PVH Corp. (PVH) Earnings Call Transcript & Summary

Good morning, and thank you for joining us for this next session of the Goldman Sachs Global Retailing Conference. My name is Brooke Roach and I cover the Apparel and Accessories Brands here at Goldman, and I'm very pleased to introduce our next fireside chat with PVH. Here today, we have Stefan Larsson, CEO; and Zac Coughlin, CFO. Welcome, Stefan. Welcome, Zac.

Thank you.

Stefan, maybe we can kick it off with a discussion of the PVH+ Plan. It's been a little bit over a year since you unveiled this plan, which targets $12.5 billion in revenue and a 15% EBIT target by 2025. Can you give us an update on the progress that you've seen so far and what are the most important opportunities that you see as you look ahead?

Absolutely. So thanks for having us back. We were here last year. We had just set out the plan last year when we had a similar fireside chat. So what's different now is that we have a year of execution behind us. So let me just ground everyone in what we have set out to do. So what PVH is, it's a brand group owning 2 of the most iconic brands in our sector, in the fashion sector, Calvin Klein and Tommy Hilfiger. We're roughly, half of the company is Tommy and half of the company is Calvin. And what we have set out to do is we have set out to grow these brands, brand desirability to become the most desirable lifestyle brands in the world. That's our vision. So that's the starting point. That's the vision, that's the direction. And then to your point, we set out the PVH+ Plan, which is a brand-building growth plan, where we, in a very systematic, repeatable way, drive towards the vision of building desirability quarter-by-quarter, month by month, day by day into these 2 brands. And what I'm excited about and what led me to PVH because my background is I started being part of the team that grew H&M. So we grew it from $3 billion to $17 billion and 23% operating profit. And I had to leave to realize that, that was quite good. But I didn't think we were good. We just were relentless in continuously improving the consumer offering. And then I came to the U.S. roughly 10 years ago to turn around Old Navy. And then we turned around Old Navy and drove 13 consecutive quarters of growth. Then I came into Ralph and repositioned Ralph for the growth that they have been driving now. And since 2 years I'm here. Why am I here? I have a lot of choices on what to do in my career. I'm here because I love the space in general, and I love iconic brands. And the reason I -- part of and why I believe, it's a really good investment opportunity to invest in iconic brands. But only if one thing is true. So what I see in the space, in the fashion space is the barriers of entry have come down, anybody can start a fashion brand, but it's become very difficult to break through. So if you look at the fashion space, building another Calvin, another Tommy, another Ralph, another Levis, another Nike, very, very difficult. Since you already have a consumer that globally loves your brand, then it's our job, and that's the PVH+ Plan is all about, is to tap into that beloved DNA on Calvin and Tommy and make it more and more desirable. And we have 5 growth drivers, product, winning with product in a very systematic way as well. I can come back to more of the details, winning with product, winning with consumer engagement and winning in the marketplace. Those are the 3 consumer-facing parts of our plan. And if you think about the market, the market is, there is a sea of generic brands and stuff down in the market. And then there are some brands that just stand out from a consumer-facing perspective. They are hyper relevant to the consumer. That's where we are taking Calvin and Tommy. The brand love is already there. We are known globally as those brands. The brand desirability part is what we are driving up. So those are the 3 first drivers, the consumer-facing drivers. The next part, the second part is building a demand-driven supply chain, like the underlying engine of a demand-driven supply chain. And that's what I did earlier in my career, I did that for 15 years within the H&M Group. So think about it as we are taking Calvin and Tommy based on beloved DNA, making it more current and relevant than any time before in a way that the consumer-facing, the product, the marketing, the experience should feel super premium, we still keep the premium positioning available for many people, and then we connect that with a demand-driven supply chain. That's the reason to invest in us. It's like, I know we are very focused on quarter-by-quarter and what are we going to deliver, and we have delivered. So if I look at last year, we came out of a pretty tough macro with strong, almost double-digit growth for both brands. We continue, so this year, we have continued to start growing both brands all regions, D2C has grown significantly. So it's just -- I just want to give you the overall because it's -- I feel like what I do with my team and I just came back and got a little bit of a cold because I'm outseeing stores all the time. And when I look at the consumer on a daily basis. I've seen 6 countries in 6 days, and I just came back on Sunday night. And what I see is there is this strong consumer love for our brands and then I look at product, I look at consumer engagement, I look at the execution, demand-driven supply chain. We have 90% left to do. So that's where I see where we are. And I also see that's the key reason why to invest in PVH.

