PVH Corp. (PVH) Earnings Call Transcript & Summary

Good morning, and welcome to another session of our GS 32nd Annual Global Retailing Conference. My name is Brooke Roach, and I cover the apparel, accessories and brand sector here at GS. And I'm thrilled to introduce our next session with PVH Corp. Here today are Stefan Larsson, CEO; and Zach Coughlin, CFO. Welcome, Stefan. Welcome, Zach.

Thank you.

Thank you.

Stefan, you've been executing the PVH plan for several years now. As you look across regions and brands, where have you seen the most tangible proof points of the strategy resonating with consumers?

Yes. So for those of you who are new to our story, so we are PVH, 140 years, one of the longest traded on New York Stock Exchange. What we have is Calvin Klein and Tommy Hilfiger. And that's what led me to PVH. So we have 2 of the most iconic brands in the world. We have 50% of our business roughly in Calvin, 50% in Tommy. And we have strength globally. So we have the strongest and biggest business in Europe. We have the second strongest in -- here in the U.S. and North America. And then we have the biggest growth potential in APAC. But -- so what we have set out to do for 3.5 years now is to tap into the brand power of these iconic brands. And why that is so important and such a big value-creating opportunity coming from that is because we see 2 things happening in the fashion industry. The first is the barriers of entry coming down. Anybody can start a fashion brand. I'm sure you see a lot of these brands. But the barriers of entry have become the barriers of growth. The noise level has come up. So if you are one of these few, there are only 5, 7 -- 5 to 7 globally iconic beloved brands, and we happen to have 2 in Calvin and Tommy. It's Calvin, it's Tommy, it's Ralph, it's Levi's. You have a few of those, and we have 2. And you go back to the DNA of what made Calvin and Tommy collide with culture, and you make it more and more relevant. You make it current. So you go into what's iconic and what's current. And that's what I'm most proud of, what we have done. We have connected into the DNA, the beloved DNA of Calvin and Tommy and then connected that to the consumer and connecting it to culture. So what you see for those of you who are here, you see 2 images. And it's summer and the beginning of fall. So the Calvin image is Mingyu. So he's a K-pop star. Some of you might know him. First 24 hours on Instagram, his post got over 1 million likes. 7,000 customer comments, 7,000 individual comments. His denim jacket and denim became one of the top 1, top 3 sellers globally. He's wearing the icon cotton stretch, our biggest innovation in underwear. So we are very systematic in tapping into that brand love through leaning into the biggest product categories. So for Calvin, it's underwear, it's denim, it's outerwear. So biggest innovation into the biggest product franchises within those categories and then amplify by cut-through campaign. And for those of you who follow Calvin closely, you'll see that we are starting to have the strongest talent lineup we have ever had for a fall. So we have Mingyu, we have Trent Alexander-Arnold, up-and-coming soccer star in Real Madrid. We launched with him yesterday. We have Jalen Green, the NBA shooting guard from Phoenix. We launched him today. We have the biggest -- one of the biggest female music stars globally, similar -- like an equivalent of a female Bad Bunny. That kind of stature. So we have her coming out in 1 to 2 weeks, amplifying our biggest product innovation yet in women's underwear. So we lean into the iconic brand love. We lean into the biggest and most iconic categories. We put a lot of innovation into the most important products. We amplify it with cut-through campaigns. And there, you see in Calvin in Q2, you saw where we have put innovation into underwear, we're up 14%. Where we have put innovation into new denim, we're up 19%. And Tommy, you see Damson Idris. For those of you who can see the image is from F1 The Movie. How many here have watched F1 The Movie? A few of you. Thank you, Brooke. Tommy, partner -- we partnered with Apple Studios. When we heard that they were going to make a blockbuster around Formula 1. Why did we do that? Because Formula 1 is true to the DNA of Tommy's lifestyle. Tommy's dream has always been about classic American style connected to pop culture. And he has been the first -- he was one of the first brands that partnered with Formula 1. So he partnered with Ferrari, then Mercedes and here comes Apple. So the Formula 1 movie this summer became the biggest blockbuster. It's the biggest grossing sports film ever. Brad Pitt's biggest success ever, biggest viewed movie. I asked ChatGPT this morning on -- give me a back of the envelope of how many people have seen it in cinema? And we all know, sometimes it can be correct, sometimes not. But this is what ChatGPT said. 50 million to 60 million people have watched the movie so far. So -- and it's right into the core of Tommy's lifestyle. Tommy himself, he lives that lifestyle. So it's Formula 1, it's the movie, it's Formula 1 collaboration. We just launched with Cadillac. So Cadillac, 2 American icons, Tommy and Cadillac coming together on the grid U.S. first team on the Formula 1 grid. And also why Formula 1 is important commercially is the fastest-growing sport in the world from a viewership and the fastest-growing sub-consumer categories, the Gen Z consumer, Gen Z female, actually. So and then we tap into the lifestyle of Tommy Hilfiger, the Nautical with U.S. SailGP. We have a multiyear collaboration with them. It's like Formula 1 on the water. So you'll see us expand Tommy's presence in culture, in music, entertainment, sports. So that's -- sorry to be lengthy, but that's what excites me the most to see that we are able to tap into this unique DNA and the strength of having global consumer love, global distribution, global supply chain, global talent engine and then translate that into not only relevance at the top of the brand funnel, but what you can see in Q2. So every quarter, we are aiming to deliver better and better. So Q2 was better than Q1. We drove 4% growth. We drove growth in both Calvin and Tommy. And what excites me the most with that is how we did it. We did it with stronger products. We did it with stronger consumer engagement. We did it with better marketplace execution. So if you look at Q2, the rest of the year, we were able to reaffirm our earnings guidance despite tariff rates coming up almost 2x. And part of that is also because we have 70% of our business outside the U.S. So 70% is international, 30% U.S. So bigger international business for Tommy and Calvin than most competitors. So our goal is to quarter-by-quarter expand the impact of the PVH+ execution. But what personally excites me the most is when I'm out traveling, when I'm in a wholesale door or a store and see the windows and taking that iconic brand love and driving relevance in the window. So like Calvin just had a very strong underwear in denim window. And then you see the culturally relevant talent. Then you walk in further into the store and you see that we lean into the key categories that matters the most. You see how we -- then put innovation into those categories. We improved the presentation, the inventory matching with what the consumer wants to buy, the customer experience. It's like, because I know that every improvement we make that the consumer sees in the consumer offering will drive shareholder value. And that's what excites me the most.

