Q4 2022 PVH Corp Earnings Call
Speaker 1: call.
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Speaker 2: It is now my pleasure to turn today's program over to Cheryl Freeman, Senior Vice President of Investor Relations.
Speaker 3: Thank you, operator. Good morning, everyone, and welcome to the PVH Corp. fourth quarter and full year 2022 earnings conference call. Leading the call today will be Stefan Larsen, Chief Executive Officer and Zach Coughlin, Chief Financial Officer.
Speaker 3: This webcast and conference call is being recorded on behalf of PVH and consists of copyrighted material. It may not be recorded, rebroadcast, or otherwise transmitted without PVH's written permission. Participation constitutes your consent to having anything you say appear on any transcript or replay of this call.
Speaker 3: The information to be discussed includes forward-looking statements that reflect PVH's view as of March 28, 2023, of future events and financial performance. These statements are subject to written uncertainties indicated in the company's SEC filings and the State Harper statement included in the press release that is the subject of this call. These include
Speaker 3: PVH's right to change its strategies, objectives, expectations, and intentions, and the company's ability to realize anticipated benefits and savings from divestitures, restructurings, and similar plans, such as the planned cost-efficiency action announced in its second quarter earnings release and its 2021 sale of assets and exit from its heritage brand.
Speaker 3: about the duration and extent of these impacts. As a result, 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 for current description, estimates, and suggestions. PVH does not undertake any obligation to update publicly in a forward-looking statement, including without limitation.
Speaker 3: and in the company's current report on from 8K furnished to the FCC in connection with the release.
Speaker 3: At this time, I'm pleased to turn the conference over to Stefan Larson.
Speaker 4: Thank you Cheryl and good morning everyone and thank you for joining our call today.
Speaker 4: We are pleased to report that we drove strong fourth quarter financial performance ahead of expectations for both the top and bottom line, led by strength in our direct-to-consumer businesses. We exceeded our expectations on both a reported and constant currency basis.
Speaker 4: and underlying growth, excluding the impact of currency and the Russia-Ukraine exit, was plus 9% in the fourth quarter, driven by better-than-expected results for both Tommy Hilfiger and Calvin Klein.
Speaker 4: We are coming into 2023 with strong momentum and expect to continue to grow our top line, led by outsized D2C growth, while planning to deliver EBIT margin expansion and double digit EPS growth.
Speaker 4: The growth in 2022 was driven by strong consumer response to our product, marketing and marketplace execution across both brands and across all regions.
Speaker 4: We showed that we were able to compete to win in what proved to be a much more challenging macro environment than any of us expected going into the year.
Speaker 4: And I would like to highlight some of the proactive choices we made to make that happen.
Speaker 4: Last April , we shared our long-term vision and multi-year growth plan at our investor today.
Speaker 4: Today, the PVH Plus plan is our brand-focused, direct-to-consumer and digitally-led growth plan.
Speaker 4: that will over time build Calvin Klein and Tommy Hilfiger into the most desirable lifestyle brands in the world.
Speaker 4: and in parallel, making PVH one of the highest performing brand groups in our sector.
Speaker 4: The clarity of our direction and plan have provided a very strong focus for everyone in the company.
Speaker 4: We know where we are going, we know how we will get there, and we made great progress in the first year of execution. This stronger execution focus is gaining traction across the company.
Speaker 4: and we will continue into this year.
Speaker 4: In 2022, both Calvin and Tommy delivered increased strength in product with hero products across key categories.
Speaker 4: and in our consumer engagement with cut-through campaigns.
Speaker 4: collaborations and world-class talent partnerships. This strength in product and consumer engagement is a big reason we drove high quality plus 9% underlying revenue growth with increased pricing power.
Speaker 4: For 2022, from a regional perspective, Europe continued to grow from a position of strength in a challenging environment and delivered a very strong plus 10% growth in euros when adjusting for the Russia exit.
Speaker 4: In Asia, we are setting out to accelerate our growth. We were able to drive outstanding performance in the markets that were not in COVID lockdown, driving plus 11% constant currency growth for the total region and plus 23% constant currency growth outside of China.
Speaker 4: And in North America, we were able to start to win more with our domestic consumer, driving plus 9% growth for Tommy and Calvin together in a brand accreted way, recognizing that this is the beginning of a multi-year unlock.
Speaker 4: From a supply chain perspective, we successfully navigated through the COVID-related challenges. Over the year, we increased our on-time deliveries from 60% to 95%, which have and will continue to deliver positive impact on both availability and cost.
Speaker 4: And we are now about to unleash the next steps in building our supply chain to become a real strategic value driver.
Speaker 4: We are creating a strong data-driven sourcing approach that will return not only efficiencies and cost reduction opportunities, but also enable us to invest back into great products. In addition, we are optimizing our skew breath to create higher productivity.
Speaker 4: by cutting the unproductive assortment tail.
Speaker 4: We also came into the year knowing that an important underlying driver of the PVH Plus plan is to become more cost-competitive. In a way that simplifies how we work, increase our speed in decision-making, and empowers our team to execute, and enables us to drive new growth by making strategic investment.
Speaker 4: Perhaps the most important improvement we have made this past year was to continue to strengthen our management team with the capabilities needed to translate our PVH Plus plan to impact. From my experience, the strength of the leadership team is the single most important factor.