That's really great. That's a great intro. I really appreciate that. As you think about what's left to do and the success that you've had so far, one of the things that's been top of mind is that supply chain optimization helped you unlock the plan so far. Maybe you can contextualize a little bit more the benefits that you're seeing in supply chain today. What does that mean for PVH's margins overall, both in terms of the near-term easing of the supply chain, which is just an industry driver, but also the PVH specific actions.

Yes, absolutely. So on the supply chain -- do we have an extra chair here? We have a chair over there. So back to supply chain. When I came in, I realized that -- so the difference between the 15 years of growing a demand-driven business versus the past 10 years coming into big American iconic brands is that in big American iconic brands, I found 20%, 25% unproductive inventory at any given time. So a big mismatch between what is being created and bought and planned and allocated and shift and what the end demand actually is. So one of the improvements of the management team that I've done since we saw each other last year was to hire the Head of Global Supply Chain from the H&M Group with 20 years of experience from doing this into our team. So what he did was that he got the fundamental basics back because when we sat here a year ago, we had supply chain delays. We were not competitive supply-chain wise. So we quickly fixed the fundamentals. And now we're in a place where we are able to chop the lead times and connect the supply chain to how we build the assortment so we were able to, when we release Q2, 2 weeks ago to communicate that we are going to target 25% lower inventory in relation to sales. And by end of 2024, we're starting already now, but 25% less inventory in relation to sales. And that's good. I'm excited about it as a leader because I've tried over the last 10 years to really get that going in a number of different brands. And it's proven quite hard when you took my initial approach, which is, please, organization, tell me why it is this way. And here comes to all the reasons why and why not? But now with David's help, and with my experience of trying new ways to be successful in this, which eventually became successful at Old Navy and what's the beginning at Ralph is, you start with the end goal and say we should be able to drive 25% less inventory and drive more sales and less -- and then you say, what has to be true in the assortment creation. You have to be really clear on the category offense. You have to be really clear within each category on the role of each product. Then how you plan that closer to demand, so you start to cut lead times. Then how you allocate that based on data versus gut feeling. So it's -- I have a funny story from Q2 after we have our earnings, we have all hands and town hall and then it's live Q&A with 26,000 team members. And sometimes, we learned a lot from the questions. But one question was it's a choppy macro. How are we going to continue to create value et cetera. And I just gave some specific examples because I believe when you sit in the office, on a high floor, this business is quite difficult. When you're out in stores, walk-in stores, looking at what's really happening, you see value everywhere. So I took the example of, I was in the Southeast U.S. market a while ago and the market leader told me that for 2 years in a row, we had allocated heavyweight down jackets to Puerto Rico. And then I took that as an example of, say, not doing that this year is a margin opportunity. And so -- and then we just -- and then I came back from London and I was on Saturday night in stores with our London teams just before the White City Westfield closed and it was a good Tommy story there. And I said, what would it take to drive 20% more business? And often, the store manager has the best insight. So she said, well, you know what? The basic flag tee -- the Tommy flag tee, we get it and then we sell it out and then we don't get it replenished for 4 to 6 weeks, or we don't get it in 8 colors that I know my customer asked for, we get it in 4. And then it's the same with oxford shirt. The same with the chinos. And then you start to add those building blocks and the value-creating opportunity for us is that relentless focus in the 5 value drivers because that will, from a consumer-facing side by brand desirability, up, up, up. And then it's the demand-driven side. So 25%, I'm happy because it's a real commitment. It's real. We will do it, but it's not heroic, it's not the end state.

