue to be there as well.
Just to give a bit more context stretching our eyes out further now we talked last quarter about that low double digits for the fall and that has firmed up and.
The team from there and then looking a little further to pre spring and spring, where obviously there is a lot more news that the sort of our key partners have absorbed and we're still seeing high single digit growth.
And the order book there as well in the early looks at that so I think we see the strength that our European team has continued to build this year into the fall and then carrying on into the spring off of.
Honestly, a significantly larger base as well.
Thank you.
We have time for one more question.
Bruce gross from Goldman Sachs. Please go ahead.
Good morning, and thank you so much for taking our question I was wondering if you could dive a little bit deeper into the gross margin update and your outlook there.
And how that's changed versus last quarter.
The step down all a function of North America wholesale Zach, perhaps you could give us an update on your forward thinking on AUC.
How that might be looking into 2023. Thank you.
Thanks, Brooks, let me just start by saying that the team is doing a really good job mitigating all the macro factors playing into the gross margin rates were close to record breaking.
Gross margin rates still even though we are navigating the disruption so.
And what gives me confidence from the underlying drivers of gross margin rates going forward. If again the ability to execute on the PVH plus drivers in being even more disciplined on connecting the right product categories.
To the consumer.
Increasing level of focus and those sorts of until the hero products and then.
Having.
David come in as our global head of supply chain on December 1st.
Really bringing our best in class demand driven supply experience when we unlocked a further so from a business driving perspective, I see a lot of opportunities that we step by step over the coming years, we continue to drive gross margin rate.
And to put some numbers around that Brook, maybe I'll break it down into the time periods for the second quarter.
Largely speaking our margins landed at expectations and at the record high levels from last year other than exchange translation. So through the second quarter, we've continued to hold.
Well there with the progress the team has made as we look forward into the second half I think let me talk a little bit region by region. So our international markets have held up very well.
Thus far through this and we expect them to be able to continue to hold at those margin levels that we've seen driven by the key business drivers as defined as mentioned earlier.
Beyond the exchange rate impact, we do see in our planning for the second half for the North American market to become more promotional I think as we see not so much our inventory levels, but where the marketplace is leading to.
Higher competition from there and so we do foresee some margin headwinds more than we had previously planned into the second half.
We're planning down accordingly, and I would say that's across both the wholesale and our own stores. We want to continue to drive the sales growth as defined I talked about earlier up 8% in the second quarter by being relevant in the market for our customer.
Moments, where the marketplace is.
And so I think we see a slightly slightly more headwinds that we had assumed previously.
We look forward into the into 2023 again, we're not giving more structured guidance from there.
But I think it's defined as mentioned by really managing pillar four of its demand driven operating model is really the key to make sure that regardless of what.
We are experiencing in the marketplace, we're able to make sure that.
We're staying close to the customer inventory levels are staying in line and we used an example, with Stefan mentioned earlier on Asia for how they've managed inventory here throughout the year. This year, leaving an open to buy open to adjust quickly and to make sure. We can continue to hold for full price selling.
As we have said.
Thank you very much.
Thanks Brook and before we wrap up just want to say that never we have never been more focused on unlocking the full potential of Calvin and Tommy through the PVH plus plan and I'm very proud of the teams.
<unk> to drive this kind of underlying growth, we continue to build out on our strength in Europe and Asia, we lean in to unlock North America potential we know we have really big potential there.
And we continue to align the management team to increase our ability to execute and we lean in to drive efficiencies and invest in these initiatives. So that's where our focus is so thank you for spending the time with us.
Look forward to catching up soon again.
Yeah.
Thank you. This concludes today's conference call. Thank you for your participation ladies and gentlemen, you may now disconnect.
[music].
Good day and welcome to the PVH second quarter's wages just went into the earnings call. Today's conference is being recorded at this time I would like to turn the conference over to shell Cheryl Friedman Senior Vice President of Investor Relations. Please go ahead.
Thank you operator, good morning, everyone and welcome to the PVH Corp, second quarter 2022 earnings conference call, leading the call today will be Stefan Larsson, PVH, as Chief Executive Officer, and <unk> Chief Financial Officer.
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 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 information to be discussed includes forward looking statements that reflect pvh's view as of August 32022 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 subject of this call. These risks and uncertainties include pvh's right to change its strat.
<unk> 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 global inflationary pressures and the war in Ukraine continued have impacts on the Companys business cash flow and results of operations.
There is significant uncertainty about the duration and extent of the impacts of these events.
The dynamic nature of these circumstances means would have 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.
<unk> does not undertake any obligation to update publicly any forward looking statement, including without limitation any estimate or 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.
<unk> to GAAP amounts are included in Pvh's second quarter 2022 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 Stefan Larsson.
Thank you Cheryl and good morning, everyone and thank you for joining our call today I want to start by saying that despite the macro challenges. We're all facing we have many strong proof points on the progress we are making in executing the PVH plus cloud.
Starting with the underlying strength of our business in the second quarter on an underlying basis, we delivered solid revenue growth of 6% compared to last year, excluding the impact of currency, Russia and the heritage brands divestiture.
Underlying growth speaks to the effectiveness of our strategy and resilience of our two brands, which are two of the strongest most iconic brands in our sector globally. We also had solid profitability with non-GAAP EPS for the quarter above guidance.
This quarter started strong with the trends we experienced in the first quarter continuing through May the macroeconomic environment, then soften in June as high gas prices and other inflationary pressures began to affect consumer discretionary spending it was most pronounced for us in the middle income and value consumers nor.