Speaker 4: in successfully translating a value-creating plan into action and impact. I'm proud to share that we made significant progress in this critical area. Zach Coughlin joined as our CFO , David Savman as our Chief Supply Chain Officer, and Sarah Bland as our Chief Strategy Officer. All three bring highly relevant experience.
Speaker 4: and we are already seeing the positive impact from their leadership.
Speaker 4: And then as of this month, Eva Serrano joined as Calvin Klein Global President.
Speaker 4: having spent 20 years as one of the key leaders behind the growth of Zara and Inditex.
Speaker 4: And Donald Kohler joined us Calvin Klein, America's president, having spent a big part of his career on the team that turned around Burberry, both from global roles and as head of North America for them.
Speaker 4: With these appointments complementing our strong existing leadership team
Speaker 4: we have the capabilities, experiences, and the competitive mindset needed to deliver on our long-term PVH Plus growth commitments.
Speaker 4: Finally, I spent a big part of my time in 2022 traveling to experience our markets and stores from the consumer's perspective.
Speaker 4: and I continue to be impressed by our people and teams around the world. I want to thank all of our associates for their hard work during 2022 and give a special recognition to our store managers.
Speaker 4: Their incredible work ethic, expertise, and their passion to every day go out there and win with the consumer is an inspiration to all of us.
Speaker 4: Now, turning to our regional performance and how we are connecting our brands and executing the PVH Plus plan across each region.
Speaker 4: Turning to our regional performance and how we are connecting our brands and executing the PVH Plus plan across each region. Starting with Europe .
Speaker 4: Our Europe team continued to drive very strong performance.
Speaker 4: reflecting the power our brands have with consumers in the region. Despite macro headwinds, we really leaned into the business and finished the year strong.
Speaker 4: We delivered double digits year-over-year growth for the fourth quarter and had another record quarter exceeding 1 billion euros in revenue.
Speaker 4: For the year, Europe also delivered double-digit underlying revenue growth, adjusted for FX and our Russia exit, including growth in every quarter of 2022.
Speaker 4: Growth in the fourth quarter was led by our retail stores.
Speaker 4: which generated very strong performance during the holiday selling period.
Speaker 4: We also saw strong early wholesale shipments of Spring 2023 collections.
Speaker 4: which have been very well received by our partners. Growth was enabled by better product availability, increased operational efficiencies, and faster product deliveries.
Speaker 4: Our TOMI product strategy continues to be driven by product elevation, winning assortment and product stories true to the TOMI DNA.
Speaker 4: All with a focus on reaching the aspirational consumer.
Speaker 4: This was supported by our hero product strategy, which was a strong enabler of growth in 2022. And in 2023, we are further increasing our category office and with that amplifying our iconic products.
Speaker 4: For Calvin, we continue to leverage our proven playbook from Tommy to further build out Calvin as a lifestyle brand across product categories.
Speaker 4: We see strong growth momentum in footwear, accessories, next door established Calvin Klein underwear and jeans businesses.
Speaker 4: We have seen favorable demand from consumers for our spring collection with on-plan early sell-through at wholesale.
Speaker 4: Looking ahead, adjusting for Russia and improved delivery performance compared to last year's supply chain disruptions, our shift order book for fall is expected to be up low single digits.
Speaker 4: while our wholesale partners are taking a conservative approach given the potential for macroeconomic volatility.
Speaker 4: We are well positioned to capitalize should stronger demand continue through our best-in-class operating model and strong never out of stock program.
Speaker 4: Moving on to Asia Pacific. Our Asia team continued to deliver solid growth in constant currency in the fourth quarter, outside of Greater China.
Speaker 4: In Greater China, we generated stronger than expected 11.11 performance, which was offset by the widespread Covid impact.
Speaker 4: For the year, the region generated strong double-digit constant currency growth, and both Calvin and Tommy continued to increase their brand awareness.
Speaker 4: Our focus on key growth categories and hero products and ongoing efforts to refine the product assortment through regionally relevant products with skew rationalization are driving results.
Speaker 4: In the fourth quarter our hero products outperformed with higher AURs and lower discounts.
Speaker 4: We continue to lean in and win key consumer moments, such as Lunar New Year, by driving engagement and performance above plan.
Speaker 4: fueled by successful product capsule launches and consumer activations.
Speaker 4: Both brands continue to move up the rankings on Tmall, underscoring the strength of our brands and product in the market, and how well they are resonating with consumers. For the holiday, we launched the Tommy Miffy capsule collection, which featured the iconic cartoon character Miffy. The omnichannel campaign and capsule launch was brought to life in the UK.
Speaker 4: As we look toward 2023, we are working to further expand the region's digital capabilities.
Speaker 4: and to enable a single consumer view across channels, as well as faster digital execution. We continue to make investments in newer channels such as Douyin live streaming and collaborations with the Tmall Innovation Center.
Speaker 4: which leverages big data and consumer insights to offer customized styles.
Speaker 4: We're also laying the foundation for new and enhanced capabilities in our supply chain through Asia for Asia sourcing, as well as improving our demand planning to focus increasingly on core replenishment and a read and react model to enable shorter lead times with higher in-season buying.
Speaker 4: Looking ahead, our brands have a clear premium brand and product positioning, with the opportunity to grow further in all markets.
Speaker 4: We continue to lean into further increasing overall brand awareness, especially in China where both Calvin and Tommy are under-penetrated.
Speaker 4: Lastly, shifting gears to our business in North America.
Speaker 4: Step by step, we are getting early traction in growing the business in a brand-accreted way, underpinned by a clear category and product focus to deliver sustainable, profitable growth with an increased focus on the domestic consumer.