Zac, any comments on margin associated with those supply chain opportunities as well as that inventory target that was just provided. Any additional color that you can provide on the clarity of when we might see the cadencing of that inventory reduction?

Yes. It's almost impossible to overstate the amount of impact across the P&L tied to this. So obviously, I think it starts with what Stefan has said is it's not less inventory at the expense of availability. In fact, we expect availability to go up. So no impact to top line, if anything, growth. On a gross margin perspective, obviously, it translates directly into in the puffer example, lower discounts, in terms of the need to acquire that. In SG&A, you take out the weight of managing all that inventory in the supply chain. And then ultimately, from a cash flow perspective, our commitment of returning share -- returning capital to the shareholders and increasing buybacks, all that flows through. So I think from a cadence of what we would expect to see from a gross margin perspective. We're going to start to see impact of that by the end of this year. We had a tremendous amount of headwinds that we're facing sort of throughout last year and into the first part of this year. And many of those transitioned very quickly to tailwinds. So we've got, obviously, the efficiency of the supply chains, eliminating all need for air freight. That's the easy step number one. Step 2 beyond that from a freight perspective, the rates are coming down significantly. We begin to pick that benefit up, increasingly from the third quarter and especially into the fourth quarter from there. And then I think the last piece around there, tied to this is, just getting closer, ordering closer to where the consumer is. We're beginning to see the cost base from a cotton perspective, not just normalizing from a sort of a macro-esque perspective, but actually the work that David and the team are doing, beating the macro improvement. We'll pick up a little bit of that at the end of the fourth quarter, and that is really a powerful impact starting in 2024. So all of that's still ahead of us, sort of at the run rate of where we are today, building into the second half and especially in the next year.

And what excites me the most is, sometimes, what we do, especially when we speak with investors, seems very technical. But it's -- you start with the unique position of both brands. So Tommy started his brand with an idea of classic American cool, like classic American with a twist to always make it current. It's a fantastic idea. It's idea also of a lifestyle of the American dream. So when you look at the Tommy brand and the promise and the dream, huge opportunity. Then you look at Calvin, which is modern, tential, confident, started with fragrance, underwear, denim and then what I'm excited about is when we play these different parts together. So we make the brands come to life like never before in the product premise. Then we do -- Tommy, we just came out -- we had a New York Fashion Week event on Sunday, unfortunately, I missed it. I was on a flight. But we had a fashion event where 300 influencers were invited by Tommy himself to do a Tommy branch with a twist, all dressed in Tommy. There were 500 influencers who wanted to go. So 300. 300, those 300 influencers are connected to 300 million people. So I sent a note to my team last night, the top 400 leaders. I said guys, look at this. We take Tommy's dream of classic American style with a twist. We lean into the most iconic Tommy products. We connect that with 300 influencers. Then we connect that at one branch with the size of almost the U.S. population. And then we do it again and again and again. So that's art. To me, it's -- I'm working so actively to connect the 5 drivers to the dream of the brand. And it's -- I have also an interesting story, kind of fun story. So I started -- because I'm always looking at how can I get the team to work as if we fit in one hand. How can we work more entrepreneurial? Because what tends to happen in big companies is here are all the reasons why we have to go really slow and it's really complicated. So I've started an initiative a few weeks ago with -- I launched an e-mail that said, share it with Stefan at pvh.com, feel free to use it as well. If you see it. So I said, anyone on the team that sees opportunities that are any green shoots, anything good, anything bad, you send it directly to me, and I'll respond immediately and I'll share it with the rest of the leaders. And then I sat back, I was out traveling. So I launched it. I was like, I wonder who the first leader is. That's going to be like both. Who do you think it was? What's Tommy Hilfiger, the man, sent the first email, that's pretty unbelievable, isn't it? He was just like great idea, let's do it. So we have -- to me, it's just -- it's the connection of Tommy and Calvin's dreams of these lifestyle brands that became larger than what anyone could imagine. And then 90% still to unlock, but playing it -- playing them together the 5 drivers and constantly looking at what works, what doesn't work and then the compounded effect of improving that.