Very clear. Let's shift to the execution of the strategy by geography. Starting with Europe, you've talked about a path to get back to high single-digit growth in the Europe business and you've indicated that wholesale order books are on the right -- heading in the right direction, up in the low single digits for the spring. What gives you confidence in that improvement in trend? What are you seeing in the macro backdrop in Europe today? And where is the biggest opportunity over the course of the next 1 to 3 years?

Yes. So if you'll -- again, Europe, our biggest market, have the strongest and uniquely strong brand position for Tommy and for Calvin. And to your point, we started in fall driving high-quality growth in our wholesale forward-looking order book. So we're coming into fall with increased strength in product, increased relevance in the cut-through campaigns, more -- even more disciplined marketplace execution. So we're coming in with that strength, the wholesale partners, some of the best partners in the world we have in Europe. They are showing their belief in us and in the brands and the work we do by the growth in the order books to your point. And then for spring, we're also already being able to share that we secured growth -- continued growth in the forward-looking order books. And then what you can see in Q2 in D2C was a sequential improvement in D2C performance as well. So uniquely strong brand positioning in the European market, driving high-quality sales growth in wholesale and driving through these brand improvements in the D2C channels as well. So we are very encouraged by the strength we have and how we are building. And it's going to be about high-quality long-term growth.

Very clear. Let's shift to North America. And before we dive into the PVH+ strategy there, let's ask a few questions that we're asking nearly everyone at the conference. Looking forward, what are your expectations for the environment in the back half of '25 versus recent results? Do you expect things to be the same, better or worse? And as you look ahead into 2026, is there anything that would change your answer relative to what you are about to say about '25?