Speaker 4: Our Tommy and Calvin businesses delivered mid-single digit growth in the fourth quarter, led by our D2C stores.
Speaker 4: We delivered strong performance despite a very promotional holiday period given elevated inventory levels across the market.
Speaker 4: For the year, our Tommy and Calvin businesses increased high single digits.
Speaker 4: Our D2C stores delivered high single digit positive comps in the fourth quarter, driven by improved product assortment and in-stock levels.
Speaker 4: Most importantly, we continue to drive improved domestic consumer comps. Our assortment and product improvements continue to yield results.
Speaker 4: For Tommy, our global bestseller initiative, which focuses on combining global winning design
Speaker 4: scaled quickly to 70% of our D2C business.
Speaker 4: This initiative is generating higher AURs, stronger sell-throughs, and higher gross margins compared to the balance of the assortment.
Speaker 4: One great example that we shared with you last quarter pertained to our expanding Polo business. Building on the prior quarter's success in this key category, in the fourth quarter, our three biggest Polo product franchises were up plus 21% versus 2019. We also saw significant progress with on-time delivery of the new product franchises.
Speaker 4: We are focused on applying our learnings from 2022 and further scale our growth initiatives in North America.
Speaker 4: We are doubling down on the performance drivers in our D2C stores through rigorous assortment building and editing, even better match to demand, with a focus on in-stock improvements in key categories.
Speaker 4: For Tommy, we're expanding the Tommy Global Bestseller Initiative to the wholesale channel.
Speaker 4: And for Calvin, we are building market share in CK underwear by improving replenishment execution and in-stock levels across all channels, coupled with our impactful marketing execution. At the same time, we are making investments in store upgrades to ensure our stores deliver an elevated consumer experience.
Speaker 4: Next, I'll share a few global brand highlights and how we are bringing both brands to life for the consumer beginning with Calvin Klein.
Speaker 4: Jonathan Bonhamley, our global Calving Client CMO and our Calmin Marketing Team have done a fantastic job in going back to the iconic DNA of Calving Client and made it highly relevant to today.
Speaker 4: During the past few months we have been able to see this work come to life under the campaign umbrella of Calvin's or nothing.
Speaker 4: In January the campaign launched with global tennis star Carlos Alcaraz in our signature cotton underwear styles wearing our classic straight jeans and he drove strong results.
Speaker 4: More recently, the spring chapter of the campaign was launched globally starring ambassadors and friends of the brand, including Michael B. Jordan, Jennie Kim, Kendall Jenner, FKA Twix and Aaron Taylor-Johnson.
Speaker 4: Dressed in the latest underwear and jeans, the full cast introduced a wide range of new styles for the season. The campaign launched with Michael B. Jordan timed to the release of his highly anticipated film Creed 3.
Speaker 4: The campaign images quickly went viral across social media and generated very high engagement. The collab post between Calvin and Michael B. Jordan is now one of our highest performing posts to date, with a total reach of 8 million on own social.
Speaker 4: We saw incredibly strong organic broadcasts and digital coverage across entertainment, pop culture and fashion outlets, including on Jimmy Kimmel Live, for a total reach of $1.3 billion in the 24 hours after launch.
Speaker 4: And the campaign pick up didn't stop there. The brands collab post with Kendall Jenner is now the highest reaching post of the year with 13.4 million in reach. Again a testament to the power of the right imagery and the right talent to cut through. Still launching this week.
Speaker 4: John Cook, a member of the extremely popular South Korean boy band BTS, will join the brand as global ambassador for Calvin Klein jeans and Calvin Klein underwear. Moving on to Tommy Hilfiger.
Speaker 4: Tommy, with his unique classic American Cool DNA, continued to drive strong brand visibility and relevance among our target consumers.
Speaker 4: The brand generated approximately 4 billion impressions from November to January .
Speaker 4: Tapping into a moment of strong consumer relevance, the Brandt's Miffy collaboration, which I just spoke to.
Speaker 4: although developed for the Lunar New Year celebrations, was leveraged globally and it was one of our strongest performing capsules. Looking ahead, our Tommy Spring campaign, Classics Reborn with Shawn Mendes, recently launched globally.
Speaker 4: And as part of that, Tommy and Sean just hosted a tour of immersive events in London, Berlin, Milan and Mexico City. Selected flagship stores held in store activations.
Speaker 4: Sustainability stands at the heart of this collaboration with the collection incorporating a broad range of recycled and other sustainable materials. The Tommy Jeans label is also fostering new consumer connections through the upcoming Tommy Aries collaboration.
Speaker 4: which features a bold and creative play on all things Tommy Jeans. The collection is inspired by archival Tommy pieces, and will in the coming days be available for early access online, in our own stores, and in key streetwear retailers globally.
Speaker 4: For both brands, we are looking forward to an exciting 2023.
Speaker 4: It will be a year to take another big step forward in delivering on our PVH Plus commitment.
Speaker 4: towards our long-term vision of building Tommy and Calvin into the most desirable lifestyle brands in the world, all while becoming one of the highest performing brand groups in our sector.
Speaker 4: I recognize the macroeconomic environment will likely continue to be tough, so we will be relentless in executing our five PVH Plus growth drivers across both brands and all regions.
Speaker 4: In Winning with Products, we will advance our category offense and create the best hero products in the market. In Winning with Consumer Engagement, we will deliver seasonal cut-through campaigns charged by an increasingly strong network of aspirational talent.
