Q3 2023 PVH Corp Earnings Call
Good morning, everyone and welcome to todays PVH third quarter 2023 earnings conference call.
At this time all participants are in a listen only mode.
Later, you will have an opportunity to ask questions. During the question and answer session.
You May register to ask a question at any time by pressing the star and one Keith on your telephone keypad.
This call will be recorded and I'll be standing by if you should need any assistance it.
It is now my pleasure to turn today's program over to Shell Freeman Senior Vice President of Investor Relations. Please go ahead.
Thank you operator, good morning, everyone and welcome to the PVH Corp, third quarter 2023 earnings conference call, leading the call today will be Stefan Larsson, Chief Executive Officer, and Zach Coghlan 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 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 November 32023 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 include Pvh's right to change its strategies objectives expectations and intentions and the companys ability to realize anticipated benefits and savings from divestitures restructuring and similar plans such as the planned cost efficiency actions announced in August 2022, the 2021 sale of assets of an exit from.
As heritage brands menswear, and retail businesses and the November 2023 sale of the heritage brands Womens intimate apparel business to focus on is Calvin Klein and Tommy Hilfiger businesses PVA.
<unk> does not undertake any obligation to update publicly any forward looking statements, including without limitation any estimates regarding revenue or earnings generally the financial information and projections to be discussed will be on a non-GAAP basis as defined under SEC rules reconciliations to GAAP amounts are included in Pvh's third quarter 2023.
The 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 for the third quarter. We drove strong performance led by the strength of our two globally iconic brands, Calvin Klein and Tommy Hilfiger, and our disciplined execution of our brand building growth plan to PVH Clos Pla.
Despite an increasingly choppy macro backdrop, particularly in Europe. We grew overall revenue in line with guidance up 4% on a reported basis and up 1% in constant currency, while expanding our gross margins and we beat our guidance for the bottom line.
We drove high single digit growth in our direct to consumer business with growth across both brands in all regions. This included double digit growth in our owned and operated E Commerce and mid single digit growth in our stores, partially offsetting the strength in D. C trends, we experienced incrementally.
More challenging trends in wholesale brought by the tougher macro environment.
As a company we are driving a much more profitable business on a non-GAAP basis. In Q3, we grew EBIT by 13% versus last year with strong margin expansion and in Q4, we project to grow EBIT by over 30% versus last year with an approximate 12.
5% EBIT margin.
Looking ahead, we are reaffirming our EBIT margin and we are increasing our EPS guidance by <unk> 10 for the full year on a non-GAAP basis.
By focusing on what's within our control for the full year of 2023, we remain well positioned to drive meaningful margin expansion and double digit EPS growth.
We just came out of the imports on Thanksgiving and Black Friday week, one of the key consumer moments during the holiday period, and I am pleased to share that in both North America and in Europe, We beat our growth plans versus last year and delivered a strong start of the holiday season.
We continue to make strong progress and gain increasing traction across all five growth drivers of the PVH plus cloud.
And we relentlessly named to the execution on winning with product when and where to consumer engagement winning in the marketplace as well as developing a data and demand driven supply chain and investing in growth while driving efficiencies.
And as I mentioned on our last call each of our growth drivers plays an important role and he is when we play them. All together, that's something really powerful happens let me share. Some concrete examples on how we made that come to life this quarter.
First our strong D to C growth was fueled by increased product our supply chain strengths that drove higher gross margins.
Sales growth was supported by a nearly 20% increase in marketing investments with strong cut through campaigns and global talent amplification.
From a regional perspective, we drove constant currency revenue growth for our combined Calvin and Tommy businesses for all regions.
Our outperformance in the quarter was driven by North America, which is a very important proof point for how we are already positioning both Calvin and Tommy for long term sustainable growth in the region through strong execution of the PVH plus cloud.
For the second consecutive quarter, our EBIT margin for our Calvin and Tommy businesses in North America, together took a sizable step forward and expanded to 13, 1% in the quarter with significant gross margin expansion in both our direct to consumer and wholesale business.
Inventory continues to be in great shape, boasting composition any levels down 19% at the end of the quarter.
We made significant progress increasing overall inventory productivity as part of our actions to lower inventory in relation to sales by 25% by the end of fiscal 2024, all while improving availability for the first half of 2024, we also see decreases in our.
<unk> with more than 5%.
This is partly driven by favorable macro but even more importantly is driven by an improved approach to our costing process. The first results of a better raw material strategy and early returns on a much sharper assortment productivity.
We continued to invest in growth, while driving cost efficiencies and are improving our cash flow increasing share buybacks showing our confidence in our ability to execute over the long term.
During the quarter, we further sharpened our focus on our two core brands with a divestiture of heritage brands. The proceeds from the transaction will be used to repurchase stock and we now expect to repurchase approximately $550 million of our stock up from $400 million previously.
Finally, it will be the strength of our brands, our consistency and direction and our relentless execution of the PVH class plan that was set us apart over time.
And this will in turn be driven by the quality of the management team, which we have strengthened significantly over the past year.
I'm happy to share. The addition of Lea Rich Goldman who will join US as global brand precedent of Tommy Hilfiger in spring 2024.
<unk> uniquely strong and experienced brand ambitious builder with an outstanding track Records building brands globally.