So if we look at the fall is we see the same as you all see and all our competitors see. There is an uncertainty, of course, around the tariff situation. We -- when we look at the North America consumer, we were encouraged by the response to, again, our brands, our products, our experience in Q2. So we had a strength in D2C. We had a strong first half in wholesale. We lean in with our key wholesale partners. So we focus on building the consumer offering stronger and stronger. And then with the tariff overhang, it's going to be really important to be a brand. And in our case, to have 2 aspirational premium brands because -- and it's also going to be really important on how you execute the customer promise with those brands. So PVH+ has, for 3 years, been about stronger, more relevant product. Every time we combined something that the consumer sees as iconic with Calvin or Tommy and we put innovation in that, it works, like in underwear and denim. So we are confident in our ability to continue to win with the consumer in the U.S., and then we'll work through the tariff situation like everyone else.

Very clear, very clear. From a competition perspective, do you expect market share consolidation to speed up, slow down or get the same? Thus, will the competitive environment get more difficult, easier or about the same?

I believe it comes back to the brand strength and brand relevance and how good you are as a brand to translate that into more relevant product, more aspirational product, better consumer engagement, better experience so that you can take share and you can do it with margin expansion and with pricing power. So I believe we are heading into a world where brands will matter even more.

Let's dig into the channel dynamics in North America a little bit. From a DTC perspective, that's been an area of a little bit softer performance relative to what you've seen elsewhere. Can you discuss the drivers that you expect to return this business to sustainable growth and the time line that you expect to achieve this?

Yes. So what [ second ] I saw in Q2 was really encouraging. So we saw a sequential improvement of D2C. And one thing -- one proof point that is really important to share is how we drove the improved D2C performance in the U.S. this past quarter because it's a reflection of the improvements we have made in the customer offering, and we can see it now in -- we grow the consumer base. So we have more new consumers coming to the brand. We have more of those new consumers shopping again with us within a certain time period. We keep our consumers longer and we recover more of those consumers who moves between brands. So really encouraging to see that we are building strength in the consumer base. And we are increasingly focused on being clear on the consumer segments, being clear on taking that consumer into the improvements that we make. What do I mean with that? I mean that we have been initially -- this is a step-by-step journey, and we were initially very fast, successful in driving cultural relevance. What we then realized is that we need to build out the middle of the funnel of the -- if relevance is in the top consideration in the middle and then conversion. So what we saw in Q2, we were very successful in taking that top of funnel, this brand is relevant to this is product storytelling that's relevant to me where I want to shop your brands. So if you engage with our brands, you will see that we are getting better and better at taking that aspirational brand halo and driving into product storytelling that drives conversion and then builds the consumer base. So that's our focus. And Q2 was a great proof point of that.

Are there any other changes that we should be expecting and how you are bridging that -- bridging to consideration and thus purchase as you drive product stories?

It's the strength of the middle of the funnel because what we realized when we started to build this out and executed was we had incredible awareness and relevance at the top. And then we saw how do we -- we saw the opportunity. How do we turn that into building the consumer base and driving down to conversion. And the biggest opportunity we had was to build out. So you will see more and more product storytelling. So if you look at this fall versus last fall, the connection between -- here are the key categories for Calvin underwear, denim outerwear. And here are the key hero products and here is the innovation. And here is the story we tell you about that when you are contemplating buying new underwear, new denim, new outerwear. So you will see more and more of the building blocks come into place. And you will see us being more systematic and repeatable in how we approach that.

Let's talk about how this applies to wholesale. As you engage with your key wholesale partners in North America, how are those conversations trending today? Are you seeing a much more cautious order book? Or are you starting to see some opportunities ahead into '26?

Yes. We see opportunities for the rest of this year. We see opportunities for '26. We have great partnerships with some of our strongest partners in the market. Exciting to see what Tony is doing in Macy's. I've always been a big believer in Tony's approach to brands matter, product matters, real value matters. So really exciting to see that. Working with all our strategic partners that way and tapping into their strength because we know that the consumer wants to shop our brands D2C and wholesale. They want to shop multi-brand as well. So it's very much the same of looking at our top 150 doors and with wholesale partners across the world and saying, how do we make sure we invest in shop-in-shops? How do we make sure we invest in the presentation, in the customer service? How do we make sure that we have the strength of the assortment that you see in social media and in our e-commerce that you see that in wholesale? So it's a very strong and close partnership. It's an increasingly close partnerships globally.