Speaker 4: You will also see us improve the aspirational presence of all consumer touchpoints, ranging from social media, e-commerce to in-store.
Speaker 4: We are also investing more into marketing as a share of sales to make sure we continue to cut through with our initiatives. In winning in the digital marketplace, we will continue to drive D2C offers across both e-commerce and stores with improved productivity.
Speaker 4: all while we strengthen our partnership and business with our key wholesale partners.
Speaker 4: and increasing our full price penetration.
Speaker 4: We are continuing to drive e-commerce strength both owned and operated and with key partners.
Speaker 4: We are only in the beginning of developing our demand driven supply chain.
Speaker 4: And this year, we will make progress in cost of goods, delivery accuracy, and leveraging our scale across both rounds.
Speaker 4: All while we take big steps to become cost-competitive, going after efficiencies while investing behind our growth drivers. I look forward to building on the strong momentum we started in 2022 to win in 2023 and beyond.
Speaker 4: We are starting to get real traction around the vision, the plan, the execution, and most importantly, the team and the mindset needed to get it done.
Speaker 4: Over time, there is enormous power in the compounded effect on being consistent in direction and value creating focus through the PBH Plus plan.
Speaker 4: I'll now turn the call over to Zach to discuss the financials in more detail.
Speaker 5: Thanks, Stephan, and good morning. My comments are based on non-GAAP results and are reconciled in our press release.
Speaker 5: As Stefan discussed, we are extremely pleased with our results for the fourth quarter in the full year, which significantly exceeded both our top and bottom line guidance, driven by strength in our European business and continued cost discipline globally.
Speaker 5: 2022 was a year of unprecedented macroeconomic volatility, and in this tough environment, we fought hard to win by focusing on what is within our control. Our ability to drive underlying revenue growth of 9% for 2022 and earnings per share of $8.97.
Speaker 5: in line with our initial expectations at the start of the year of approximately $9 per share, is a testament to our disciplined execution of our strategic priorities and the power of our two global brands, Calvin Klein and Tommy Hilfiger. We are encouraged by the positive momentum we drove in the fourth quarter.
Speaker 5: and are confident that we can deliver solid top-line growth in 2023 while driving increasingly improved profitability.
Speaker 5: I will now discuss our 2022 results in more detail and then we'll move on to our outlook for 2023.
Speaker 5: Our strong fourth quarter results delivered underlying revenue growth of 9% versus last year, exceeding our top-line guidance by 4% on a constant currency basis, and we delivered earnings per share of $2.38, significantly exceeding our earnings guidance by 73 cents.
Speaker 5: Our underlying revenue growth was driven by both our Tommy Hilfiger and Calvin Klein brands.
Speaker 5: We delivered strong revenue growth in Europe and continued growth in North America driven by the direct-to-consumer business. We continued to experience negative impacts in China from the COVID pandemic, but the rest of Asia Pacific continued to drive growth in constant currency. On a reported basis, Behm Toolkit, executive director of the European Gas Moulin Priest Relations Center said relatively hard to
Speaker 5: Fourth quarter revenue was up 2%, which reflected a 6% negative impact from exchange and a 1% negative impact from the war in Ukraine.
Speaker 5: We continue to focus on driving performance in our direct-to-consumer business, where we have the closest connection to our consumer, and DTC was up double digits on an underlying basis driven by strong, high single-digit growth in North America and mid-teens growth in Europe in Euros. On a reported basis, DTC revenue is up 4% compared to last year.
Speaker 5: which reflected a 6% negative impact from exchange and a 1% negative impact from the war in Ukraine. From a regional perspective, fourth quarter revenue for our international business was up 11% versus last year on a constant currency basis, continuing to significantly exceed 2019 pre-pandemic levels.
Speaker 5: Within our international business, our European business had another record quarter following the first 1 billion euro quarter in the company's history in the third quarter.
Speaker 5: Our Asia-Pacific business was down 8% on a reported basis, including a 9% negative impact of exchange.
Speaker 5: Fourth quarter results in Asia Pacific were severely impacted as COVID cases in China rose following the lifting of restrictions there, but saw improvement at the end of the quarter and into the first quarter of 2023.
Speaker 5: In North America, revenue in the fourth quarter was up 5% overall for Tommy Hilfiger and Calvin Klein.
Speaker 5: with our retail store business up high single digits versus last year as we drove sequential improvement versus the third quarter in sales to domestic consumers. Our domestic comp sales are now up mid single digits compared to 2019 levels.
Speaker 5: Our global brands also continued strong underlying growth, balanced across both brands, with Tommy Hilfiger revenues up 10% on a constant currency basis and Calvin Klein revenues up 8% on a constant currency basis.
Speaker 5: Reported revenues were up 3% for both Tommy Hilfiger and Calvin Klein. In the fourth quarter, we delivered gross margin of 55.9%, up approximately 190 basis points compared to pre-pandemic levels, but down approximately 240 basis points compared to last year. Gross margin reflected favorable region and channel mix compared to last year.
Speaker 6: 23.
Speaker 5: SG&A expense as a percentage of revenue for the fourth quarter was 47.2%, down nearly 400 basis points from last year and better across all dimensions of the business.
Speaker 5: We continue to take a disciplined approach to managing expenses, driving cost efficiencies while making targeted investments in strategic areas to fuel growth in line with the fifth growth driver of the PBH Plus plan.