Let's dive into North America for a moment because that's one of the areas where there's a lot of opportunity for the PVH+ Plan. But at the same time, as you mentioned, I think, in one of your stories earlier, there is some concern about the macro overall. Maybe we could start with, do you think that the consumer is going to face more or less headwinds next year? And then how do you think about the PVH+ Plan and how that unveils in wholesale given some of the choppier trends that we've seen among some of your wholesale partners?

It's a great question. So when we were here a year ago, part of the plan was to unlock North America to drive -- start to drive brand accretive growth in North America. We have been too dependent on tourism, too dependent on -- not focused enough on winning with the domestic consumer. So this past quarter, we were able to show for the first time what we have seen coming, which is we drive in both brands in our D2C channels to start with e-commerce and stores. We drive -- we drove this past quarter, mid-single-digit growth. And what's exciting about the growth is it's brand accretive growth. So it's -- the category offers the hero products that are starting to come to life, higher AURs, higher margin and better sell-through. So that's the D2C. So we are starting to build now a foundation where we will drive brand accretive growth. And if you shop us on our -- if you shop us our brands in North America and our e-commerce and in stores, you will see this come to life. Then in wholesale was also exciting there despite that the wholesale channel in North America is challenged. And they're very cautious. What I'm excited about from a year ago is that we are working very closely with one of our most important partners Macy's, and taking ownership together with them and saying our stores in Macy's, we should run them as if they were our doors -- our stores. And the reason why I'm so excited about that is -- and then we say, how do we make this -- how do we change this? How we run? How we execute this together. So we started with 25 stores. And we are driving now double-digit growth in those stores when the whole market is down in the channel. So it's -- and my experience from Ralph is when we took ownership and got much closer with Macy's I said, we're going to -- this is going to be our full price representation in the North America market. And we're going to take ownership of the assortment, the inventory replenishment, the pricing, the presentation and make the shopping experience great. Then it works. So we see it in our 25 stores. We see it in all 200-plus stores today, start -- strong start of the fall. So yes, the macro is choppy, it's going to remain choppy most likely, but we have so much within our control to improve. So I always say to my team, like don't talk with me about macro because that's the only thing we cannot do anything about. But we can improve the category offerings, the hero products, the newness, the consumer engagement, the marketplace execution, the supply chain. And when I look at all of those value drivers that will not change. So what you will know as investors from us, the vision remains, the value-creating focus remains and then we are just -- what changes is the learning and the relentless execution.

It sounds like there's a lot of green shoots in North America as you execute that plan. Maybe Zac as a follow-up on that North American outlook, one of the most frequent questions we get from investors is how to think about the path to better margin delivery in North America. Can you talk about the key levers for improvement? And then how you think about the time line for that as you execute this plan?

Yes. I think we stated, publicly, as a part of the PVH+ Plan to drive North America margins back up to low teens is sort of what the commitment is. I think we saw in the second quarter an important and sizable first steps towards that, mid-single to high single digits across both of the brands. So I think an important step forward and you consider that in the face of as we talked a little bit earlier on some of the gross margin, some of those macro is not yet turning to tailwinds. So that's still ahead of us from there. So I think in terms of the composition, we've been very clear, winning with the domestic consumer in increasingly brand relevant way. That will manifest itself in gross margin improvements. And we saw that already beginning in the second quarter. That will continue and then magnified by the macros that will come with us around freights and around material cost. And I think below that as well, making sure that we get the operating model and the cost structure oriented to the size of where the business is today. Those are still pieces that are ahead of us to drive beyond the sort of the mid- to high single-digit operating margin we delivered for the second quarter. That will happen sort of steadily and sequentially towards that commitment in 2025 of low teens operating margin for North America.

Maybe as we zoom out from the North America operating margin to the consolidated PVH entity, one of the things that's been moving around a little bit this year is your SG&A expense. Both in terms of cut through marketing campaigns that you're investing behind, but also some of the efficiencies that you're finding in the organization as part of the PVH+ Plan. Can you provide a little bit more context into where those cut through marketing campaigns are going and what that actually means for driving financial results. And then Zac, maybe you can provide some context as well about how you're thinking about the driving of -- the inflection in SG&A leverage that you expect into the fourth quarter and beyond.