Very helpful. Let's shift back to your global business and specifically look at APAC and China. What are you seeing there today? And how are you adapting your approach to the current backdrop that you find yourself in? And then for APAC broadly, what gives you confidence in delivering your guidance for this year and a return to sustainable growth?

So let me start and then, Zach, feel free to jump in as well. But Q2 was encouraging for us because we saw a stabilization of our business in APAC, the biggest markets. We have a very strong team there. And we have a great positioning. So what we were able to do in Q2 was to focus in on the big consumer moments. So if we look at China's in 06/18 summer -- one of the biggest summer events, we were able to drive significant growth versus last year on significant growth the year prior and both Calvin and Tommy ranked as top 5 on Tmall of international brands. So we were able to see that we were able to, despite the choppy macro, the consumer response to the work we do with bringing the brands to life stronger and stronger.

Yes. And I think just in general, Asia Pacific for us is our highest DTC market. And inside of there, by far, it's heavily weighted toward fall price. And so I think the confidence that we're building the stabilization was step 1. As you move now into the back half of the year, the marketing that Stefan was talking about earlier, we know drives quick in responsiveness from there. So a lot of the fall campaigns coming have amazing Asia talent that responds very well inside of there. And I think we've seen some of that recently with what we see on the screen here as well as the Harajuku sort of store that we opened last week as well. So I think that we're putting the investment behind to continue to build on that momentum to go from eventually stabilization driving back the growth from there. We're seeing some of the returns on that already coming here in the third quarter.

Harajuku is a great example. So we opened our biggest -- globally, the biggest flagship for Calvin that we have in the world. We opened on Thursday last week. And 36 hours before we opened, and this is Harajuku. Most of you know the importance of Harajuku from a brand building. It goes way beyond Japan and a fantastic consumer base, both domestic, international. 36 hours before we opened, we had thousands of people in line. So -- and what you see in Harajuku is the best brand expression. So you see the world of underwear, the world of denim. You will see the world of collection, the runway collection, the first season. And you can really see the Gen Z consumer. You can see the more brand-focused consumer. And it's been an incredible opening. And what's exciting? Maybe the most exciting is when we opened Harajuku and we had the influencers and the talent and John Cook was wearing a Calvin Tokyo Harajuku cap when he was traveling in Asia. He wasn't there for the opening, but it created a complete frenzy. But -- and the Harajuku collection sold out in a very short period of time. But the most exciting is it drove the business across Japan, wholesale, D2C, outlet. So it created a halo that drove the business across all channels. And that's brand building in practice because we need a few of those flagships globally and create that ultimate experience, and then that then drives all the different parts of the distribution. So incredible start so far. And then...

I was just going to say beyond the influence in Japan, I think importantly for us, significant instantaneous positive result in China as well. So as much as Asia Pacific is a collection of different markets for us, I think when we do big things in the most important places within the region, we see a ripple effect even outside of the countries themselves that it is in.

Yes. That's why we opened SoHo. We opened Calvin Klein's first flagship in the U.S. in SoHo here in New York at the end of the year. Equally same purpose as in Harajuku, a few flagships globally, a few regional really strong expressions of the brand where you see, "Aww". This is the ultimate expression of Calvin Klein or Tommy Hilfiger.

Let's stick with Calvin for a moment. There's some operational improvements that you're executing in the brand as you think about the centralization of the global product creation team. Stefan, you mentioned -- you talked a lot about this on the call. So maybe for this question, Zach, can you give us a financial perspective of this? How much opportunity do you see ahead as you cycle this for sales and margins given the impact that you have this year?