Under <unk> leadership, the Tommy Hilfiger, Brian will operate in the same way our global Calvin Klein business operates today under <unk> serono, creating a consistent a unified global brand structure each of our two brands now has one leader who sets the vision Lee.
<unk> product creation brand marketing and consumer experience globally, working closely with our regional teams, who inform those strategies and lead the brand to win in the marketplace.
Now, let me share a bit more of what drove our performance in the quarter, both from a global brand and regional perspective.
Starting with Calvin Klein.
Throughout the third quarter Calvin continued to focus on driving very strong consumer engagement globally through our most important hero products and driving a strong category offense, we had growth across sell refined performance and underwear categories. It was another quarter, where we delivered cut through camp.
<unk> globally and continue to amplify our talent partnerships. When we last spoke to Brian had just launched its fall campaign, which included our long term ambassadors journey, Kim Jong Cook Kendall Jenner wearing our most essential underwear denim and refined women's wear styles.
We cut through with nearly 4 million average video views, some tick tock and over 20% engagement rate on Instagram.
As part of the fall campaign. The brand also launched a surprise performance with John Cook in Times Square in New York. The constant was announced only 30 minutes beforehand and tens of thousands of funds gathered within minutes, John Cook and his whole crew were dressed in iconic Calvin Klein and Theyre looks were immediately shopper.
<unk> on our site.
It was a perfect example, on how we amplify global talent to win with consumer engagement.
For holiday the brand campaign features Hailey Bieber in iconic Calvin Klein stars, where our hero products. So prominently featured on social through shopper bolt content to drive commercial impact.
Finally, I am excited about the progress we are making to align Calvin Klein to one global brand vision since joining Eva has been focused on tapping into calvin's core DNA to make the brand more current than ever as part of this work, we're expanding the capabilities of our global product teams.
Here in New York to drive a more unified product vision across key categories to win serving oil markets.
Let me now share a few examples from Tommy Hilfiger.
This fall the Tommy brand reinforced this core DNA going back to classic American cool and iconic Tommy lifestyle through our family focus seasonal campaign as part of this campaign with a special focus on Asia, we celebrated the K pop band stray kids BMA win with a warm welcome.
The Tommy family breaking a record of social media engagement in the first 30 minutes when we connect our brand and authentic ways with global talent like this our fans to respond and we expand our reach and inflows.
We combined another culturally relevant moments with aspirational talent when Tommy campaign Star CSR hosted in New York Fashion week Brunch with over 100, VIP guests and Influencers generating over 800 million impressions on social.
And just two weeks ago at the Las Vegas Formula One Grand Prix, we expanded our partnership with Formula one by welcoming one of Hollywood's biggest rising stars Thompson address to the Tommy Hilfiger brand family is our newest men's ambassador together, we damson Tommy hosted a number of events with key.
Influencers featuring day and night Tommy looks.
For the holiday our Tommy campaign celebrates the happiness of returning home families and friends are captured in Thomas Classic American prep with twist as they unite to celebrate the season, all amplified by very strong talent.
Now, let me turn to our regional performance.
Like to start with North America, which is a big proof point for us this quarter as I mentioned earlier, we've made significant progress building the foundation for sustainable increasingly profitable brand accretive growth for the region and I'm very encouraged by the major initial traction we are gaining.
Our Tommy and Calvin businesses together delivered high quality low single digit revenue growth and most importantly, a 13, 1% EBIT margin in the quarter, including higher gross margins and higher AUR.
We drove outperformance for both our direct to consumer businesses, and our wholesale business, which showed meaningful sequential improvement and this is with still a big part of the pre pandemic tourism not yet back.
Let me share a few highlights.
For Tommy our D to C growth continues to be driven by our best premium style essentials, which increased by over 50% compared to last year supported by elevated in store execution.
For Calvin leading with our category offense, we delivered our third consecutive quarter of double digit growth in the refined category. The expanded essentials focus was also once again the standout supported by an integrated marketing campaign and elevated execution on <unk> call.
Across both brands, we drove another quarter of double digit growth in our owned and operated E. Commerce businesses. This was driven by the elevation of our brands through strongest storytelling improved site merchandising and new commercial tools.
In wholesale while our partners remain conservative we continue to see strong gains, resulting from our efforts to build a much stronger business with our key partners such as Macy's.
Let me share some examples we.
We drove double digit year over year growth in Tommy test stores, where we have invested together, we'd Macy's is stronger field team coverage and we are driving double digit AUR growth at Macy's through the ongoing success with our improved product assortment, including our polo offense and seasonal categories.
For Calvin our men's essentials business increased over 50% that Macy's with investments in the right premium essential based assortment. We also saw strength in refined categories, which grew 25%.
I am very proud of our North America team execution. This past quarter and we now have the team the plan and the disciplined execution in place to unlock our full potential in the region.
Turning to Europe.
We continue to drive growth this quarter building on our historically large business market, leading awareness and overall brand strength in the region in the third quarter, we delivered high single digit revenue growth on a reported basis and low single digit growth in euros against a record.
Breaking quarter last year our.
Our revenue exceeded 1 billion euros led by mid single digit growth in D. C for each brand.
