PVH Corp. (PVH) Earnings Call Transcript & Summary

And welcome to another session of the Goldman Sachs Global Retailing Conference. My name is Brooke Roach, and I cover the apparel, accessories and discretionary brand categories here at Goldman Sachs Research. And I'm thrilled to introduce our next session with PVH Corp. Here with me today are Stefan Larsson, CEO; and Zach Coughlin, CFO. Welcome, Stefan. Welcome, Zach.

Thank you.

Thank you.

Stefan, would you like to kick it off with some opening comments?

Yes. So thank you for taking the time to be with us a little bit today. We are in the process of taking two of the most beloved -- globally beloved iconic brands in the world, Calvin Klein and Tommy Hilfiger, build them into their full potential. So that's the vision we have and that's the journey we have been out on for the last 2.5 years. We set out a plan called the PVH+ Plan to go back to the DNA of what made the brands iconic and beloved and make them current and relevant like they have never been before. So that's the journey we are on. Sometimes you have to see it in order to feel it, et cetera. So what I have asked Brooke is do is just to play a short intro of our fall campaign, 30 seconds Calvin Klein. So you will see us increasingly take the DNA of the brand, the Calvin underwear; key growth categories, denim, and connect it and collide it with people who shape culture. So you will see that with Jeremy Allen White. And then you will see Tommy doing the same thing, true to its DNA of classic American style and dress Stray Kids. And for those of you who don't have Stray Kids high up on your Spotify playlist, there are a lot of people who have. So we just started, we just launched last week both campaigns. And when you see the consumer engagement, we have around 1,000 comments on Instagram as an example and that's not likes. We have hundreds and thousands of likes for both Calvin and Tommy. And when you read the comments, people actually take time out of their lives, their busy lives, to write something positive. So we have 99.99% positive, but thousands of people taking a step back from their busy life and say, "I'm going to engage with this brand." And that is -- we are so grateful for that and to see how that is starting to come to life. So without further ado, can we play the...

Yes. Let's roll the video. [Presentation]

Yes. So a snapshot. But what happens when we do this -- and we do this in a very systematic, repeatable way. So every season, we have a breakthrough campaign. Every season, we lean into our key growth categories. Every season, we put new innovation into our hero products. And every season, we connect to talent who shape culture. And so when you see the engagement, that's the starting point to tap into the full potential of these brands. And I see in the market something that just continues to happen that either you are a brand that creates desire for the consumer or you fall into the sea of generic brands. And we were lucky to have two out of, let's say, a handful of brands globally that have that kind of underlying consumer love. So that's what we are tapping into.

That's really -- that was a really great introduction. Thank you for sharing those videos and taking the time to bring those to our audience today. I was hoping we could kick it off with a discussion of some of the progress that you've made along the PVH+ Plan today. What do you think is tracking in line with your objectives? What gives you confidence in achieving that? And then, Zac, as a follow-up, could you talk about where we're still on track for the 2025 targets? And what might be a little bit longer dated?

Absolutely. So let me start on the brand side because PVH historically have been an acquirer of brands. And what we're doing now is that we are focusing on Calvin and Tommy, those are our iconic brands, and we are building those brands. And we're doing it through 5 growth drivers. So starting with -- let's start with consumer engagement because, to me, it starts there to say the consumer engages and are excited about these brands. So we are building -- and that's from a lead time perspective to execute, that's the shorter lead times. If you compare it to product, that's longer lead times. So the progress you already see now is both in Calvin and Tommy is record engagement with the consumer. And then we engage that consumer around better and better products. And what you see, even though we are in a tough macro, tough consumer backdrop, you see the product acceptance, the product strength going up. And we see it in pricing power. We see it in margin expansion. So that's on the product side, where we lean into key growth categories. We lean into hero products that we put innovation in. We lean into the right level of newness to excite the consumer. And in terms of -- lead times matters here, that's why we have been on this journey for a little over 2 years. But this full '24 is the first product season that we have had our global product teams in place to have a positive impact. So that's on the product side. On the marketplace side, you have seen us over the past 2 years drive the most growth in D2C. And then we work really closely with our key wholesale partners to drive brand accretive growth. And then on the demand driven -- so if you look at PVH+, there's 2 parts: a consumer-facing brand-building part that the consumer sees, product marketing and experience. And then underneath there, a demand-driven supply chain. So we had a supply chain that wasn't competitive 2 years ago. We have made great progress there. So we are cutting our lead times. We have less inventory in relation to sales. We have more stock freshness. We have lower AUC with higher-quality products. So still early days, but tangible, measurable progress. And then on the fifth growth driver, which is to invest behind the growth, you have seen us increasingly invest more behind marketing. You have seen us -- you will see us also invest more in stores, invest more in supply chain, tech. And then we have efficiencies. So Zac will be able to take you through a little bit more of the path to driving 200, 300 points of efficiencies. Then underneath all of this, a plan is a plan, that's only going to take you so far. And then it's all about execution. And what you have seen over the past 2 years and started -- today, we were able to put the last piece of the puzzle in the team that has the capability and the experience to do this. So today, we just sent out a press release that we hired our Head of Europe. So he comes from a background where he was part of building H&M from $10 billion to $20 billion. Number of key leadership roles, the biggest role he had was Managing Director for the whole brand globally. Deep experience with everything from product to marketplace partnerships. So we are thrilled that he's coming in as CEO for Europe. And with that, we have the team in place with Eva Serrano was part of building Inditex. She's in place as head of Calvin Klein since the year. We have Lea Goldman as Head of Tommy, the brand, who turned around costs over the last 4, 5 years. She's in place since 4 months. Zac as my partner on this journey from the beginning with experience from DFS, Converse, LVMH Group. We have David Savman, Head of Supply Chain, that was part of building the supply chain for H&M and so on and so forth. So we now have the team in place, which -- and you start to see the difference. When somebody comes in with experience of having done this, you start to see the traction and the momentum rise. Zac, for the financial.