America, but we also experienced some pullback in certain European markets.
Consumer demand has stabilized in July although at reduced levels, we experienced in June and we are now planning prudently for demand to remain at these lower levels for at least the remainder of the year and we have revised our outlook accordingly.
Importantly, we are still projecting underlying high single digit revenue growth for the full year driven by continued strength in our direct to consumer business led by the international regions.
As a management team, we continue to intensify the execution of our PVH plus plants, where we are in the early days of a multiyear journey to outlaw Calvin Klein Tommy Hilfiger as full potential we developed the PVH plus plan to compete to win in the new normal because there is no such thing as normal.
Operating conditions anymore. Our plan, it's about operating in a way that helps us compete and win long term regardless of macro challenges.
I want to start by thanking our teams around the world for their hard work and dedication through our extraordinary talent that we bring the PVH plus plan to live step by step for the consumer.
Our financial performance.
As we navigate the current business conditions, we have not one but two of the most iconic global brands that resonate deeply with consumers around the world. We have the PVH plus plan to deliver brand D to C and digitally led sustainable growth over time, where.
We're taking concrete steps to further strengthen our financial performance, particularly in North America.
We remain committed to achieving the 2025 targets, we presented at our Investor day four months ago.
More than ever across both our brands. The five key growth drivers of our PVH plus plan provide a clear roadmap to execute profitable long term growth and value creation.
Our first growth driver is about winning with products and it's about intensifying our focus on the most important product categories for our consumers, where we have the right to play to win and where every season, we will have stronger and more focused hero product offering with the best essential.
<unk> in the market.
During the quarter, we saw strong performance in key hero product categories in men's polo set Tommy Hilfiger, and our iconic outerwear and denim categories of Calvin Klein.
We're also continuing to see positive momentum in refined our smart casual categories like woven shirts dresses and paths as consumers are elevating their apparel more people are returning to the workplace and attending events and we both brands being true lifestyle brands, we are well positioned.
To deliver on consumer needs ranging from casual to refine.
Our second growth driver is about winning with consumer engagement.
Main way, we drive increased customer engagement is by connecting our brands through our hero products with people, who shaped culture in our maturation away and two big consumer moments throughout the year you can see the impact of this right now in Calvin Klein through our collaboration with <unk> Kim.
The South Korean group Black ink, just 69 million followers on Instagram. She is a big supporter of the brand loves our iconic products and drive big engagement among consumers in Asia and increasingly globally. Tommy is doing the same type of work with Shawn Mendes with strong results and for both brands.
This is just the beginning of building a very strong influence capability that will leverage and multiply each brand's iconic global strength.
We're also creating our own big brand moments and Im excited that Tommy Hilfiger is returning to the New York fashion week for the first time in three years with an X brand show runway event that we'll unveil the latest see now buy now for 2022 collection, while immersing audiences both specifics.
<unk> and digitally in a refreshed brand world.
Our third growth driver is to win in the digital marketplace, where we continue to align our channel mix to where the consumer wants to shop, our brands, we delivered solid underlying growth in our digital channel led by our owned and operated business. In addition, our.
Third party partnerships continue to provide important platforms for our brands globally.
This was important to mention is that this year's performance will reflect consumers coming back to brick and mortar shopping in most regions. After a multi year apsos, including lockdowns during the height of the Covid. However, we still expect that the digital channel has the strongest long term trajectory.
Growth over the coming years across both owned and operated and third party ecommerce channels and digital continues to represent approximately 25% of our revenue.
Our fourth growth driver, it's about developing a demand in data driven operating model to enhance the speed and agility of our supply chain. Even though we are early days in this initiative, we already have some significant international proof points, a major portion of our European best seller.
Our core replenishment with short lead times to match demand in Asia for the first time. This season, we were able to keep 15% open to buy these are just a few important first steps that we will scale and enhanced globally over the coming years.
In North America, we are continuing to work through inventory issues driven by both external factors and internal execution challenges. We've previously shared with you that residual pandemic related supply chain issues were the primary driver of inventory shortages in our North America DTC business.
Particularly in our stores, we are still working through those issues and they are still pressuring retail inventory levels. While we are still experiencing inventory shortages in our North America retail channel, we ended the quarter with excess inventory in certain categories within our wholesale business as <unk>.
Spending software, we have a clear strategy to strategically manage inventory through the remainder of the year. In fact, we will give you more details around that.
Our business in North America has also been over reliant on the international consumer and ethanol sufficiently prioritize the domestic consumer.
These issues have also made crystal clear the need to simplify our execution, especially North America within our supply chain globally.
As such we are evolving our leadership team to the needs of the execution of the PVH plus plan and the changing environment and we have made two significant leadership announcements.
We recently announced Davis will be joining us as global Chief supply chain Officer, David Joyce PVH from <unk>, where he has served as head of global supply chain and brings a wealth of knowledge and experience in managing best in class global supply chain.
We're excited that David is joining the team later this year and we look forward to have them hit the ground running and helping us make our supply chain our competitive advantage.
We have just announced that Trish Donnelly CEO of PVH America, and Calvin Klein Global will be leaving the company to pursue other opportunities. She will remain in an advisory role through November 30 to assist with the transition we are deeply grateful to Trish for her commitment hard work and dedication.
Leading America and Calvin Klein we.
We believe it's critical to strengthen our ability to execute our PVH plus plan for the Americas and continue growing the Calvin Klein brand globally.