In wholesale we confirmed our pre spring spring 'twenty four order book at low single digit growth on a constant currency basis with pre spring already shipping in Q3, leading to timing differences versus Q4 last year.
Like others, we have seen a more challenging macroeconomic backdrop in Europe and that is impacting consumer confidence and the wholesale channel.
Additionally, this quarter just as we were about to kick off the fall season, we saw the longest streak of record setting warm weather in Europe. Since the 18 hundreds both factors have driven an increasingly promotional environment in the marketplace and for US. The heatwave in September was a double whammy given our historical stress.
In outerwear sweaters and heavyweight knits.
Weather aside going forward, we anticipate this challenging macro backdrop, and then increasingly cautious wholesale channel to continue into 2024.
In this environment, we are not sitting still we are leveraging our market, leading strength and driving much increased profitability and proactively adjusting how we operate we're taking our PVH plus plan execution to the next level and we are doing this in two main ways first against the current macro.
Dropping the wholesale channel we feel that is critically important to avoid having too much inventory in the market, even if that means less selling in.
To secure strong sell out with high margin and less discounting.
Our main priority independently macro for both brands will always be to strengthen our position for long term sustainable brand accretive growth.
Second we will lean into the next level of PVH plus execution through DTC and with our key wholesale partners leveraging our key strengths in product consumer engagement and market based management.
Highlighting a few examples of how you will see this in action.
Across both brands, we have product innovation coming for 2024 in technical fabrics dress casual more choice of our best premium essentials more transitional products to become less weather dependent and all while we continue to cut the unproductive assortment tail in.
Consumer engagement, we just shot very strong cut through campaigns for both Tommy and Calvin that we launch for spring 2024.
And in the marketplace, you will see us continue to invest in our stores shop in shops, and digital experiences to keep elevating the consumer experience.
You can already see the positive effects of our next level PVH plus execution in our D to C channels, where we have more control between product and consumer and can execute would impact more quickly.
In wholesale thanks to the much improved inventory management to season. Despite the tougher conditions you will already in Q4 be able to see a significantly improved profitability versus the same quarter last year.
I have personally spent more time in Europe over the past few months I've visited over 50 stores in six countries to work with our teams as we adjust to market conditions and put the next level of PVH plus execution interaction.
Standing out the most from this work is the foundational strength, we have in both brands with consumers across the region and the opportunity to continue leveraging this as we navigate the current environment.
Moving on to Asia Pacific.
We continue to drive strong performance, which included double digit constant currency growth in our direct to consumer businesses across the region, including China. We continue to winning key consumer moments such as Chinese Valentine's Day, and T Mall membership day fueled by strong hero products.
Successful capsule launches and both Calvin and Tommy continue to move up the rankings from Tmall.
Most recently, we delivered double digit growth in GMB during China's important 11, 11 activation, leading with a product category offense, we focus on growing live stream sales and leveraging talent in innovative and engaging ways. We also captured market share on DAU yen as consumers.
Increased spending on these newer formats of shopping.
We leveraged our global Mega talent to expand brand awareness in the region in October Calvin celebrated fall 2023 collection in Tokyo, featuring brand Ambassador John Cook, the vent drove strong brand awareness across the region and globally.
And Thomas Fall campaign reached a total fan base of over $130 million with regionally relevant ambassadors, including K pop group Stray Kids. In addition to new ambassadors Lee Chen and Greg Xu who drove over 430 million impressions in China alone during the.
The campaign period.
Overall, we are doing a great job of executing the PVH plus plan in the region and we are very optimistic of the long term growth opportunity for both of our brands.
In closing I feel very good about the strong performance, we delivered in the quarter and how we keep gaining traction through our brand building PVH plus execution before I turn the call over to <unk> I would like to thank all of our associates around the world for their hard work and important contribute.
<unk> this year.
Wish everyone, a happy and healthy holiday season.
Thanks, Stefan and good morning, My comments are based on non-GAAP results and are reconciled in our press release.
As Stefan discussed we are pleased with our results for the third quarter, driven by our iconic brands and disciplined execution, the PVH plus plan.
We continue to build on our track record of performance delivering our topline guidance, while exceeding bottomline guidance as we compete to win in this highly dynamic global environment.
We delivered revenue growth of 4% on a reported basis and 1% on a constant currency basis in line with our guidance with significant strength in DTC and in spite of an increasingly challenging macroeconomic environment, especially in Europe on.
On the bottom line, we once again exceeded our earnings guidance with earnings per share of $2 90.
Driven by strong expense management.
Delivered operating margin of 10, 5% for the quarter up 90 basis points versus last year delivering on our commitment of sequential second half improvement.
Also importantly, our inventory at quarter end is down 19% compared to last year as we continue to proactively manage our inventory levels as I mentioned last quarter, we expect to end the year with inventory significantly lower than last year with improvement to continue through 2024, as we make progress.
On our previously announced goal of a 25% reduction in inventory as a percentage of sales.
We also completed the sale of our heritage brands intimate apparel business earlier this week for $160 million in cash which was yet another important step as we accelerate our focus on our core global brands, Calvin Klein and Tommy Hilfiger.