Speaker 5: In total, EBIT for the quarter was $215 million, exceeding our expectations due to strong revenue performance and lower expenses. Operating margin was 8.6%, as reported, and 9%, excluding the negative impact of approximately 40 basis points due to exchange. savings per share was $2.38 compared to $2.84.
Speaker 5: external factors, earnings per share was almost flat to prior year.
Speaker 5: Our tax rate was approximately 22%. As a reminder, in last year's fourth quarter, we benefited from non-cash tax rate relief tied to our purchase of the Calvin Klein brand back in 2003. This benefit ran out in 2021.
Speaker 5: As a result, our tax rate in the fourth quarter of last year was a benefit of approximately 33%. Inventory was up 34% at the end of the quarter compared to the prior year period due to a combination of factors. As we've discussed, inventory levels were abnormally low in 2021 due to supply chain and logistics disruptions.
Speaker 5: which intensified in the second half of 2021. We have seen steady progress over the course of 2022 towards pre-pandemic production capacity and significantly improved delivery times.
Speaker 5: and in the fourth quarter this year we experienced much earlier receipts of inventory as these supply chain and logistics disruptions had eased. This enabled us to capitalize on incremental top-line opportunities in wholesale for the quarter, but also contributed to the higher ending inventory levels. Absent the elevation due to timing of receipts, we saw a decrease in the number of receipts that were received in the quarter.
Speaker 5: we have normalized back to inventory levels that support our planned growth.
Speaker 5: We also felt the full impact this quarter of higher product costs compared to last year. Looking into 2023, we expect costs to improve as we move through the year, particularly in the second half.
Speaker 5: We ended the full year 2022 with revenue of $9 billion and underlying revenue growth of high single digits aligned to our long-term financial algorithm and driven by growth in all regions and in both our Tommy Hilfiger and Calvin Klein brands. Our full year reported revenue was down 1% versus prior year.
Speaker 5: and reflected a negative impact of 7% from exchange and 3% from the exit of heritage brands in the war in Ukraine.
Speaker 5: Operating margin was 9.5% and our tax rate for the year was 23.3%.
Speaker 5: Overall, we delivered earnings per share of $8.97, delivering our initial start of year guidance of approximately $9 per share.
Speaker 5: Additionally, we delivered on our commitment under the PVH Plus plan to return excess cash to shareholders, returning over $400 million to shareholders during the year through the repurchase of 6.2 million PVH shares and our dividend, including approximately $73 million for the repurchase of 1.1 million shares in the fourth quarter.
Speaker 5: Moving on to our outlook. In 2023, we expect to continue to execute our strategic priorities to unlock the full potential of our two global brands, Tommy Hilfiger and Calvin Klein, and as a result, our strong financial performance across all regions.
Speaker 5: We ended 2022 strongly and are entering 2023 with momentum behind the PVH Plus plan.
Speaker 5: With that said, we acknowledge that macroeconomic uncertainties still exist with consumer sentiment tempered by inflationary concerns, particularly in North America and to a lesser extent in Europe , and retailers planning cautiously due to elevated inventory levels industry-wide. As such, we have approached our plans for 2023 with a healthy balance of optimism and prudence.
Speaker 5: 2 to 3% on a constant currency basis compared to 2022.
Speaker 5: This reflects a benefit of less than 1% from the 53rd week of 2023. Europe and North America are planned to grow low single digits, with strong growth in our direct-to-consumer channel, tempered by wholesale, as retailers remain cautious on buys.
Speaker 5: and Asia Pacific plan to grow by low double digits as China has eased COVID restrictions. We expect our four-year gross margin rate to increase over 100 basis points compared to 2022, despite approximately 100 basis points of higher cost due to exchange, which we have previously discussed.
Speaker 5: The improvement in our gross margin is supported by a favorable shift in channel and regional mix compared to 2022, as we accelerate growth in our higher margin DTC business, in line with our PVH Plus strategies, and our DTC and international businesses make up a larger portion of total revenue.
Speaker 5: Additionally, we are seeing ocean freight rates coming down rapidly.
Speaker 5: We are using significantly less air freight and abnormally high raw material costs will ease as we move through 2023, particularly in the second half of the year.
Speaker 5: SG&A expense as a percentage of revenue for the full year is expected to increase approximately 70 basis points compared to 2022.
Speaker 5: We continue to drive cost efficiencies across the business while targeting our investment focus on key areas that drive growth, especially marketing. We expect to generate increasing savings as we move through the year related to our plan to reduce people costs in our global offices by approximately 10% by the end of 2023, for these benefits are more than offset by the impact of regional and channel mix.
Speaker 5: which although favorable to our gross margin, carry higher expenses. We expect our four-year operating margin will increase to approximately 10% reflecting high single-digit EBIT growth. Our interest expense is projected to be approximately $100 million and our tax rate for the year is estimated at approximately 24%.
Speaker 5: For the full year 2023, we are projecting earnings per share to be approximately $10, 11% vs 2022.
Speaker 5: Looking at the balance sheet, we expect to build cash with a significant increase in cash flow operations, reflecting an improvement in working capital due to lower inventories compared to 2022 as receipt flow normalizes.
Speaker 5: We are projecting capital spending of $350 million, which is approximately 4% of sales, as we invest in our stores, supply chain and technology, and in line with our PVH Plus plan priorities.
Speaker 5: We are also currently planning at least $200 million of share repurchases, and will continue to review opportunities for capital deployments as we move through 2023.