Absolutely. So let me start with the cut through campaign. So if we look at Calvin, as -- I would say, they are really leading, not only between Tommy and Calvin, but leading in the market cut through campaigns. So we have record engagement through the cut through campaigns in Calvin. So what -- the way we build our cut through campaigns is we are very clear with the brand promise of Calvin. So the DNA of Calvin, make it come to life through the biggest highlighting, the most important product category. So if it's Calvin, it's been underwear, denim, the jeans lifestyle and increasingly the refined lifestyle. So we are very disciplined when we build the campaigns on, here's the product component, and then we connect that on the highest level to super talent like Jennie Kim, BLACKPINK, Jungkook, BTS, Kendall Jenner, et cetera. So we have super A talent with playing back into those products and categories that matters the most to the consumer. And then we make that cut through in the marketplace. So when we do that, we just added 1.5 million, almost 2 million followers on Instagram. We quickly built a big TikTok following. We are increasingly present in all the most important channels in China, social channels. So it's -- that's the cut-through campaign. It's the combination of the super strong product offering with A-list talent, amplified with campaigns, marketing that goes out and communicate and engage us to consumer. What's important to say is, cut through campaigns today to work have to be connected to what we call the influencer engine or the talent engine. So it's -- when you look at influence, it's a network effect. So you have to have -- if you're us, you have to have the AA -- global A-talent. But then if you look at how you engage and the consumer engages, they get influenced through Instagram and TikTok from a number of different tiers. So it's Tier 1, Tier 2, Tier 3. Tier 3 could be influencers, style influencers that are regionally specific to North America that have 20 million followers, but 10%, 14% engagement. So when they start to wear the Tommy flag or Calvin, that drives further down in the funnel of conversion. And when you see it's a combination of seeing Jungkook and Jennie Kim and Kendall Jenner and the style influencer that you follow to influence your purchase. So it's -- that's -- and again, everything we start to do, we do in a repeatable way where we have -- by doing it, we're also learning that we have 90% still to do. So Tommy as an example is probably the best on the local regional influencers. They have been able to engage up-and-coming actress Madelyn Cline, or you see -- and they're like -- most of our consumers knows who Madelyn Cline is. 20 million influencers, loves the brand, highly engaged content, and we give her our iconic product. She's a brand ambassador for us. And she starts to style it her way. And it's -- the backdrop is her life. Think about Tommy's brand proposition. It's an American dream. It's your dream life. So it goes really well into the life that influencers live. One brand partner, I had the opportunity to spend some time and take a coffee with 2 weeks ago with George Russell, the Formula One driver. And he loves the brand. His girlfriend loves the brand. Yes, he is part of AMG, Mercedes and we are a brand partner, but they have many brand partners. He really likes the Tommy brand. And the benefit is he goes on vacation. He shared that he was in Ibiza with his extended family and lived what I felt looked like a Tommy Life. And it just cuts across. And then you have the consumer seeing that and experience that and be inspired by that. So -- it's -- but it's -- it starts with you have to have 2 beloved brands. Like you cannot get Jennie Kim or Jungkook or Kendall Jenner, unless they like your brand. So it's -- but it's translating that love for the brand into long-term partnerships and cut-through campaigns and the talent engine. So it's very exciting to see.

That's great. And Zac, the financial profile?

Yes, I think, importantly, to fuel all of that growth-oriented investment, I think we committed at the Investor Day to drive 500 to 600 basis points of SG&A efficiency to make sure that we're able to continue to fuel investments in marketing and the other parts. I think the first major piece of that we announced around this time last year, which was the $100 million of people-related cost reduction by the end of '24. We've -- we'll be completing that program by the end of the third quarter. So we'll start to see that as the first piece in the fourth quarter, annualized effects. We get a little bit this year and then have a significant impact to that next year. But that's really only the beginning. If you think about the rest of the SG&A elements, we were a company that was built by acquisition and was largely left to run autonomously and decentralized. We're building -- the PVH+ Plan is a single strategy that's going to drive the 2 major brands and one operating engine below that. And the efficiency you get there across real estate, as you go to market as a single scale company. You get that same around technology as a single technology platform. Those will be the next waves that you'll begin to see impact of that beginning next year and increasingly through '24 and into '25 from there as well.