Yes. And I think from a financial perspective, obviously, financial outputs are a combination of things in our control that we're executing and the external environment we operate in. There's been -- Stefan laid out the progress on the internal pieces. There's been plenty of outside as well that's happened over the couple of years we've announced. So I would say we're laser-focused on delivering what we can control on the inside. And I think that measures best with regards to operating margin, EBIT margin, and the commitment of 15%. I would say as we've got into the PVH+ Plan, all of the elements are still intact to be able to deliver that regardless of what may happen from a backdrop perspective. We talked about that maybe being a year too long with the 15% of the building blocks from where we are today comprised of the 200 to 300 basis points, as Stefan has said -- just mentioned around direct sort of efficiency driving that will work on that over the next 18 months to bring that to life. And then as we move towards growing, that will generate some element of leverage and scale. And then the work that David Savman and the supply team have already shown the ability to do to deliver steady incremental improvements around gross margin, we believe that leaves us with the things squarely in our control to go about delivering the 15% still.

That's really great color. Thank you for that introduction. Let's talk about the implementation of the PVH+ strategy by geography, and maybe we could start with Europe. It's been a choppy backdrop, macro backdrop. And you've also had some idiosyncratic quality of sales initiatives in the region. Can you talk to the trends that you're seeing in the near term? Are you seeing any near-term improvement in trend in Europe that's relevant to the PVH+ initiatives? How are consumers responding to the brand today? And are you seeing any change in engagement by country?

Yes. So we see the -- so Europe was one of the regions where we saw the consumer backdrop getting tougher first. Over the past few quarters, we see that tough macro backdrop continue. Our focus is to strengthen the unique position we have for Tommy and Calvin. So Tommy has a uniquely strong position in Europe and Calvin has a unique growth opportunity in Europe. So both brands have a very strong standing in Europe. And when we saw the macro -- when we saw the consumer backdrop come down, we took the proactive decision to take a step back and say, "Let's make sure now that we protect this position so that we can drive long-term sustainable growth over time." And that led to our quality of sales initiative this year. So three very concrete actions. We stopped anyone from buying our products and reselling them on the big digital platforms because what we saw happen with that was that they drove pricing power down. So we stopped that from midyear this year. And that was sales that we sold into people who then sold it on these platforms. So that was near-term pain for mid- to long-term gain. The second one was that we focused on our key wholesale partners and build quality sales growth with them. And we took away some of the low-quality pure players, those who used our brands to get the consumer in by heavy discounting. So we cut those. And then overall, we just bought tighter inventory to demand. So what you can see in Q2, as an example, is that what we said we were going to do in quality of sales is what we did. And the quarter for -- Q2 for us is May, June, July and you can see two chapters. May, June was the full price season selling and we were on plan, did great. In July, you can see the market dip into heavy discounting. But we had bought much less end-of-season clearance, so we had much less end-of-season clearance. And we decided not to follow the market, but rather have more new products. So new products started -- new product season started selling much better. In July and early August, the new products didn't fully compensate. But coming into the fall now, we're in a position for a really strong fall because we have much better inventory composition: less old, more new, more fresh products. And then we have the product strength that comes from having the global brand teams. Two years ago or 2.5 years ago when we started this journey, we had two of the most iconic -- globally iconic beloved brands, but we didn't have the brand teams. We didn't have the engines. So we have put the engines together now and that's what you will see then in continued product strength being built out starting fall and then you continue to see some by season.