Speaker 5: To zero in on the first quarter specifically, we expect to continue to be challenged by residual inflationary pressures and lingering macroeconomic uncertainties.
Speaker 5: Our overall revenue is projected to be relatively flat as reported and to increase by approximately 3% on a constant currency basis compared to the prior year.
Speaker 5: First quarter earnings per share are projected to be approximately $1.90.
Speaker 5: which reflects a negative impact of approximately 10 cents due to exchange translation.
Speaker 5: Our tax rate for the first quarter is estimated at approximately 24%, and interest expense is projected to be approximately $23 million.
Speaker 5: Before I open up for questions, I just want to reiterate that we remain confident in our ability to win in a tough environment, as evidenced by our performance in 2022. And while we expect the macro environment will continue to be volatile in 2023, we are continuing to focus on executing our strategies to drive top-line growth and improve our performance in 2022.
Speaker 5: improved profitability, and strong double-digit EPS growth in 2023. And with that operator, we would like to open it up to questions.
Speaker 5: and strong double-digit EPS growth in 2023. And with that operator, we would like to open it up to questions. Yes, sir.
Speaker 2: At this time if you would like to ask a question, please press the star and one keys on your touch tone phone. If at any time you find that your question has been addressed, you may remove yourself from the queue by pressing star 2.
Speaker 2: Our first question will come from Bob Droubles with Guggenheim. Your line is open.
Speaker 7: Hi, good morning. A couple questions that I have actually. On the first one, can you just talk about what surprised you the most in the fourth quarter? The results were just well ahead what we expected. Then the second piece of it is when you think about the PVH plus plan, what elements do you think you got the most traction on that give you the
Speaker 4: that you've portrayed for FY23. Thanks. Well, thank you and good morning, Bob. First of all, from the surprises in Q4, I would say it's the lack of surprises because we set out the PVH Plus plan almost a year ago.
Speaker 4: and Tommy and the PVH Plus plan is about leaning into each of these iconic brands.
Speaker 4: main product categories and we were able to get traction on that. There are lead times so we set out to do that a year ago and what you can see in the fourth quarter was that we were starting to get traction. So starting to get early traction on the product category focus.
Speaker 4: starting to get traction in Q4 on developing some of the best hero products in the market, the most important products in the consumer's wardrobe. And then we were able to really deliver cut-through campaigns with world-class talent. So we were able to tap into the iconic strength of the brand. We were able to increase the product strength.
Speaker 4: then bring that to market and compete to win in as Sak mentioned a much tougher macro with
Speaker 4: a cut-through campaign in Calvin and a cut-through campaign in Tommy that look at it as a campaign umbrella that will continue to go because it's really combining the category, the hero products, the world-class talent and that's what we can see in Q4, consumer facing.
Speaker 4: On the underlying business engine side, we were able to drive better, much better supply chain execution. So we were 60% on-time delivery last year, heavily affected by the COVID disruptions. Today we are 95% close to 100% on-time.
Speaker 4: then we were able to drive cost efficiencies while investing more in growth so you will hear SAC good
Speaker 4: take you through how we invest more in marketing. And then as the final part is the leadership team and getting the capabilities on the leadership team we needed to execute this. So this is some of the highlights of what I see drove fourth quarter.
Speaker 4: and also how it will continue that this is just the beginning and that drives the confidence for the outlook this year.
Speaker 4: continue that this is just the beginning and that drives the confidence for the outlook this year. Thank you.
Speaker 8: Thank you. Our next question will come from Michael Benetti with Credit Suisse. Your line is open. Hey, guys. Thanks for taking our questions. Let me add some congrats on a great quarter here. I guess I have two on the finance side, Zach. Can you give a little more color on sizing the buck?
Speaker 8: above 2019. I know you talked previously about almost 30% of sales in those doors are from tourists before COVID. Can you offer any specific quantitative examples where North America DC
Speaker 8: stores are in terms of total productivity levels and profitability levels compared to pre-COVID and what you think is the right pace investors can think about to recapture some of that opportunity.
Speaker 4: Well, thank you Michael, it's Stefan. So let me just start from the business side in terms of the gross margin strengthening in the outlook because I'm encouraged by a lot of what I see on the gross margin side. First, cost of goods are coming down, freight is coming down and also the supply chain strengthening so that we are getting better.
Speaker 5: mind going through more in detail. Let me put some numbers around that for you Michael. I think that first of all as we've said gross margin we expect to grow by over 100 basis points this year versus last year and keeping in mind that includes approximately 100 basis points of transactional exchange headwind that we talked about previously to your
Speaker 5: So to your question on the 200 basis points of underlying improvement, as Stephon mentioned, first, we are planning for a significant increase in DTC penetration aligned to the PBH Plus plan, and that drives almost 100 basis points of gross margin improvement. And then second, we are planning for a significant increase in DTC penetration aligned to the PBH Plus plan.
Speaker 5: You know, we expect that several of the macro headwinds that we experienced were increasingly transitioned to tailwinds, but as we work through 2023. So included in that are significant reductions in ocean freight rates and a decrease in utilization of air freight as the supply chains have normalized. Those two changes alone are worth approximately 100 bases.
Speaker 5: in terms of the international stores. At this point in time, our outlook does not count on a return to 2019 levels of international tourists. We're still assuming a significant decrease versus 2019. We are seeing the beginnings of some of that start to come back this year.