I'll let -- I promise I'll let Zach speak. But I want to continue to speak about it as well. It's for us -- nothing is more frustrating than when we try something and it doesn't work. But here's what happens. So Calvin Klein 2, 3 years ago had a completely decentralized product creation. So we pulled it together and build a global product creation capabilities, same as we already have for Tommy. And we were overconfident -- took too many parts of this together in one season. And the team realized it that they were on their heels in the middle of a product season, and it had a big negative impact on the gross margin this year. It's super frustrating. What's exciting by what followed from there is that we leaned in and we said -- so it's, of course, frustrating to have to share this with investors and everyone else that we didn't fully succeed see Season 1 to get that right. To see the team leaning in to fix this, and I was personally involved in working with fixing that and seeing how -- what we said we were going to do last quarter, we have done. So we are now fully back on track. So fall, so this is what -- the negative effect was in the first half of this spring. The second half of this year fall that we're going into is significantly improved, as we said we were going to do. Spring '26 is fully back on track. So fully back on track timing-wise and fully back on track margin-wise. And now we have the capabilities. So -- but it's still frustrating, of course. But it shows that sometimes we -- it gets harder than what we expected. But the only way then it's through it to fix it, lean in, roll up your sleeves and fix it. And that's the excitement now. We had a big Calvin Klein strategic follow-up meeting yesterday, and I was just thanking the team because they rolled up their sleeves and now we have the global capability. There is no way we can do what we have set out to do. There is not a single successful competitor that doesn't have a global product capability. We had to do it, and we hit some turbulence and then we fixed it. But that's why I wanted to just shout out to say, it was painful to share last quarter. It's less painful today because we have fixed it.

And I think from a financial perspective, this was all felt most predominantly in gross margin percent. As Stefan said, the pain of that really most heavily impacted the first half of the year. And as we progress now through the back -- second half of this year and the first half of next year, I think we're already seeing some of those improvements in our third quarter gross margin rate being sequentially better versus last year than the first half. That's predominantly coming from things coming -- arriving more on time. And so avoidance of air freight and some of the discounting with wholesale partners. So that's in the plan already for the second half. And you can see that in the third quarter. Fourth quarter gets a little murkier with tariffs coming in. And then as Stefan said, as we move into the spring season, a little bit of a longer tail of actually being able to have the time to design in margin to the product, what we refer to as go-in margin, a significant step forward. And we're confident of that as well because we placed the buys recently here for spring season. So we've had a chance to see that explicitly. So I think we know things are on time. So we're confident there. We know the go-in margin will be a dramatic step upward in the first half of next year. And so the stabilization that we've talked about last quarter that we had planned to do, we've now delivered in the financial implications of that will then positively step back up over the next sort of couple of quarters sequentially.

And the learning -- the bigger learning here is the biggest frustration comes out of when you see something not go right and you see it too late. So what this has led to is when we now build the growth plan forward-looking, when we build the consumer offering, we have the brands and the regions working together to set the commercial plan to win with the consumer in each of the regions, in each of the channels. We have then the forward-looking product creation to build strength at the right time in this commercial plan and the right going margin and the right timing. Then the marketing, the cut-through marketing, the right talent. So it was a really good learning. So the benefit of this challenge was that we stepped up our forward-looking steering across the board because to do what we have set out to do and to do what some of our best competitors are doing, we have to become very, very good at the forward-looking steering on creating that consumer offering, that's -- you have to start planning and building that out a year, 1.5 years in. And then you keep checking like are we landing the plane where we said we were going to land it. Because when we land the plane, is 14% up in the part that we have innovated in underwear. It's 19% up in fashion denim. So it's not like when we land it, it sometimes work. When we land it, it works. That's the most frustrating part as well. I'm out 55% in the stores in markets, and I visit the stores in the same way every single time. So I have a 1 page, which very simple, just sales and margin by men's, women's, by category, by product. And you see like plus 14%, plus 19%, but then there are too many categories where we haven't yet had that kind of discipline and impact. But it's one-to-one where we lean in, we deliver and it's just getting the discipline of forward-looking doing that. And the Calvin Klein challenge of the -- that first season led us to improve our steering across the board.