We plan to utilize approximately $150 million of net proceeds from the sale for share repurchases. In 2023. This increases our planned share buybacks for the year to approximately $550 million compared to up to $400 million previously we expect the sale to be slightly accretive to our operating margin in 2020.
Sure.
As we head into the fourth quarter, we see continued strength in our DTC business and also expect pressure in the wholesale business to continue this is especially true in Europe as the macro environment continues to be challenging exacerbated by record high temperatures in September as Stefan discussed, causing retailers to take a cautious approach.
This as well as the impact from the sale of our heritage brands intimate apparel business is reflected in our revised revenue outlook of 1% growth for the year on both a reported and constant currency basis.
Our prior guidance was an increase of 3% to 4% as reported in 2% to 3% on a constant currency basis on the bottom line. We are reaffirming our approximately 10% operating margin outlook and raising our non-GAAP EPS outlook for the year to a record high $10 45 compared to 10.
35 previously despite our lower revenue outlook as we further strengthen our focus on driving profitable sales and disciplined cost management.
I will now discuss third quarter results in more detail and then move on to our outlook.
Revenue was up 4% for the quarter, which reflected a 3% positive impact from exchange.
Third quarter revenue for our international businesses was up 1% on a constant currency basis.
Revenue, our European business was up 1% in euros, despite the increasingly challenging macroeconomic environment with mid single digit growth in the DTC business, partially offset by pressures in wholesale and an unseasonably warm start to the fall season.
Revenues for Asia Pacific were up 1% on a constant currency basis and down 2% on a reported basis strong demand across the region drove low double digit constant currency growth in the DTC business, which was largely offset by timing of wholesale shipments compared to last year.
In North America revenue for our Tommy Hilfiger, and Calvin Klein brand businesses combined grew 2% as we delivered another quarter of growth in both our retail stores and owned and operated E. Commerce business with total DTC up low single digits are owned and operated E. Commerce sales were up double digits for <unk>.
Both brands again this quarter as the investments we have made in the platform and overall site experience continue to resonate with consumers.
Wholesale sales for our Tommy Hilfiger, and Calvin Klein brand businesses combined in North America were also up low single digits.
Although retailers continue to take a cautious approach retail sales trends improved sequentially compared to the second quarter, particularly at Macy's as we focus on driving sell through and healthy inventory across the channel.
Importantly, our quality of sales is improving significantly in North America as we grow that business gross margins were up over 500 basis points with increases across both brands in all channels.
Looking at our overall third quarter revenue from a channel perspective, we continue to drive strong performance across all regions and our direct to consumer business.
Our total DTC revenue was up 6% on a constant currency basis and up 8% on a reported basis in the quarter and up approximately 150 basis points as a percentage of our total revenue compared to last year.
We delivered another quarter of strong growth in both our stores and our owned and operated e-commerce business with constant currency revenues up, 4% and 12% respectively compared to last year.
Total wholesale revenue was down 3% on a constant currency basis for the reasons I previously outlined on a reported basis wholesale revenue was up 1%.
Our global brands delivered another solid quarter with Calvin Klein revenues up 6% and Tommy Hilfiger revenues up 4% as reported.
On a constant currency basis revenue for Calvin Klein was up 3% and Tommy Hilfiger was flat as macroeconomic challenges impacting Europe weigh more heavily on the Tommy business Importantly, our DTC business was up in both brands and in all regions.
In the third quarter, we delivered gross margin of 56, 7% an increase of 80 basis points compared to last year. Despite a 100 basis point negative impact to product cost due to exchange.
Gross margin reflects a significant favorable shift in mix with a higher gross margin DTC and international businesses, making up a larger portion of total revenue and a favorable impact from lower ocean freight rates compared to last year.
SG&A expense as a percentage of revenue for the third quarter was better than planned at 46, 2% and flat versus the prior year.
We continue to take a disciplined approach to managing expenses, while making targeted investments to drive the PVH plus plan, including a nearly 20% increase in marketing compared to last year to fund cut through brand campaigns.
These investments and the impact of the shift in mix to our DTC and international businesses were offset by an approximately 150 basis point improvement in expenses versus last year due to savings realized from the actions we have taken to reduce people costs and prudent management of expenses.
In total EBIT for the quarter was 249 million exceeding our expectations operating margin was 10, 5% and expanded 90 basis points compared to last year. Despite the 100 basis point negative impact of exchange on our gross margin.
And importantly, our operating margin for the quarter reflects a significant improvement in our North America business to 13, 1% for Tommy Hilfiger, and Calvin Klein combined.
Earnings per share increased 12% to $2 90.
Compared to $2 60 in last year's third quarter and exceeded our guidance by <unk> <unk> driven by the improvement in EBIT.
Our tax rate for the quarter was approximately 22%.
And now moving on to our outlook starting with the fourth quarter, we are projecting fourth quarter revenue to decline, 3% to 4% compared to last year on both a reported and constant currency basis with projected strong high single digit growth in our direct to consumer businesses more than offset by a decline in wholesale.
Revenue, including the revenue reduction from the sale of the heritage brands intimate apparel business.
Excluding the sale the decline in wholesale revenue was mostly in Europe, where the wholesale revenues are projected to be down approximately 15% versus last year.