How are you currently thinking about the path to return to revenue growth in Europe?

Yes. So it's a good example and I would say the best proof point, the most tangible proof point, is wholesale order books. So we were able to, last week when we communicated Q2, to share that now we have landed spring '25 order books. And we were -- and fall '24 in wholesale Europe, we were down high single digits. And for spring, we closed it on low single digits. So very strong sequential improvement and as a response to the improved products, the tighter collaboration with them. And then we continued to build on that. So that's a trajectory change that's really positive for us and really well received from the partners as well. So that's -- I believe that's the most tangible proof point further out because with D2C, we can buy a little bit later.

That's great to hear. Let's pivot to North America. One of the questions that we're asking nearly all companies at our conference today is their expectations for the macro outlook. What are your expectations for the environment in the second half of 2024 relative to your recent results? Do you expect things to be the same, better or worse?

We always pride ourselves not to try to become macro experts, but focusing on what we can control. So we always forecast based on what we see now. So we expect it to stay tough, and within that, we lean in to execute better product execution, better consumer engagement, better marketplace execution, better channel execution, better supply chain, refill of selling. So we see it continue to be tough and we continue the improvements we make. Because for those of you who might have been here 2.5 years ago when we set out the journey, one question from the audience was, is there a hope for the brand? Is there a future for the brand? Can you make something out of the brands in North America? And I believe our operating profit at the time was very, very low. And now we have 4 consecutive quarters of 400 basis points of margin improvement, and Q2, we ended at 11.7% EBIT margin and we drove growth in Tommy and Calvin 1%. So 1% growth, record high gross margin and an EBIT rate of 12%. That was the unknown 2.5 years ago saying, can Tommy and Calvin. I said -- and the reason I was so bullish on it was because of the data, the consumer data. So when you look at Calvin's and Tommy's consumer data versus a Ralph or a Lacoste or a HUGO BOSS and our competition, very, very strong. And that's something like -- you see it in the thousands of comments on -- like this underlying love for the brands, our job is just to tap into that and make irresistible products better and better engagement, better and better execution from owned and operated e-commerce stores, wholesale. So in North America, it's a great proof point to -- what we can do in a relative short period of time.

That's really helpful. As we think about digging into your North America business, your DTC business has been quite strong, but it decelerated last quarter. You gave some examples as to why with clearance product inventory, but what gives you confidence in positive comps in North America DTC as you move into the back half of the year and beyond?

Yes. So we see -- again, we can't influence the macro, but let's say it continues as it is, that's how we operate as I shared. But the confidence comes from every season we get better, every month we get better and better and leaning into our growth categories. So whether it's underwear in Calvin, its performance in Calvin, it's denim, it's outerwear, it's seasonal transitional outerwear. So we become more and more granular in understanding how we tap into those growth categories. And then we put more and more innovation and newness into those. And then we execute that in terms of how we plan and buy with D2C, as an example, we are in control all the way from how we plan and buy. So we improve how we plan. We improve our allocation. We improve our replenishment. So we improve our presentation in the stores. So it's the totality of that, that gives us confidence that we have the engines firing up on the product side to continue to drive growth even in a tougher macro because what I'm saying internally is, yes, the macro might be tougher, but the marketplace is very dispersed. Like we are big brands, but we still have a relatively small market share. So we can still take market share by executing our brands better.

As we think about the wholesale channel, it's been pretty clear that there's been some cautious ordering patterns as a result of some tough compares for some of these wholesale partners, and that's been top of mind for investors. What current trends are you seeing between sell-in and sell-through as you move through the back-to-school season? And how are your conversations going with key partners regarding growth as you look ahead into 2025?

I'll see if I start and then, Zac, feel free to add. But we have, over the past 1.5 years, continuously seeing a better sell-through with our wholesale partners and then that has resulted in sequentially improved order books. And we see that continuing despite the macro.

Yes. I think one of the big changes we made in the second half of '22 was to move away from, in the U.S., from a sell-in mindset and focus on sell-through. And I think what that allowed us is to really align our objectives with our key wholesale partners with the sort of implicit trust that better sell-through would come with more sell-in. I think for a while there, we needed to build that trust with that sort of -- and I think we're seeing now the beginnings of the other side of that. And so as we focus there, we see velocity and movement. We're seeing relatively responsive reactions by almost all of the wholesalers to continue to invest in behind that. And I think that's been one of the key successes for the North America profit turnaround as well is to move out of the boom-and-bust cycles that, in some ways, we live with for a long time. And now we see a much -- a progression that looks much more like where consumer demand progresses, which is in steadier cycles over time and a good measure of the progress that we're making, similar to what we see in retail.