We therefore plan to separate Tricia responsibilities and hire two leaders with different skill sets, so we'd be able to devote their full attention to each of these key roles.
In the Americas, we need a very strong leader, who can help us unlock the full potential of both Calvin and Tommy in the North American market and especially when it comes to winning more with the domestic consumer.
At the same time, we're continuing to expand the Calvin Klein brand around the world. This requires a brand visionary whose singular focus is realizing the brand's significant global growth opportunity.
We have launched a global search process to identify the right leaders for these roles in the interim I will lead to PVH Americas and the global Calvin Klein business working very closely with leadership and teams from both organizations.
Lastly, our fifth growth driver, it's about driving efficiencies and investing in growth as we are proactively managing what's within our control managing the cost base is critical at Investor Day, We spoke about how we will work differently and more efficiently manage our expenses.
This effort includes reducing our people costs in our global offices by approximately 10% on a net basis by the end of 2023 in order to streamline our corporate organization drive efficiencies have fuel strategic investments in line with the PVH plus plan I want to.
Emphasize that our focus on managing expenses is to simplify how we work stopped doing work that doesn't align with the PVH plus plan and better leverage our global scale as we generate those savings were committed to reinvest a portion of them in PVH plus growth drivers such as product.
Consumer engagement digital and supply chain capabilities.
Now turning to our regional performance and how we are connecting our PVH plus plan across each region I want to start with Europe .
We continue to experience positive brand momentum even ask the European consumer is showing some signs of softening our business across both our brands in Europe remains strong and growing our European business is now 25% larger than pre COVID-19 levels in local currency.
With significantly higher profitability during the second quarter, we continue to achieve healthy year over year growth on an underlying basis adjusting for the impact of our exit from the Russian market and FX, which have been headwinds to our business for the quarter, we generated mid single.
Digit growth versus last year adjusting for these impacts we are seeing continued momentum in consumers returning to stores with traffic up meaningfully compared to last year. There is some bifurcation and the strength of our business between northern and southern Europe , our southern European markets continue to show.
Solid business performance, while Germany, our largest market in Europe has been most impacted by macro factors. However, we continue to see underlying growth for the region as I mentioned earlier brand relevance for both Tommy and Calvin remains very high among European consumers Tommy Hilfiger.
<unk> ranks number two across global lifestyle brands spontaneously mentioned in Europe for both men and women in Calvin Klein continues to be the runaway leader in underwear category that brings huge visibility and constantly engaged shifts new consumers into the brand. In addition, we are seeing a pause.
Steve impact on AUR and gross margins from premium positioning two product elevation. This will remain a key priority for both France and demand in future order books across brands remained solid with the spring 2023 see some planned up high single digits on top of double digit growth.
This past year.
Moving on to Asia, we continue to be encouraged by the underlying momentum in our brands across the region and we are pleased with the progress we've made in Asia against the PVH plus plan, excluding China the region demonstrated a 25% year over year growth in the second quarter and this included a 12%.
Headwind for foreign currency.
The resurgence of Covid has continued to pressure sales in greater China, but we are gaining momentum in other markets across the regions such as Australia, New Zealand Southeast Asia also in Japan, and South Korea, we grew at healthy rates compared to last year.
Across the region, we build on the strong underlying performance, we have achieved and remain focused on driving the PVH plus plan execution with a very strong focus on regionally relevant hero products talent and focus on the biggest consumer moments.
Our hero product strategy continues to yield strong results with sales up over 300% of like for like categories with sales outpacing inventory during six months <unk>, the largest selling period of the quarter and China sales increased nearly 40% year over year with strength in <unk>.
Both Calvin and Tommy.
Hero product activations, including underwear, Ts Polo's, where key features of our sale events and include a strong marketing support further elevation of interactive content and supplemental live streaming from stores. In addition E Commerce for Asia grew strong double.
Digits with notable strength in China, and Korea, driven by key volume driving platforms, such as Tmall JD and in addition to rapidly expanding do yet.
E. Commerce also remains significantly underpenetrated relative to the sizable growth opportunity, we have which is a big reason for optimism and a key factor in our strategy. We also increased our investment in our supply chain, including Asia for Asia product sourcing getting us closer to the market.
And closer to the consumer by.
By leaning into the initiatives and core tenants of the PVH plus plan in Asia. We continue to have a long runway ahead to grow both our brands in the region.
Lastly for North America as I mentioned earlier, we are seeing the effects of the weaker macroeconomic environment in North America, with just pressuring consumer discretionary spending and we felt the softening consumer environment most prominently in our wholesale channel where performance was below.
Our expectations and our partners have taken a more cautious approach to orders and while there are some signs of improvements in foreign tourism. The absence of most international tourists from Asia remains the headwind we remain in the early phase of our multiyear journey to unlock the significant opportunity we have in this <unk>.
However, our focus on winning more with the domestic consumer is already starting to deliver some positive proof points in our DTC channels, we have driven improvements in positive comps for domestic consumers that continue to improve sequentially, we grew our own and operated stores across.
Both Calvin and Tommy by 8% in the quarter and traffic trends for our factory stores outpaced the market in July improved inventory levels of hero products and enhanced store experience a stronger execution will translate into an even stronger performance over time.
As we focus on improving our product offering we're seeing encouraging results at stores, where we have a full assortment of the most important product essentials for our consumers our hero products in Tommy Hilfiger stores, we have been strategically repositioning inventory to high volume test stores and <unk>.