Approximately two thirds of that decrease is due to one time shipment timing differences compared to last year when supply chains were still normalizing and about one third is due to a decrease in sales to lower margin accounts as we remain focused on quality of sales.
Looking forward as Stefan mentioned, we do expect the tough macros to continue into 2024.
As a result, and combined with our continued focus on quality of sales. We now expect lower selling for wholesale next year with a higher quality sell through the.
The benefit to the fourth quarter from the 50 <unk> week in 2023 to our overall revenue is mostly offset by the revenue reduction from the sale of the heritage brands intimate apparel business.
While fourth quarter revenue is projected to be lower than last year importantly profitability is expected to be significantly higher EBIT is expected to increase over 30% compared to last year and operating margin is expected to expand to approximately 12%.
Up nearly 350 basis points compared to last year.
And importantly, Europe profit is planned up significantly as well with regional operating margin up over 500 basis points versus last year and close to all time highs.
The overall increase in operating margin is almost entirely due to an approximately 400 basis point improvement in gross margin the.
The improvement is comprised of an approximately 150 basis point benefit due to a favorable shift in channel and regional mix approximately 125 basis point improvement in freight expense and approximately 125 basis point improvement due to the raw material cost for spring 'twenty four product being significantly lower.
We expect all of these impacts to carry forward beyond the end of 2023.
We also expect a modest increase in SG&A expense as a percentage of revenue in the fourth quarter compared to last year with the higher expenses of DTC, mostly offset by the significant efficiencies we are driving in spending.
Our fourth quarter earnings per share is projected to be approximately $3 45.
Up approximately 45% compared to $2 38 in the prior year, driven almost entirely by higher EBIT due to the significant profitability improvement.
Our tax rate for the fourth quarter is estimated at approximately 22% and interest expense is projected to be approximately $25 million.
And now bringing that altogether for the full year 2023.
As I mentioned, we are updating our full year revenue outlook and now project revenue to increase by approximately 1% on both a reported and constant currency basis, we are reaffirming our operating margin guidance for the year of approximately 10% and raising our non-GAAP EPS guidance by <unk> <unk> to approximately $10 four.
Five.
Up 16% compared to 2022 and a record high for PVH.
Regionally, our full year revenue outlook for North America for Tommy Hilfiger, and Calvin Klein combined is unchanged, but our overall outlook for the region is now planned down mid single digits compared to down low single digits previously due entirely to the impact from the sale of the heritage brands intimate apparel business.
Our outlook for Asia Pacific on a constant currency basis is also unchanged planned up mid teens, while on a reported basis, our revenue outlook for Asia Pacific has been negatively impacted by exchange.
With growth on a reported basis now planned up high single digits compared to up low teens previously.
In Europe, we are now planning full year revenue approximately flat in euro as compared to last year.
This compares to our prior guidance of up low single digits in euros, our DTC business in Europe continued to be planned up mid single digits, but is mostly offset by a decrease in wholesale versus last year, given the macroeconomic challenges I mentioned earlier.
On a reported basis Europe was planned up low single digits compared to up mid single digits previously.
We continue to expect our full year gross margin rate to increase over 100 basis points compared to 2022, despite approximately 100 basis points of higher costs due to exchange.
As we've indicated previously the improvement in our gross margin reflects an approximately 100 basis point benefit from a favorable shift in mix and approximately 100 basis points of improvement due to lower freight costs.
We also continue to expect that SG&A expense as a percentage of revenue for the full year will increase approximately 70 basis points compared to 2022 with our investments in DTC and mix of international business driving higher expenses.
Additionally, as I have discussed in prior quarters, we continue to invest in key areas that drive growth, including increased marketing with our full year target of continuing to be approximately 6% of revenue.
These impacts are partially offset by cost efficiencies, primarily due to the people cost actions we have taken.
As a reminder, in the third quarter, we completed our targeted 10% people cost reduction with annual savings ahead of our targeted $100 million of savings.
Our full year operating margin projection continues to be approximately 10% and continues to reflect high single digit EBIT growth.
Interest expense is projected to be approximately $93 million versus approximately $100 million previously and we continue to expect our tax rate will be approximately 22%.
Before we open up for questions I want to reiterate that we're pleased with our third quarter results.
We continue to work relentlessly to drive results and as Stephane talked about earlier, we're laser focused on delivering our commitments by executing our five key growth drivers of the PVH plus plan, bringing together the consumer facing value drivers of product consumer engagement and marketplace with our underlying operating engines to deliver.
<unk> result in a systematic and repeatable way.
And with that operator, we would like to open it up to questions.
At this time, if you would like to ask a question. Please press the star and one on your telephone keypad.
You may remove yourself from the queue at any time by pressing star two.
Once again that is star one to ask a question.
Our first question comes from Bob <unk> with Guggenheim. Please go ahead Sir.
Hey, guys.
Good morning, Greg.
Great progress in North America, this quarter, especially around the profitability can you just walk us through how we should think about the trajectory of North America going forward. Thanks.
Thank you Bob Yes, North America was really the standout this quarter and it's really the results coming through from the PVH plus focus we put forward.
Over a year ago, and the team coming into place and really building the brands and driving the richness to win more with the domestic wholesale margin. So you see the strength in product so.
The category offense and the hero products.