One of the biggest -- if I may, just to say, one of the biggest challenges for us right now is to keep discipline in a tougher macro to not sell in more than what the actual demand is. Because when you own brands like ours, there is always an appetite, always an opportunity to sell more. What we're trying to do is we're going to drive growth. PVH+ is a growth plan. We're going to drive sustainable long-term, brand-accretive growth. Why? Because that's going to drive pricing power, margin expansion. How? Because we're going to be able to invest in a great product value proposition. So it's keeping that discipline to execute on the plan for the long term. It's -- I've said it many times before, there are faster ways to drive growth than PVH+. There are easier ways, but we believe PVH+, we are convinced, that it's going to generate the biggest value creation over time. So it's keeping that discipline and driving the growth that we know we can then continue to drive growth on or our partners can continue to drive sustainable, increasingly profitable growth. Because again, it comes back to the market of -- the consumer has so many choices. You're either among the most desirable or you're down here in the generic sea. And this, we are fortunate to have two of these iconic loved brands that every time we execute a product true to the DNA of each brand, that it's perceived as highly relevant, true to the DNA, great quality value, we sell. We drive growth and we drive margin expansion. And that's the model for us because then we can continue to build that flywheel, but that's what takes time for us to build that flywheel in a responsible way in a tough macro.

You spoke a little bit about the product value equation. And value has been something that we're hearing consistently from brands and retailers about the consumer who is seeking value. As you think about that, are you planning any change to the proportion of product newness, marketing or pricing strategy in either of your brands to engage the U.S. and North America consumer in the back half and into 2025?

Yes. We feel like we have great -- when we look at the competition and us and the marketplace, we see that we have great price value, great. And we are putting more value, higher quality, better innovation, better fabrics, better technology at the same price roughly. And the way we drive pricing power mostly is less discounting. And we see versus competition, we are super well positioned. And that's one of the reasons as well that gives us confidence over the long term that we love our positioning to be premium for the many people. We love that. Like providing something great to -- that's a great product at that last great quality, but still affordable for the many people. That's great. And it's the core success factor of what made Calvin and Tommy succeed in the first place.

That's really helpful. On North America, two more questions before we move on to some of the other things. G-III licenses are coming up and we're getting a lot of questions on what that might mean for the P&L. You spoke on your last call about being prepared and excited to take those back. But Zac, could you talk a little bit about the investments that you've made to ensure a smooth transition and what that might look like on the P&L?

Do you want to start, Stefan, in terms of the strategy. I mean, I can...

Yes. Let me just start, big picture. What we are doing is that in North America, in wholesale, we had women's divisions, women's product categories licensed out. And that gave us a royalty. And what it didn't give us was the opportunity to make that brand promise come to life with the product design, the investment in quality in the product, the decision on distribution, the pricing decisions, all the levers between -- within PVH+ is -- so over a multiyear period of time, we are taking these licenses back. And it starts with spring '25, we have coming Calvin Klein sportswear coming back and Calvin Klein jeans. And then spring '26 is Tommy sportswear and we're talking women's wholesale. And so we're working very closely with our partners. We are very clear on the product creation, having the product creation capabilities. Both Eva and Lea are experts in women's. They have very, very strong experience of creating outstanding women's products. Then it's the sourcing side. We're already prepared, clear on the sourcing partners to make that assortment come to life. And then we are over a multiyear period of time. And Zac, you can go into that taking these licenses back. But the most important, the rationale behind this is we believe that the core product offering of Calvin and Tommy we want to be in control of because we have to increasingly make sure that, that core reflects what the consumer desires and continue to invest into that.

And I think from a financial perspective, the headline is that we don't expect the transition to materially distort the P&L. And I think if you pull back and look at the PVH+ Plan in general, it was built on steady progress over a number of years, oriented with the flexibility to adapt to whatever the conditions might come. I think we've done the same thing with the transition here. We purposely built in sort of the phased time line to make sure that we didn't have to have any one big giant moment, we could sort of work and invest little bits over time. And I think also if you take a step back and think about it, we're bringing in categories that we do, to a certain extent, in the U.S. already, just for other channels, and we do around the rest of the world. And so much of the capability required to do those actually already exist inside of whether it's product design, merchandising, supply chain or the channels. And so I think that those factors mitigate some of the worry about any sort of momentary P&L distortions that may come from this.