Speaker 5: And as they're coming back in, they're buying strongly, but I think we've learned over the last couple of years to not count on that. The focus will remain on really satisfying the domestic consumer, and that will be the area from there. And if international tourists come in, that will be a source of growth later in the year that's not currently planned for. Thank you. Michael, one part that was excite...
Speaker 8: It was nice to see you here. Thanks for the call, Stéphane. urn.schemas-microsoft-com.
Speaker 8: Thank you, Mike.
Speaker 9: Thank you. Our next question will come from Jay Sull with UBS. Your line is open. Great. Thank you so much. I think you mentioned for the full year guidance you expect revenue growth in all regions. Maybe just elaborate a little bit and maybe give us an idea of how you're thinking about growth in North America versus Europe versus Asia. Thank you. Yes, absolutely. Thank you, Jay. And as we have you mentioned with arise in this country, Apple has put quite a bit of effort into direction change. We're actually testing to see if it will expand. The one that assistants can focus on is how those investments will make them flexible.
Speaker 4: main driver, we see that being true for both Europe and North America and Asia. When we look at North America it's continuing to build strength with that domestic consumer in a brand accreted way and then when it highlights on Asia is the comeback of China and the...
Speaker 5: expectations in both North America and Europe and then low double digits in Asia. I think both in North America and Europe , we wanted to make sure with the uncertain consumer backdrop that we're planning prudently for the year. I think we see some of that in terms of the work we have with our accounts, a bit more of a cautious approach. I think considering the volatility we're experiencing, we think that that is a prudent way to plan for the year, focus on those things in our control. We'll see what happens with the swapVisuals. We'll do some building St. Louis journals, you know, so we went through the work, last week everybody said we'd do a trend. And boom, our
Speaker 5: Depending on how the year evolves, if there's stronger consumer demand of that, we're ready to address that both in the US and Europe as that comes.
Speaker 2: Okay, great. Thank you so much. Thanks, Jay. Thank you. Our next question will come from Dana Telsey with TAG Advisors. Your line is open. Good morning, everyone, and congratulations on the nice progress. As you think about Europe and the order book going forward and what you're seeing in wholesale globally.
Speaker 4: Well, thank you, Dana. So when we look out for 2023 in Europe , we see strong consumer demand. So if we look at Q1, we see strong consumer demand continuing from Q4 last year. So start of the year, strong consumer demand in both D2C channels.
Speaker 4: and in wholesale sell-throughs. So consumers response to our spring product is strong. For the back half of the year our wholesale partners are taking a more cautious approach and it comes back to the volatile macro.
Speaker 4: What really makes us have a uniquely strong position in this situation is that in Europe in particular we have a very strong ability to react into and fulfill in-season demand. Both in D2C and in wholesale.
Speaker 4: continuing to see the consumer strength that we see now for the rest of the year we will be able to react and fulfill into that beyond the pre-planned order books.
Speaker 5: Yep, and I think just to sort of talk a bit more, put some numbers around that Dana, around the European order books. Just a reminder for Spring 23, we had order books in at high single digits. And we're happy to say that that is actualized fully as product supply chains normalize and products started showing up earlier than expected. Now,
Speaker 5: keeping in mind that's about in line with where pre-pandemic was, but earlier than us or the accounts for planning, the accounts have been very eager to take that product. So we're able to ship in partially in fourth quarter and the rest early here in the first quarter and we're seeing from those floor sets as they're setting is strong consumer response. I think we feel great about the spring order book as Stefan mentioned.
Speaker 5: The fall order books have come in and the numbers are low single digits from a growth perspective, which is not aligned with what we're seeing from consumer response today. So we believe they're taking a cautious outlook and we're aligning our overall expectations over the year to that. But I do think it's important to highlight what Stefan had mentioned that we saw specifically through the COVID period and all that volatility, our European operating model, the team has built the never out of stock fulfillment model. We have had severaltimer
Speaker 5: best in class, we were able to chase quickly into demand that showed itself then. And I think as consumer trends stay where they are, we believe we'll be well positioned to do that as well heading into the year.
Speaker 2: And then just lastly, just on marketing, how do you see marketing progress through the year and what percentage of sales do you see marketing becoming? Thank you.
Speaker 4: Thanks Dana. So on the marketing side, as I mentioned in my prepared remarks, Calvin, Jonathan and the Calvin team has done a fantastic job to start with Calvin. In Calvin's or Nothing is the campaign umbrella. So it's very much connecting back to the iconic beloved DNA and making it
Speaker 4: super relevant for today, whether it's Michael B. Jordan, Kendall Jenner, and most recently John Cook from BTS, the BTS star, who is now becoming a Calving Global Ambassador. And it was remarkable yesterday, we teased it on Instagram, Zach and I were following the reaction hour by hour. In a few hours, we got a million and a half likes, we got 157,000 comments. Like from our customers, our consumers saying things like, our dream has come true.
Speaker 4: I'm dying, my life is complete, I'm ready to die. I'm crying right now. So it's that, you can only do that if you have an iconic beloved brand like Calvin and Tommy and then connect that with incredible products and incredible talent. And then something I saw late last night, the team members sent through.
Speaker 4: Tommy and Shawn Mendes are doing the Classics Reborn campaign. Also focusing on the DNA, the classic American cool, the style icons and making them relevant for today. Fantastic response to that. And what I received last night was a video clip from one of the – it's called the Arts – one of the premier shopping centers in Mexico City. Shawn Mendes were there and did an immersive appearance.