During our best stores have appropriate inventory of the Reits hero products and as we pursue this strategy sales in these stores have shown a 20 percentage point positive improvements compared to the rest of chain and control doors.
This shows how our brands and product strategies resonate with consumers when we play and the right product categories with the right hero products in the right stores and the right inventory levels in front of the consumers then will drive profitable sustainable growth. This also provides a roadmap for driving future growth as we resolve supply.
Chain challenges.
Headed into the fall and holiday we are working to scale. The most impactful initiatives. We have tested it is important that over time, we start to accelerate these green shoots we are growing and build them into how we win with the domestic consumer in North America across both brands and all businesses.
Next I'll share a few key global brand highlights on how we are bringing both brands to life for the consumer beginning with Calvin Klein.
Global brand aided awareness remains incredibly high with ongoing strength in Casa duration and high visibility in key markets.
From a product perspective for fall, we are building out our hero product franchises in key categories, starting with underwear, where we're expanding our hero modern cotton program with new silhouettes seasonal colors are sustainable fibers. We are doing the same with denim and a number of other key categories, where we are.
Make sure we have the best essentials in the market.
As we move into fall, we have structured a multi month program to strategically strengthen our brand positioning just last week full 22 images of gender Kim were revealed on Instagram E Commerce and high visibility placements, including household Street in New York City.
Time to black <unk> release of their new single the activation created excitement for the fall campaign and further tapped into the brand's connection to culture additional images starring journey as well as accurate Dominic fike accurate Actavis Seuss's random models, Leila Moss and precious Lee.
And more we launched today all executed in an iconic unmistakably Calvin way. In addition to brand announced sung Jong Min as brand Ambassador for Calvin Klein underwear in South Korea Show Me and will be featured in an exclusive campaign in South Korea for this fall season.
During one of Calvin Klein underwear newest styles and bolster icon the announcement generated significant excitement on the owned social with Sonus pulse driving higher reach engagement and comments volume. This is an early example of how we are building out calvin's talent collaborations across regions.
<unk> <unk>.
Moving on to Tommy Hilfiger, we continue to drive enhanced brand equity with consumers demonstrated by continued strength in brand visibility and relevance across markets, we are driving Brian Keith.
And momentum through connections with pop culture collaborations with Shawn Mendes, the MBA and the anticipation for our upcoming returned to New York fashion week have all increased the visibility on Tommy Hilfiger.
Our collaboration with Shawn Mendes generated a record breaking $1 5 billion impressions and the highest global growth and new followers. Since 2019, our summer 2022 Classics reborn campaign, featuring shown wearing a collection fully made for more sustainable materials.
Drove a meaningful uplift in sales of our full priced 1985 essential business across all regions.
We applaud shows courage to speak openly about mental health and his efforts towards healing and recovery.
<unk> is an inspiring acts that sets a positive example for his 100 plus million followers. Following his recovery, we look forward to the next exciting phase of our collaboration.
Turning to Tommy Jeans, the brand launched a global capsule collection with the NBA, continuing our focus on creating unique capsules.
Collection drove hype and quickly sold out.
Supported by strong media placement in key outlets, coupled with the successful influencer push with more than 22 million impressions.
Looking ahead in September through the brand's return to New York Fashion week, we kick off an exciting global brand activation campaign, featuring Kate Moss legendary drummer and produce the Travis Barker and Grammy winning artist and Golden Globe and Emmy nominated actor Antonio Ramos.
In closing.
We are early into the execution of our PVH plus plan to achieve the 2025 targets, we shared at our Investor day, while we are prudently navigating the current macro challenges we remain laser focused on executing our plan to set the PVH up to win in the new normal and drive long.
Long term sustainable growth, we already have proof points of our strong execution in Europe , and Asia and with the actions we have taken to strength in North America, and our global supply chain, how we drive efficiencies and invest in growth initiatives with the current level of macro impact we would still be well.
Positioned to deliver underlying growth for the remainder of this year and deliver on our long term commitments.
With the power of our two iconic brands and quarter by quarter connecting them closer to where the consumers' going driven by the execution of the five value creating initiatives of the PVH plus plan, we're confident in our ability to generate long term sustainable growth and value for shareholders with that.
I'll turn the call over to <unk> to discuss the financials in more detail.
Thanks, Stefan and good morning.
My comments are based on non-GAAP results and are reconciled in our press release.
Our commitment to simple transparent and long term focused communication and engagement with our investors is more important than ever as we continue to navigate a challenging and increasingly complex macroeconomic environment.
We are focused on what is within our control I'm pleased that we delivered underlying revenue growth of 6% and EPS above our guidance for the second quarter, driven by disciplined management of expenses and a lower tax rate and despite a greater negative currency impact and a shortfall in revenue compared to expectations.
While we expect pressure on our results to continue in the second half of 2022, which is reflected in our revised outlook. The PVH plus plan is a multi year strategic growth plan and we remain committed to our long term financial objectives. We are moving ahead quickly to align every area of our company with the PVH plus plan, putting the consumer at.
The center of all we do as we execute our five key growth drivers.
In line with the fifth growth driver of the PVH plus players drive efficiencies and invest in growth, we are taking steps to simplify and streamline how we work reducing spans and layers to shorten the path to the consumer.
And working more efficiently and collaboratively to leverage our resources and global scale. These actions will enable us to reduce people costs in our global offices by approximately 10% by the end of 2023.
As we resize the organization around our streamlined model.