It's working and Youll see it in gross margin rates going up pricing power going up told me as an example of that.
Best Essentials to premium essentials is up 50% for assess last year Calvin.
Paul Essentials, much more much better essentials team to align much better sell through much higher AUR. So you see product strength continued to cut through and really resonates well with nickel silver and you will continue to see sequential improvements of that consumer engagement.
When it comes to both Calvin and Tommy that helped through campaigns with the relevant talent amplification is really working so you see the improved product amplified by strong talent under strong capture of campaigns, whether it's Jan Coke Hailey Bieber Kendall Jenner Louie.
Hamilton, George Russell Seesaw down suddenly address just we're starting to to pulsate steadily execute on the PVH plus growth driver in terms of strengthening products strengthening consumer engagement and then it's the marketplace execution, so really well done by the team.
Indeed to see both stores and e-commerce are much.
Much stronger executed.
You will see the consumer experience elevated and then as I mentioned in my prepared remarks.
Our focus on getting closer to our best wholesale partners is really yielding strong results. So Macy's is a great example, where we are working very closely in.
To start with test stores, where we execute a stronger products to better essentials to better newness better presentation, We co fund.
More staffing and we see the results is very very strong very encouraging so looking at our results in North America, and then how it trickles down to 13, 1% operating margin, it's just reinforces what.
We knew when we set out to PVH plus plan is that when we lean in to the iconic strength of these two beloved brands Calvin and Tommy and we execute and Whatsapp was just mentioning systematic and repeatable way then it really pays off so you will see this continuously.
Growth in North America, both in D C and in wholesale.
I think Bob it's a great question, we're really proud of North America, North America EBIT margin of 13%, that's up 800 basis points versus last year and what's exciting is it's really all elements of the business revenue was up with significant improvement in DTC gross margin was a big driver of 600 basis points with better inventory improvement.
<unk> and the beginnings of some of those macros turning to tailwind and SG&A percent also down as the work on head count efficiency is taking shape. So a great quarter looking forward, we are going through the normal quarter to quarter profit fluctuations, but we do expect full year profitability. This year for North America to lag.
And in the high single digit operating margin range with a much better second half than first half.
And so we think this shows a clear path to the low teens for a full year that we committed by 2025 and the PVH plus plan.
And this just to build on the SaaS close saying here. This is on top of quite a tough macro in North America as well. So we see that we're able to tap into the strength of the brands the consumer love for their brands by the better product engagement and marketplace execution. Despite the tough macro so very encouraged.
Most recently by the strength in the <unk>.
Start of the holiday, so black Friday, which is now a bit Calvin Black Friday week Thanksgiving week weeks.
We delivered the strongest start than planned for both Calvin and Tommy North America.
Okay.
Great. Thank you very much.
Happy holidays.
Due to a ball.
Thank you. Our next question will come from Michael Binetti with Evercore ISI. Please go ahead.
Hey, guys nice to talk to you congrats on a nice quarter in really tough macro Stefan I wanted to ask you a little bit more specifically about some of the initiatives David <unk>, putting in on the ground as he is working on supply chain and inventory maybe within the context of the 25% reduction in the inventory to sales.
<unk> ratio.
Ratio that you talked about that's going to keep going for the next five quarters I think what are some of the examples of work that he's doing that is really starting to land already and then Zach.
The 12% operating margin fourth quarter Thats, a very very different I think I think the margin in the fourth quarter been high single digits in the past, so youre way above that and it seems like a new level, how should we think about margins. After 23 through the lens of what looks like a step change in the business in fourth quarter, and maybe you could frame the 15% margin target each spoke about for 2025.
At the Analyst day, I know you joined the company, maybe 20 minutes before that target went out. So now you've had some time to think about it maybe we can get some perspective on it.
Okay.
Alright, Thanks, Mike I'll, let start with the first question on the progress of the demand driven supply chain and then seeing what David has been able to do with his team in a very short period of time.
It's really encouraging so whats happening. So you know that last quarter, we set out the long term targets by end of 2024 to drive down inventory in relation to sales with 25%, while improving availability. That's a key part and what we see already now is inventory in great shape.
Really the best shape, we've ever had at minus 18% versus last year with improved availability. So if we start on.
How that is possible much better much more focused planning upfront assortment planning so I keep speaking about the demand driven supply chain based on my experience at always starts with supply chain coming in upfront with the product teams better assortment planning up for.
And there we are just starting to leverage that but that is part of why we can run at minus 18% in inventory, we had better availability. What you'll also see is that AUC is coming down. So if we look at the first half of 2020 for AUC will come down with more than 5%.
And this is not just sitting there writing the macros. The macros are favorable on top of that we are driving significant improvement.
It improved raw material management, so we get better fabric more competitive fabric higher quality for the consumer at the lower cost.
Better costing process better discipline and the costing process more data driven we have a better and more sharp assortment productivity. So we given that we build a schwarzman now with a very strong intent of starting with the best must have the essentials, we should always.
Having calvin and Tommy true to their DNA each of their DNA. It's the best must have essentials in the market. That's what we're working so we build the assortment from that then we make sure we have the appropriate newness and then we can continue to cut the unproductive assortment tail. So what you see is really a.
Multitude of.