Very helpful. North American margins have been a bright spot. And Stefan, you mentioned this earlier in the chat already, the significant improvement that we've seen. What's the next step in that margin journey in North America? How should we be thinking about the quantitative opportunity over the course of the next 1 to 2 years?

Yes. As I've mentioned, we have had 4 quarters of 400 basis points improvement. It's a mix of gross margin increasing because of the disciplined product and planning, supply chain work. And then there is an SG&A piece, a cost piece. And we are operating the brands more efficiently. We are more simple in our approach. So that's -- those have been the key drivers. We continue to drive -- we will continue to drive gross margin improvement. And we will continue to drive more operating efficiencies, the way we should always do to say, are there simpler ways we can do things. But these kind of 400 basis points improvement, we are now at 12%. So Zac, you know what we have shared in terms of long term...

Yes. We are -- I mean, we've taken a leap of 700 basis points over the last couple of years. We've committed low teens as a part of the PVH+ Plan. And even though the backdrop is obviously a lot different than the U.S. when we rolled that out, our commitment to low teens is still very much intact here in the near term for us. So I think that's -- so we will see less of the big momentum sort of step-ups and now more of sort of a relentless incremental improvement. I don't think that any of us would view low teens as the end state of what success looks like. We can look at the rest of the sector and realize that there's still headroom against us. But it will now come in sort of the small steady improvements that I think are reflective of the steady improvements that we're seeing across the rest of the value drivers.

Let's zoom out and speak about margins for total PVH following some of the success in North America. Your gross margins have been at or near all-time highs in recent quarters. What are opportunities on the horizon? Zac, can you walk us through these headwinds or tailwinds that we should consider as we move into 2025. And then within that, one question we're asking all companies at the conference is are cost pressures expected to be the same, better or worse in 2025.

So if I start from the business consumer perspective, brand perspective. So the gross margin -- I mentioned that fall '24 is the first season where the global brand engines are starting to have their hands on product. So we are early innings in unlocking our full gross margin potential from a product creation perspective. Calvin Klein is a good example. We used to have 15,000 different variants for a season. For spring '25, which we have the global product engine running, we are down to 7,000 SKUs. And with those 7,000 variants, we are offering the consumer more newness than any time before. And how can that be done? It's because we didn't have much overlap between the products that everyone could buy and create basically their own product, but the overlap between their bestsellers was almost 100%. So what we're doing now is that we're able to put globally a perspective on here's how we're going to drive a stronger product assortment. Here is -- here are the growth categories in this part of the season. Here are the hero products that are going to anchor the tables or anchor the stories. Here is the fashion drop and here's the size. So we give the consumer much more choice. We have much better balance between the essentials and the newness and we have half of the style breadth. So that means that we have much less products at minimum. We have much less cost. We will sell more. So that's a little bit to just give a concrete illustration of -- that this is just in the beginning. But these are numbers from spring '25 Calvin and here comes Tommy, very much the same.

And I think the record high gross margin is an amazing headline. And I think it's actually one of the best proof points of the focus on quality of sales that we've had over the last couple of years and quality of business. Looking forward from here, I think the big macro movers, we don't see either headwinds or tailwinds coming from there. So relatively stable environment. And because the ordering windows we sort of can lock that in for a period of time, we feel good about that. So from here, the improvements will really be based on the internal things we've talked about, sort of that price value proposition, maintaining that, which will be really important to us; and improvements around full price selling and markdown pieces from there. So there's still headroom ahead of us from there at that point in time that we would expect to see sequential improvement for the season by season over the next couple of years.

And one question we're asking everyone at the conference today is on promotions, both for yourself and for the industry. It's related to your gross margin outlook and you have some puts and takes here. How should we be thinking about -- do you expect your company to be more or less promotional this holiday season versus last year? And how does that compare to your expectation of the industry?

So we expect the market to continue to be tough, and we expect ourselves to do better and better and better. So within the framework of the reality of a tough market. But we should be better and better every season because we get better and better in creating that assortment, leverage that assortment, connecting the assortment. One other thing we do assortment creation-wise that we have never done is we are now able to create assortment to the space, to the store space. So we know exactly what store space we have in our owned and operated stores and in our wholesale doors, so we're able to -- already when we create the assortment, we create it and connect it already to the store, which should drive more sales and less discounting. So -- but under the umbrella of a tough macro.

Excellent. Well, with that, I'm afraid I do believe we're out of time. So thank you, Stefan. Thank you, Zac. And thank you for all of us -- all of those who joined in on the audience today.

Thank you very much.

Thank you.