These reductions will be phased in over time and across all regions as we put our new ways of working in place driving cost efficiencies and enabling continued strategic investments to fuel growth.
Including investing in global product excellence, creating customer excitement and engagement through impactful marketing campaigns elevating our digital capabilities and continue industry minded upgrade our commercial enterprise platform globally, we expect.
These reductions will generate annual cost savings of over $100 million net.
Net of continued strategic people investments with a small benefit to 2022 and increased savings as we move through 2023.
I will now discuss our second quarter results in more detail and then we'll move on to our outlook for 2022.
As mentioned previously revenue for the second quarter was up 6% on an underlying basis driven by solid performance in our international businesses.
Revenue was lower than planned primarily due to an increasingly challenging macro environment, which particularly affected our north America wholesale business as inflationary pressures weigh on consumer demand and our wholesale partners, taking a more cautious approach to their open to buy.
As well as the ongoing supply chain and logistics disruptions globally.
Overall reported revenue was down 8% and flat in constant currency compared to the prior year and reflected a 6% negative impact due to the heritage brands transaction the exit from the heritage brands retail business and the war in Ukraine.
We remain focused on driving performance in our direct to consumer business.
Channel with the closest connection to our consumer and DTC was up high single digits on an underlying basis.
On a reported basis direct to consumer revenue was down 5% compared to the prior year.
Up 3% on a constant currency basis, and reflected a 3% reduction from the exit of the heritage brands retail business and a 1% reduction due to the war in Ukraine.
From a regional perspective, we saw solid underlying growth in nearly all international markets other than greater China, which remains impacted by Covid restrictions second.
Second quarter revenue for our international businesses was up 6% versus last year on a constant currency basis and significantly exceeded 2019 pre pandemic levels.
Within our international business is defined mentioned, our European business is now approximately 25% larger than pre pandemic levels in local currency.
In our Asia Pacific business, excluding China grew approximately 25% compared to last year, even with a negative impact of foreign currency translation of 12%.
In North America revenue in the second quarter was up 2% overall for Tommy Hilfiger, and Calvin Klein, although still below 2019 pre pandemic levels impacted by the lack of international tourism from Asia.
Our North America retail store business continues to demonstrate growth in line with our plans up high single digits from the prior year.
Our wholesale business was challenged for the reasons I mentioned, which had an outsized effect on our Calvin Klein business, which has a much larger wholesale component.
We also demonstrated continued underlying growth across global brands with Tommy Hilfiger revenues up 4% on a constant currency basis, and Calvin Klein revenues up 6% on a constant currency basis.
Reported revenues were down 5% for Tommy Hilfiger, and down 1% for Calvin Klein.
In the second quarter, we delivered gross margin of 57, 2% up approximately 200 basis points compared to pre pandemic levels in nearly in line with the prior year's 57, 7%, excluding the 40 basis point impact of foreign currency translation.
SG&A expense as a percentage of revenue for the second quarter was better than planned at 47, 3% as we prudently manage expenses, while still making targeted investments in areas like marketing and digital to fuel growth.
SG&A expense as a percentage of revenue was approximately 240 basis points higher than last year.
In the second quarter of the prior year, we benefited from lower expenses as stores are reopening and we were receiving COVID-19 relief.
In total our EBIT for the quarter was in line with our guidance. Despite the tougher macroeconomic conditions and increased negative impact of foreign currency as we work to offset lower revenue with more controlled spending.
Margin was nine 9% as reported.
Operating margin was 10, 4% for the quarter, excluding the negative impact of approximately 50 basis points due to foreign currency translation.
Earnings per share of $2 eight.
Compared to $2 72 in the prior year period and exceeded our previous guidance by <unk> <unk> driven by disciplined.
Disciplined management of expenses and a lower tax rate.
Earnings per share for the quarter included a 35% negative impact compared to the prior year related to foreign currency translation and a <unk> 17 negative impact due to the war Ukraine.
Inventory was up 19% at the end of the quarter compared to the prior year period, but still remains below pre pandemic levels inventory levels at the start of the second quarter were two lean, particularly in North America were delayed receipts of inventory due to supply chain delays negatively impacted revenue.
The increase in ending inventory was due to a combination of three factors first inventory levels were abnormally low last year in all regions normalizing those inventory levels. This year to historical levels was worth about half of the overall inventory increase.
As we discussed previously we continue to increase our inventory investment in core product to mitigate ongoing supply chain and logistics disruptions and ensure that we have the right product at the right time, which was worth about another quarter of the increase.
And lastly, the balance of the increase approximately $65 million was due to elevated inventory levels in North America wholesale due to lower than expected demand.
We're executing a plan to mitigate this amount by reducing future purchases and redirecting product through our own stores.
In transit inventory levels were up over 50% versus last year and reflect the extended lead times, we continued to experience.
Additionally, we delivered on our commitment under the PVH plus plan to return excess cash to shareholders returning over $125 million to shareholders through the repurchase of 2 million PVH shares and our dividend.
Moving on to our outlook.
We have updated our full year 2020 to revenue and EPS outlook to reflect our current expectations for the second half of 2022.
Our outlook reflects the challenging macroeconomic environment and trends within the retail industry, including lower consumer demand as a result of inflationary pressures as consumers reduced discretionary spend and certain wholesale customers take a more cautious approach.
These trends are particularly noticeable in North America, where there has been a change in how our U S consumer spending due to inflationary pressures.