Very clear. There are several margin comments made in that last comment. So let's stick with margin for a moment. Tariffs have been the topic of the year. You've provided a lot of color on this on your last call. But Zach, can you help us understand the annualization of the tariff impact into 2026? And how you're thinking about the timing of fall mitigation? And then kind of alongside that, pricing and promotionality, how are you thinking about that importance? And how much of the promotionality is a function of what can be recaptured because of what happened with CK this year?

Yes. I think we've said last quarter, we started with wave 1 of the tariffs, and that would look like for us around $65 million of unmitigated impact. And we had commented then that we expected this year to mitigate around half of that. Obviously, a lot has happened since then in terms of new announcements. And so we've increased the amount of unmitigated to $70 million the last. With that, because it comes in later in the year by size, our mitigation percent is dropping a little bit below the 50% for this year. So essentially, we're running the same process we did for the first wave. Now as we look at the second wave, looking across the levers that we have to play with working with our vendors and the supply base, working across the rest of the P&L, contemplating from a marketplace perspective as well. So we don't have a sort of a full annualization number to communicate there, and we're working through from timing. I think that at the end of the day, some of that is due to, as Stefan said earlier, there's an ambient amount of uncertainty we're all steering at. I think we've got our plans in place for fall season. We're executing those. We'll read and react to what that is while we build the ongoing plan for next year. We'll have more to talk about at that point in time. But at the end of the day, the core of this is going to come down to driving the other improvements on the PVH+ Plan and delivering for the consumer an elevated offer. Out of that is going to come the best outcome for us that we'll take advantage of wherever the marketplace happens to move towards.

I would say to build on that, just taking a step back, 70% of our business is international, which puts us in a competitive advantage versus most of our U.S. competitors and peers. Being 2 of the most beloved brands in the U.S. is a tremendous advantage. And thirdly, the execution of the PVH+ Plan is about improving the customer offering so that we can drive pricing power and margin expansion. But it's uncertainty for all of us. But those are 3 really important context letters to what Zach took us through.

Your guidance currently calls for 8.5% operating margin. You have a target with the PVH+ Plan to get to 15%. How do you protect that 8.5% if the environment gets a little bit worse? And is 15% still achievable in the medium term?

Yes. Absolutely, margin expansion is definitely achievable. And what Zach mentioned is we have already locked in spring for '26 because half of our business is wholesale. And what we see there is the margin expansion we set out to drive, we have been driving. So the margin expansion coming out of improving the consumer offering season by season through the PVH+ execution and then a disciplined -- very disciplined cost efficiency work. So Zach, perhaps you want to mention a little bit of that because...

Yes, I think what gives us confidence is that the building blocks ahead of us from where we are today moving forward up towards 15% are very much in our control. We've talked about the sort of locking in the product margins, tied to the CK work that we're doing. That is in hand that we have from there. We have the European order books that we have confirmed for low single-digit growth for the first half of next year. That's a big block. And then the last piece is what Stefan said is the part on sort of the SG&A work that we're doing, which is really evolving an increasing amount of our SG&A spend from, I guess, you call it expense towards investment. And so some of that work, we've said 200 to 300 points publicly, we've been working on that over the last year, 1.5 years with the execution now largely behind us and the financial benefits now coming into the second half. That will be around 200 basis points by the fourth quarter of this year versus last year, with the remainder of that 200 to 300 coming next year. Those plans are also in hand and executed. So I think the major building blocks of margin expansion in this medium-term period, we have not just plans to do them, but many of them executed and locked in as we start to take those stair steps. We'll adapt to where the rest of the external market goes to, of course. When that clears, those building blocks will be there and so the stepping stones moving forward are not -- if they're not in place already, the plans are in place and executed and the financial piece will be coming next.

Very clear. Well, thank you, Stefan. Thank you, Zach. I'm afraid we're out of time.

I'll just say one thing. First, thank you for having us. And thank you for listening in, those of you who listened in. Again, I believe taking a step back, having Calvin Klein and Tommy Hilfiger and building them into their full potential towards a brand love that already exists. And expanding day by day, every day, we are leaning into expanding our impact. And the way we will see it is for you as customers to see it. If you see it in our e-commerce through our partners in our stores, that's how we evaluate our progress. So thank you for listening in.

Thanks.