So maybe Zac, one more with you. As we put those things together, you talked a little bit about the North American margin. You talked a little bit about the SG&A efficiencies. You've committed to a 15% operating margin target by 2025, well ahead of the 10% that you're on track to deliver this year. Put all those building blocks together for us. What's still ahead? And how do you think about the cadencing and the delivery of each of those buckets between gross margin and SG&A?

Yes. I mean, what's exciting about the 10% to 15% is that all of that is still in front of us. And all of it is directly in our control. So let's start with gross margin from there. We've talked a lot about we've got the tailwinds emerging from freight costs. That's still ahead of us from the 10% towards the 15%. We have the emerging work around product cost. Those are coming off, those are negotiated into spring '24. That's now known and ahead of us. Beyond that, Stefan mentioned David Savman coming in, our goal is not just to sort of ride with the macros. It's always to beat the macros. So that's also embedded in what we're seeing already come to life in spring '24. David's was first season handling the product. Those are still all ahead of us from a gross margin perspective. And then below that on SG&A, sort of the components we just talked about, all the headcount, people cost reduction, all still ahead of us. The efficiencies driven around the element of, sort of whether it be real estate or whether it be technology, efficiency, that's actually all still ahead of us and identified and work ahead of us to do. And in the 10% already is the step-up around marketing. So in terms of -- we've begun to put many of the investments into the business. We faced off, I would say, sort of once-in-a-generation levels of macros, held the line there. And so as all of those pieces that are directly in our control and macros coming towards us, all still ahead of us. And so our confidence in driving from the 10% to 15% has actually never been higher. And as Stefan said, completely independent of wherever the choppy macros may go.

And half, roughly, I don't know if you said that, but half is -- margin rate, half will come from SG&A. And we see, to Zac's point, a really clear path. And what I want to make sure that everyone here is before we run out of time is the management team matters. So if you think about PVH of being an acquirer of brands with an unclear path on how to grow what has been acquired. We have now set out to build Calvin and Tommy into the most desirable lifestyle brands in the world and make PVH one of the highest performing brand group. To do that, yes, strategy is important, but people are even more important. So since we were here last year, and I was alluding to, we're going to build the management team. I'm going to build the management team with the experience and expertise to do this. David Savman on supply chain. Eva Serrano is -- came in 6 months ago as Head of Calvin the global brand. She was one of the key leaders behind growing Inditex, the highest performing group in our sector, and specialist in women's. So that matters because when we decided to take back the G3, the women's, historically, we have licensed out women's in North America. While we did women's in Europe and Asia successfully, we licensed it out. We realized when we -- where we are taking the brand, we need to be in control of product creation, supply chain distribution, price. So -- but to do that, we need talent that knows what great looks like in -- so Eva is an example of that. Donald Kohler came in with a 10 year from the successful turnaround of Burberry. So we have -- Zac came in before that. So Zac with extensive experience from the LVMH Group, DFS, then Converse, Nike. So Zac, David, Eva, Donald and then I would say we are 80%, 90% there from having the team that are able to do this because at the end of the day, you can have a great vision, great strategy, but it's the ability to get it done. And that's the biggest difference. So seeing Eva coming in and showing that here is how we're going to take back G3. Here is how we -- here is the product we're going to create to meet that consumer with a better product offering. Here is how we're going to source that, here is how we're going to partner with Macy's and others to do it. It's -- suddenly, you start to see, okay, that's real value creation because she is in it and driving it.

That's so great. Thank you so much for sharing your thoughts, and thank you all in the audience for tuning in today.

Thanks very much.

Thank you.