And we anticipate a more promotional environment in our wholesale channel in the back half of 2022 as a result of elevated inventory levels industry wide.
To a lesser extent inflationary pressures are also impacting consumers in Europe , particularly in northern Europe , where inflation rates had been the highest despite these pressures our business in Europe is strong and our.
Our revised outlook continues to reflect the underlying revenue growth in the high single digits for our Europe business for the second half of the year.
In Asia Pacific, We continue to see strength in markets that are not currently impacted by Covid.
Our full year outlook also reflects an increased negative impact of foreign currency translation.
Along with an improvement in our effective income tax rate as a result of a favorable change in the mix of earnings between tax jurisdictions and recognition of certain tax credits for.
For the full year, we are projecting underlying high single digit revenue growth driven by our continued strength in our DTC business. Our international businesses continued to demonstrate strength and we expect to continue to build on strong growth from 2021 through systemic execution of our strategic priorities.
In North America, while we're working our way back to pre pandemic revenue levels. We are still facing a lack of international tourism, particularly from Asia and ongoing supply chain pressures along with pressures in our wholesale business, which are expected to negatively impact the second half.
Our overall revenue is projected to be up 3% to 4% on a constant currency basis and down 3% to 4% as reported compared to 2021 and reflects a 4% reduction resulting from the heritage brands transaction the exit from heritage brands retail business and the war in Ukraine.
Expect digital penetration as a percentage of revenue to be approximately 25%.
We expect our full year gross margin rate to remain above pre pandemic levels, though approximately 70 basis points below record levels in 2021, which includes the negative impact of foreign currency translation of approximately 25 basis points.
We expect the gross margin in our international business will hold while in North America, we expect that elevated inventory levels industry wide will create a more promotional environment.
With higher inventory levels in North America wholesale we are also lowering inventory purchases and redirecting on hand inventory to our outlet stores.
SG&A expense as a percent of revenue for the full year is expected to be approximately 100 basis points higher compared to 2021.
While we continue to prudently invest in the core pillars that PVH plus plan, we have accelerated cost efficiencies across the business in light of increased macro pressures.
Our full year operating margin is now projected at approximately 9%. This reflects a negative impact compared to prior year of approximately 50 basis points due to foreign currency translation.
We expect our interest expense to decrease in 2022 to approximately $85 million compared to $104 million in 2021.
We also have continued the important work to reduce our corporate tax rate versus previous guidance.
With the Finalization of the inflation reduction act in the United States.
We now have improved clarity on future legislation and combined with adjustments in our global tax planning, we are more able to take advantage of foreign tax credits than previously assumed. Additionally, we continue to evolve our transfer pricing structure to better align with our PVH plus planned value drivers.
The result is an outlook for 2022, 24% for our corporate tax rate, which we believe is sustainable over the medium term.
For the full year in 2022, we project earnings per share of approximately $8, which now reflects a negative impact of foreign currency translation of approximately $1 25 per share.
Our planned stock repurchases in 2020 to remain at approximately $400 million for.
For the third quarter, we are projecting our overall revenue to increase by 4% to 5% on a constant currency basis compared to the prior year and to decrease by 4% to 5% as reported.
This reflects mid to high single digit revenue growth in our underlying business and a 2% reduction from the war in Ukraine.
Third quarter earnings per share is expected to be in the range of $2 10 to $2 15.
Which reflects negative impacts of approximately 35 due to foreign currency translation and approximately <unk> 18 from the war, Ukraine compared to the prior year.
We expect our interest expense for the third quarter to be approximately $20 million and our tax rate to be approximately 18%.
Before we open it up for questions I want to reiterate that despite the increasing macro pressures we remain focused on driving our strategic priorities and are committed to delivering strong financial performance over time with.
With the PVH plus plan, our global brands and businesses are well positioned to drive long term value creation and deliver sustainable profitable growth and shareholder returns.
And with that operator, we would like to open it up to questions.
Thank you Sir as a reminder to ask a question. Please signal by pressing star one.
And our first question comes from Bob <unk>.
Please go ahead.
Hi, good morning.
Two questions for you I guess the first one is when you.
When you look at the underlying performance of the business. Just wondering if you could just help us tie the underlying performance with.
What you have now stated as the second half expectations are with a lot of the macro issues that you're facing foreign exchange et cetera, and then the second question is.
Can you just talk more broadly about digital as a channel and the growth opportunities that you have invested in and that you are seeing as part of the PVH plus plan. Thanks.
Thank you Bob.
Yes. This is an unprecedented amount of exchange rate and macro impact we see this quarter and the difference between reported and underlying growth of the business.
Leading.
Over 20 years and I haven't seen.
These kind of.
Exchange rates Metro Jefferies. What's important here is that underneath of all that.
We are laser focused on the execution of our PVH plus cloud and what's exciting to share as to your point the difference between reported and underlying this quarter, we have an underlying growth of the business with 6% and for the remainder for the full year, we're projecting an underlying growth of 8%.
So strong underlying growth.
Even though we are navigating through this more tougher macro challenge so breaking that down.
To the PVH class plan focus, which is continue to build out and accelerate the strength in Europe and Asia. So when we look at Europe , we drove a 6% underlying growth in euros were at 25% bigger as I mentioned.
25% bigger than pre pandemic significantly more profitable. So we are building a real strength in Europe .
In Asia, we drove 15% underlying growth.
Despite COVID-19 shutdowns and if we if we look at Asia outside of greater China, because we have so much COVID-19 restrict shifts to navigate through we drove.