Speaker 4: thousands of people screaming, going wild. So it's this fantastic balance between the iconic timeless DNA of the brand and then making it current. So these campaign umbrellas will just continue and for us it's about systematically, repeatedly executing better and better and better. So that's from a marketing perspective. And then we...
Speaker 5: Then, as I mentioned, we are investing more in marketing. So, Zach, will you be able to share more of the details of what that means in numbers? Yeah, we're making a commitment this year to increase marketing spend both in dollars and I think importantly as well in percentage of revenue. So the percentage of revenue will increase 30 to 40 basis points this year to almost 6%. And that's just the first step on the journey. The key investment priority for us is we work on delivering the PBH Plus plan. So a big step forward to almost 6% this year.
Speaker 5: we are investing more in marketing. So, Zach, will you be able to share more of the details of what that means in numbers? Yeah, we're making a commitment this year to increase marketing spend, both in dollars, and I think importantly as well in percentage of revenue. So the percentage of revenue will increase 30 to 40 basis points this year to almost 6%, and that's just the first step on the journey. It's a key investment priority for us as we work on delivering the PBH Plus plan, so a big step forward to almost 6% this year. Thank you.
Speaker 9: Thanks, Dana. Thank you. Our next question will come from Chris Nardone with Bank of America. Your line is open. Hey, guys. Good morning. Can you discuss the underlying assumptions around your North America wholesale business? It would be very helpful if you could discuss how sellout trends are faring for both brands, given your healthier inventory position, and then whether you think you're in a position to chase if retailers begin to turn more profit.
Speaker 4: performance in the full price wholesale channel with maces. So we're seeing improved sell-through trends for both Carmen and Tommy and we see tremendous potential here in working with maces and expressing our full-price presence in North America stronger.
Speaker 4: For both Kevin and Tommy, we are seeing so much potential there. And the exciting part in Q4 and the start of this year is that we are seeing it translate to high growth and improved sail-throughs. With that said, there is a cautious outlook in North America as well from all our wholesale partners.
Speaker 5: coming back to the macroeconomic volatility. Yeah, I think we expect, as we'd said, DTC to be our big focus in North America. And then closely behind that, as Stefan mentioned, sort of our full price execution with our key partners like Macy's. Beyond that, we do expect the broader wholesale environment.
Speaker 5: towards, I never had a stock model what that was to go through. So I think we're optimistic that you know should those trends continue we've seen early in the year that we'll be able to continue to fulfill that demand regardless of where the consumer demand goes. Okay great and then just one more in just on China can you just talk about how that reopening is going.
Speaker 4: market for us and seeing the reopening and seeing the consumers come back it's been really strong positive trends so that's why we are planning Asia for 2023 as the highest growth region so what we see is very encouraging.
Speaker 2: We have time for one more question. Thank you. Our last question will come from Ike Borochow with Wells Fargo. Your line is open. We have time for one more question.
Speaker 10: Hey everyone, let me add my congrats. Maybe just looking at the next couple of years, Zach, it's been about a year since the NLS Day and the PVH Plus plan. Targets were given. Your 15% margin goal for 25 was laid out. You're looking for 10 this year. How are you feeling a year later?
Speaker 10: in your progress towards that 15 and then I guess to that point Beyond 25 when these licensing dynamics start to play and I assume that's ludus to the margin Is there some way we should think about margins, you know past 25 as the business model changes a bit? More from owned away from license. Thanks Oh, thanks. I it's Stefan here. So if I start from just an overall
Speaker 4: business perspective and value creating perspective. First year in now into the PVH Plus plan, there is significant growth opportunities, both from a revenue and a margin expansion perspective, through each of these five growth drivers. The product.
Speaker 4: the increased marketing consumer engagement, the marketplace execution, the demand driven supply chain that we are moving towards, the cost efficiencies and then investing behind these growth drivers. So one year in when I look at this, I see that we are just in the beginning of unlocking this value and it's independently on macro because there's so much we have in our own hands and what excites me the most is to see how
Speaker 5: how we as a team have come together during this year and really locked into the direction we set out. And now it's just about consistently delivery improvements. Now we built our PBH Plus, the financial model with flexibility. You know, over any multi-year period, we were safe to assume that we'd experienced a full range of macroeconomic cycles.
Speaker 5: And we've seen that. So obviously we're going to drive growth when those opportunities are there, just like we saw in 2022 with high single digit underlying growth on all dimensions. And we will also continue to manage the remainder of the P&O to drive profit efficiency. So the DTC channel mix and pricing power to drive gross margin improvement and all elements of cost, product cost, supply chain cost. We've talked about that already today.
Speaker 5: in all elements of SG&A that we knew and we talked about, we had efficiencies to work our way through. So we knew the journey would not be linear and obviously it hasn't been in that first year, but as Stefan said, we're just as committed to delivering.
Speaker 4: The the targets as we laid out a year ago and the more just to build on what's active thing the more we lean in As a team on these five growth drivers We also see the specific opportunities and then we unlock them step step by step
Speaker 4: the targets as we laid out a year ago. And the more, just to build on what Zach is saying, the more we lean in as a team on these five growth drivers, we also see the specific opportunities and then we unlock them step by step. Great, congrats.
Speaker 9: Thank you very much. Appreciate it. So with that we're ending our call and looking forward to reconnecting next quarter. Thank you. Thank you ladies and gentlemen. This does conclude today's PBH's fourth quarter and full year 2022 earnings conference call. We appreciate your participation and you may disconnect at any time.