Efforts that are starting to gain traction, but it's been faster than what we expected and you will see us just continue to deliver sequential improvements.
And Michael on the <unk> operating margin.
<unk> around 12% operating margin for the quarter compared to eight 6% last year like you said sort of high single digits up let's just say 350 basis points just to give some composition of that.
125 basis points of that is really the full realization of the freight improvements both rates.
And because of great availability lower reliance on airfreight.
So that's sort of booked 125 basis points is tied to improvements in product cost and I think as Stephane said, one yes macros are moved from negative to positive as raw materials are coming down, but also David <unk> and the team are consistently now, beating macros and that'll be trends that carry forward into 'twenty four as well.
And the last major driver of that is really the full impact about 125 basis points of the head count reductions we've taken on SG&A. So as we look forward.
2024, obviously, we're not providing guidance there, but I think you can look at the composition of that gross margin improvement. Those are all factors that are now in place either structurally or from an external marketplace perspective, and so we do expect to see those to carry forward and fully into 2024 and to your question on the targets as I stood on the <unk>.
<unk> shoulder to shoulder with Stefan a leadership team those are my commitments as well as anyone else and I think that.
We've talked about the 15% being that bar that we're going to set for ourselves regardless of what's happening in the macro environment I think thats, 12% for the third or for the fourth quarter is a clear view of that because it's Stefan I talked to others.
Some choppy macro is now it's still driving to that and we.
We expect to continue to drive that through to 2024 as well is that next step towards the 2025 targets.
Thank you so much for the detail guys.
And coming back Michael.
The thing when it comes to the inventory of battery inventory minus demand driven supply chain.
What I see happening.
That I want to share as well as start having Eva sirona can come in and build a strength in the global product engine and Calvin and now Liana rich Goldman coming in for Tommy both highly experienced.
Brian builders and very strong in product you have the David <unk> and his team's work upfront with them on leveraging that strength in products. So its the connection between the.
The increased strength, we are driving in our two global brands when the supply chain expertise that David brings in plus the regional execution. So we are putting supply chain is at the core working with the global brass and the reagents and Thats when you see.
Again, it feels like Eva has been here for a long time, but she has only been here since.
The first half of this year and you can see the spring assortment 'twenty to 'twenty four slightly improved by slightly affected by you will see improvements coming in by Eva fall much more improvements and then it just keeps going from there so I am very.
Pleased by seeing how the team is coming together and breaking this old school sequential handover way of working and breaking it down and starting up fronts working together cross functionally.
Whether it's the early days of building H and M or the old Navy turnaround all the repositioning that's always what I have seen that happening that's where the value over time will increase.
Thanks, guys and I spend a lot of work to get to this point so congrats.
Thank you. Thank you.
Our next question will come from Matthew Boss with JP Morgan. Please go ahead.
Great. Thanks, So two part question Stephane could you just elaborate on underlying demand trends for Tommy and Calvin in Europe, maybe if we parse through some of this near term noise, which sounds like it was weather related and then for Zach just maybe on sensitivity could you just help lay out given all of the self help drivers.
And the uncertain backdrop from a revenue perspective could you see operating margin expansion next year in a scenario, maybe flat revenues or just what would that picture look like.
Yes, Thanks, Matt Let me start so if you look at Europe, and the underlying demand trends for Calvin and Tommy is still being strong.
Look at.
Q3, so when we look at Q3, we continue to grow on a record quarter in Europe last year low single digit growth on a record on a record quarter last year.
That growth was on a very strong base of 25% off versus pre pandemic and then you'll see another connection to the demand growth in Europe faced a strong DTC growth. Despite the tough macro and then what happened in the Max of what happened in the macro was in September we had the warmest start over.
Fall since the 19.
No 18, hundreds 18, 80 or something like that so of course impacting September we came back into the market came back in October from a demand trend perspective, but driving given the importance of September an increasingly promotional environment in the market and we see over over.
Q3, we see an increasingly cautious.
Macro backdrop in Europe.
<unk>.
With the biggest impact on the wholesale channel. So what we're doing there we're not sitting still we are leaning into the PVH class execution in two ways two main ways.
We don't macro my experiences when the macro gets tougher it's really important to focus on quality of sales.
We are increasing the focus on quality of sales, even two sacks point, if that means selling less in to the wholesale channel, but securing a strong sell out margin and avoiding too much inventory in the market. So thats. The first action we take the second is really.
Leaning into the next level of PVH, plus execution PVH plus execution makes a big difference independently on macro, but especially in tough macro. So a few examples I gave in terms of the product strengths that we are driving in 2020 for product innovation, whether its technical performance fabrics.
Whether it's more choice of our premium essentials more transitional products, we see that it seems like every six and now seems to start with an unusual weather situation. We can we can sit back and say okay. All we lean in the way, we do which is say okay clear we have.
To do more transitional products and that you will see already in 2024, then in consumer engagement, having in a tough macro having market leading brands.
It's a huge advantage and the way we take advantage of that consumer engagement twice as twofold, just shocked two very strong marketing campaigns for spring 2024.
Wade Mega talent amplifying the improved product strength.
And then in the marketplace, what's also going to be important.