As Sam mentioned, we drove.
Constant currency drove a 37% growth.
Very well executed PVH, plus driving strong underlying growth in international both Europe and Asia.
And even if we have much work to do in North America, what's exciting this quarter.
We are starting to gain traction with the domestic consumer income in both Calvin and Tommy and our own stores. So in our D to C channel, which we control the outcome to most we are driving an 8% growth in the quarter and we see it for Calvin stores, we see that starting to come up and beat 2000.
19 levels.
When it comes to.
The domestic consumer so, but when you add all that up.
I am very encouraged by.
Our ability across the company to execute on the PVH plus plan.
Switching gears to your digital question.
The third growth driver in our five of our five growth drivers of the PVH plus cloud digital is the third winning in the digital marketplace. We continue to do that so I mentioned in my prepared remarks Bob.
We see the consumer coming back to brick and mortar.
Very much from a COVID-19 disturbed globally for the last two years. So we see consumer really coming strongly back to brick and mortar we're still able to hold the digital penetration of 25% more importantly medium to long term, we see digital continue to grow the fastest so.
That's why we are reinvesting.
Our owned and operated e-commerce, making those to flagship across the world, but also in third party from our so China. Good example, there even though we navigated really tough.
Covid impact in China, we were able to execute <unk> digitally led with 40% growth across all platforms. So.
Very encouraged by the.
The investment and the focus our teams have on digital and and over time, you will see that shallow grow the most.
Great. Thank you.
Jay sole.
From UBS. Please go ahead.
Great. Thank you. So much my question is just on foreign exchange.
Just wondering how should we think about next year I know youre not giving guidance for next year, yet, but how might gross margin next year would be impacted.
Foreign exchange rates don't change in hedges reset thank you.
Okay.
Yes, Thank you Jay.
Again, our main focus when it comes to leading with our management team through this.
Again unprecedented exchange rate fluctuation.
On the underlying strength of diversity and in parallel with that stack do you want to share more yes. Good morning, Jay.
In general as we take a look moving forward to next year.
We see the gross impact of around 100 basis points of that transaction effects for exchange based on where we're sitting in now using a euro at about parity as an example, I think the focus of the teams is to fund had mentioned is controlling what we can control. So first off things like adjusting our sourcing footprint to better match.
Sales in buying currencies. So for example, taking a look in Europe about leveraging Turkey.
In the Euro based costs there as an example.
Timing, our fall 'twenty three by to be as late as possible to take advantage of decreasing raw material prices in the markets there.
Obviously, we will continue to watch to be able to take advantage of anywhere that there are pricing opportunities as we would expect that the competitive set us well to face similar pressures, but for right now our eyes are laser focused on what we can control, which is driving those mitigation actions against AUC.
Got it thank you so much.
Michael Binetti of Credit Suisse. Please go ahead.
Hey, guys. Thanks for all the detail here and now for the questions I guess, maybe as we as we look out multi year for the analyst day targets I think the plan is for high single digit to low double digit growth CAGR.
Through 'twenty five.
Obviously, you've got a lot of nonoperational headwinds this year as we start thinking about the inputs that we can look at today to bridge to 2023 is that still a relevant range given the 8% underlying growth rate this year.
Excluding any impacts from currency next year is that still.
Trying to look at what indicators you might be looking at to triangulate.
Two a number for next year early on at this point Admittedly and then and then the same question I guess on EPS growth rates as you look at the the operations and the analysts who need it in the algorithm for the analyst day I'm wondering if given the inputs we know about today with currency the cost savings from the freight cost recapture the order books, you pointed to Ken can they reported EPS number grew.
So next year would be the big macros like FX that are out of your control way on that ability.
Yes, Thank you Mike.
Su mentioned, the PVH plus plan, it's a multiyear plan 2025 targets.
We are very focused on making sure that.
We execute on the PVH plus drivers to five plus drivers on winning more with product winning even more with customer engagement winning into digital AD marketplace and getting to that demand driven supply chain and investing behind that growth and driving efficiency. So when.
The way, we track that internally.
Based on what's within our control the underlying performance of diversity. So as you see this year will drive in a tough macro and the 8% underlying growth and then looking into next year, but just continue to unlock more and more value of those five drivers.
Yes, I think micro to put some numbers around that obviously, we're not giving specific guidance for next year at this point, but as defined mentioned it with macroeconomic headwinds we're facing this year, which is defined as started with almost unprecedented and we're still driving underlying growth.
In line with where algorithm we had talked about is and I think as we look forward whether it be 23 or beyond from there I think that's what gives us the confidence that as we keep our heads down and laser focused on the PVH plus planned deliverables that the ability to continue to drive.
Growth in the things that we can control we still remain confident about so lots of work still to do on the plan for next year, but I think we still see significant opportunities to drive the business forward through each of the five pillars that we had discussed previously and to give you some more texture Michael on the five growth drivers. So when we look at product.
We see that the underlying growth that we are driving strong underlying growth, we're driving especially in international and D to C stores in North America is coming through the focus increased focus on playing in the big category of stuff matters. The most to the consumers we have the right to play to win at <unk>.
Acute on those most essential products silhouette true to our brand DNA and creating those hero products and and have them in stock. So a demand driven supply chain, if the fourth value driver, but it connects directly to the product focus so we see in Asia.
Already this season.
Concrete way that they have managed their inventory situation in a very volatile market very well less that they were able to keep 15% open to buy and in Europe . As an example, many of our best selling hero products are on core replenishment with short lead times. So there is.
What I'm excited about this that I'm seeing that the underlying growth. We are driving comes from the execution of these drivers and yet we as a management team see overtime, so much more value to unlock when it comes to the consumer engagement piece.
Starting to tap into.
Maturation of talent, that's why our guests an amplifier to our price. So when we put our brands together with maturation of talent, whether it's Shawn Mendes <unk> two really strong examples and they were our iconic hero products and we have them in stock.
In the channel static call silver wants to engage and digitally led.
That's where we are in Asia for example drive the underlying 37% growth. So we're early early days in unlocking what's within our control and it's going to be what's my focus with my team with my management team is to focus on lean in on a.
A few drivers underlay underneath the five growth drivers that really makes a difference and double down and execute so thats, what we stay focused on.
Thanks, a lot guys I appreciate the detail.
Okay.
Thanks, Mike.
<unk> <unk> from Bank of America. Please go ahead.
Hey, good morning, guys.
Underlying assumptions for your European wholesale business over the next several quarters can you talk about why you think this business can fare better relative to the headwinds you're facing in your U S South business in the back half of the year.
Thank you.
Yes so.
We have in Europe strong forward looking order books, so low double digits for the fall and we continue for spring 'twenty three to have strong demand so and.
And the reason we have that and the reason we have been able to execute so well in Europe and drive this kind of growth in the wholesale channel is the brand focus for both Tommy and Calvin and the product focus and staying really close to the consumer so.
Even though we see macro.
Challenged shifts impact part of Europe , our ability to pivot with the consumer and worked with our wholesale partners to make sure that we have the best hero products.
At the best perceived value.
And that is very much the product value a combination and we're able to sell through with higher AUR. So.
Demand is there and we see the forward looking to buy and to continue to be there as well.
Just to give a bit more context in a stretching our eyes out further now we talked last quarter about that low double digits for the fall and that is firmed up.
The team from there and then looking a little further to pre spring and spring, where obviously, there's a lot more news that the sort of our key partners have absorbed and we're still seeing high single digit growth.
And the order book there as well in the early looks at that so I think we see the strength that our European team has continued to build this year into the fall and then carried on into the spring off of.
Honestly, a significantly larger base as well.
Thank you <unk>.
Time for one more question.
Bruce gross from Goldman Sachs. Please go ahead.
Good morning, and thank you so much for taking our question I was wondering if you could dive a little bit deeper into the gross margin update and your outlook there.
And how that's changed versus last quarter is the step down all a function of North America wholesale Zach perhaps you could give us an update on your forward thinking on it.
<unk>.
And how that might be looking into 2023. Thank you.
Thanks, Brooks, let me just start by saying that the team is doing a really good job mitigating all the macro factors playing into the gross margin rates were close to record breaking.
Gross margin rates still even though we are navigating the disruptions so.
And what gives me confidence from the underlying drivers of gross margin rate going forward. If again the ability to execute on the PVH plus drivers in being even more disciplined on connecting the right product categories.
To the consumer.
Increasing level of focus and those sorts of until the hero products and then.
Having.
David come in as our global head of supply chain on December one.
Really bringing our best in class demand driven supplier experience.
Will unlock further so from a business driving perspective, I see a lot of opportunities that we have step by step over the coming years, we continue to drive gross margin rate.
And to put some numbers around that Brook, maybe I'll break it down into the time periods for the second quarter.
Largely speaking our margins landed at expectations and at the record high levels from last year other than exchange translation. So through the second quarter, we have continued to hold.
Well there with the progress the team has made as we look forward into the second half I think let me talk a little bit region by region. So our international markets have held up very well.
Thus far through this and we expect them to be able to continue to hold at those margin levels that we've seen driven by the key business drivers as defined as mentioned earlier.
Beyond the exchange rate impact, we do see in our planning for the second half for the North American market to become more promotional I think as we see not so much our inventory levels, but where the marketplace is leading to.
Higher competition from there and some do foresee some margin headwinds more than we had previously planned into the second half.
And we're planning down accordingly, and I would say that's across both the wholesale and our own stores. We want to continue to drive the sales growth is defined as talked about earlier up 8% in the second quarter by being relevant in the market for our customer.
At this moment, where the marketplace is.
So I think we see a slightly slightly more headwinds that we had assumed previously.
As we look forward into the into 2023 again, we're not giving more structured guidance from there.
But I think it's defined had mentioned by really managing pillar four of its demand driven operating model is really the key to make sure that regardless of what.
We're experiencing in the marketplace, we're able to make sure that we're staying close to the customer inventory levels are staying in line and we used an example, what Stefan mentioned earlier on Asia for how they've managed inventory here throughout the year. This year, leaving an open to buy open to adjust quickly and to make sure. We can continue to hold for full price selling.
As we have said.
Thank you very much.
Okay.
Thanks Brook and before we wrap up just want to say that.
Never we have never been more focused on unlocking the full potential of Calvin and Tommy through the PVH plus plan I am very proud of the team's ability to drive this kind of underlying growth. We continue to build out on our strength in Europe and Asia, we lean in to unlock North America potential we know we have really big.
Potential there.
And we continue to align the management team to increase our ability to execute and we lean in to drive efficiencies and invest in these initiatives. So that's where our focus is so thanks for spending the time with us and looking forward to catching up soon again.
Thank you. This concludes today's conference call. Thank you for your participation ladies and gentlemen, you may now disconnect.