To continue to invest in the consumer experience. So you will see that in investment in our stores investments in shop in shop in the digital experience. So overall, we are in a tough macro in Europe, leveraging better the strength the market leading strength, we have for Tommy in particular.
In Europe, and then we have the strength of having one of the biggest growth brands in Europe, and Canada, and I think just to add some color to Stefan to comment about just how disruptive the September heatwave was in Europe.
Can look at our own DTC sales, we don't typically provide intra quarter numbers, but I think it's really important context, you are coming out of summer. Our August DTC revenue was up 10% in Europe than the Heatwave hits in September right as us and all of our competitors were setting fall season, and sales were down 7% in September.
Then in October things will recover to back being up 10%, but in a significantly more promotional environment. So in our DTC channels, we can move more quickly.
Economics of our wholesalers more difficult and so we see that coming through with regards to a more cautious sell in outlook that they are putting into place and we're preparing for that potential to carry forward into 2024, but I think what's important is that readiness.
Shows up in profitability, even with a lower European revenue outlook for <unk>, we expect European profit to be up over 30% versus last year in the fourth quarter. So I think that ability to manage profitability moving into 2024.
<unk> I think to answer your question on 2024 around managing operating margin and a potential flat environment absolutely.
Commitment is to deliver on our <unk>, our operating margin commitments, regardless of where the top line is and I think we can look no further than for Q4, our success in doing that right now and we would expect for that success to carry forward into 2024 as well.
And just just building on what side, let's say in here because across.
The world in all of our regions in a tough macro we have the strength of having in Calvin and Tommy two of the most iconic beloved brands in the marketplace and we have the brand building plan I mean, PVH plus and we gain increased traction when we lean in to the PVH plus execution.
So from.
From that you will see continuously that's what's within our control we will continue to improve step by step by step and the margin is mostly in our control and Thats why you hear the confidence from <unk>.
Thank you. Our next question will come from Jay sole with UBS. Please go ahead.
Great. Thank you so much I wanted to follow up on your comments about the success you're seeing at Macy's.
Connect that to the transition that's ongoing with Q3.
Does it does.
So you're seeing at Macy's gives you the confidence that you are building the teams and the capabilities to be able to replace those revenues that G. III currently has within PVH.
Transition continues and continue to build a big business.
Really capture all of that opportunity that's out there financially as that transition takes place.
Thank you Ajay Great question, yes.
We're encouraged by the progress we're seeing with Macy's and this is also building on my experience being part of repositioning Ralph for sustainable growth.
A number of years back we did effectively the same thing we partnered with Macy's and made sure that Macy's became our best full price expression and Thats, what we are doing and we're doing it in our.
One controlled.
Men's.
Underwear today in both Calvin and Tommy and it's really working out.
It's the same confidence we have with <unk> to take them back to licenses.
Over the multiyear periods with G III.
We're already working on making sure that the product the category offense is there the product strength is there the pricing is there so yes equally confidence when it comes to mens and womens and the strength of Calvin and Tommy we'd the Macy's call Summer. We are early on in doing it.
Very deep.
<unk> silver and brand study globally, but when we start to break that down into North America and in Macys, we see the incredible strength that both Calvin and have Calvin and Tommy Haas with Macy's consumer so incredible awareness, a very strong culture duration.
And very strong brand love.
We have all the pieces in place from the consumer love for our brands and putting all the pieces in place for successfully taken back the licenses so very encouraged.
Got it thank you so much.
Thank you Jay we have time for one more question.
And that question will come from Dana Telsey with Telsey Advisory Group. Please go ahead.
Hi, nice to see the progress.
Continuing on the thought of the wholesale bank, which is so important given the progress that you've made in North America. As you mentioned like Macy's. During this time period in Europe, where the nacco smaller a little bit more challenging are there.
Relationship enhancement business enhancements that are being done on the wholesale side in Europe that can mirror in North America.
Partners like Macy's that you see it.
Dominant in Europe, that's what you see here in North America.
Just a quick question on color on wholesaling.
Thank you.
Thank you Dan is also.
An important question. So we have market, leading strength in Europe, and very strong partnership with our strongest wholesale retailers and.
When I look back at the past few months when I reference seeing 50 over 50 stores and doors in 56 countries also met with key partners like peaking kloppenburg <unk>. So very much focused on the same thing next level PVH class execution. So.
To your point there is the.
The strength in the brands and the consumer love is unprecedented for us in Europe, and then the strength when we lean into essentials, and we build our choices of our best Essentials must have seen the market. When we have the right newness when we have the right capture campaigns, when we partner with others.
Wholesale is to amplify that.
The strength in product strength and talent of strength that the retailers have.
Very encouraging.
So overall thank you.
Thank you Dana so.
Overall, thank you very much for joining our call today.
As you can hear from US we feel very strong about the increased traction we get on the PVH plus plan, we recognize the tough macro we are navigating we also recognize the strength that we have in our hands with these two very strong brands the Pla.
<unk>.
The execution strength that comes out of that plant that we're just in the beginning of <unk>. So looking forward to catching up next quarter on the progress that we will be relentless in driving and then ahead of that that just wish everybody a really happy holiday. Thank you.
<unk>.
This does conclude todays PVH third quarter 2023 earnings conference call.
You may disconnect. Your line at this time and have a wonderful day.
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