PVH Corp.
Q1 2021 Earnings Call Transcript

Published: 3 Jun 2021

[Operator:]

Good day. And welcome to the PVH Corp. First Quarter 2021 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Dana Perlman. Please go ahead, ma'am.

[Dana Perlman:]

Thank you, operator. Good morning, everyone. And welcome to the PVH Corp. first quarter 2021 earnings conference call. This webcast and conference call is being recorded on behalf of PVH and consists of copyrighted material. It may not be recorded, rebroadcast or otherwise transmitted without PVH's written permission. Your participation in the question-and-answer session constitutes your consent to having anything you say appear on any transcript or replay of this call.

[Stefan Larsson:]

Good morning. And thank you for joining. With me on the call today are Mike Shaffer, our COO and CFO; and Dana Perlman, our EVP, Chief Strategy Officer and Treasurer. I look forward to sharing the progress we are making in building our next growth chapter as we drive towards an accelerated recovery post-COVID to win in the new normal. Before I do that, I would like to thank our entire PVH team for an incredible job in successfully navigating the company through the pandemic and delivering a very strong start of the year. This quarter, we moved from navigating through the pandemic to increasingly coming into an accelerated recovery phase. This has been driven by the disciplined execution of our key strategic focus areas, led by Calvin Klein and Tommy Hilfiger, our international markets, product strength and winning in the marketplace supercharged by e-commerce.

[Mike Shaffer:]

Thanks, Stefan. The comments I am about to make are based on non-GAAP results and are reconciled in our press release. Overall revenues for the first quarter were up 55% as reported and up 46% on a constant currency basis compared to the prior year and exceeded our prior revenue guidance, driven by growth across all regions and channels. Revenue in our international business exceeded 2019 pre-pandemic levels. When we think about the comparison of 2021 versus first quarter results to the prior year, it is important to remember that during the first quarter of 2020, virtually all of our retail stores and our wholesale customer stores were closed globally for 6 weeks on average as a result of the pandemic. Our total direct-to-consumer business was up 66% versus the prior year, including a 66% increase in digital commerce across all regions and brands. Our retail stores faced continued pressure during the first quarter, although to a much lesser extent than in the previous year, with a significant percentage of our stores temporarily closed in Europe, Canada and Japan. All regions and brand businesses experienced strong digital growth due in part to the continued store closures, particularly in Europe. Although we expect digital penetration to remain consistent for the rest of the year, we expect digital growth will not be as pronounced as stores reopen. Our wholesale revenue was up 53% versus the prior year, including very strong sales to our digital channels. The increase was driven by strong performance in Europe due in part to an unplanned shift in the timing of wholesale shipments into the first quarter from the second quarter. Looking at our segments, Tommy Hilfiger revenues were up 63% as reported and 52% on a constant currency basis, with international up 78% as reported and 63% on a constant currency basis. North America was up 25%. Calvin Klein revenue was up 65% as reported and 56% on a constant currency basis with international up 91% as reported and 77% on a constant currency basis. North America was up 27%. Our Heritage revenues were up 9%, which included a reduction of 14% resulting from the sale of our Speedo North America business in April of 2020. Gross margin was 59.1% for the quarter, as compared to 49.5% in the prior year, which reflected improvements across all regions and brands due to less promotional selling, a favorable shift in regional sales mix and the absence of significant inventory reserves that have been recorded in the prior year. We continue to tightly manage our inventory, which decreased 7% at the end of the quarter as compared to the prior year. Earning per share was $1.92 on a non-GAAP basis for the first quarter of 2021 and was $1.09 higher than the top end of our previous guidance. The beat included the impact of the unplanned timing shift of Europe wholesale shipments into the first quarter from the second quarter that I previously mentioned, as well as a shift of advertising and other expenses out of the first quarter into the remainder of the year. Together, these timing shifts represent approximately $0.40 of the beat with the balance of $0.69 due to the business outperformance across all regions and brands. Notably, our EBIT margin was very strong at 12% for the quarter. This was due to the favorable shift in regional sales mix, as our international business generally carry higher operating margins, as well as unprecedented strength in our international businesses EBIT margins. The strength in international was due in part to Europe channel mix, as a larger portion of revenue came from the wholesale channel, including sales to our brick-and-mortar and pure-play digital customers, which carry very low expenses. The higher proportion of Europe wholesale was due to a significant percentage of our stores being temporarily closed and the unplanned timing shift of wholesale shipments into the first quarter from the second quarter. Moving on to our outlook. We are providing our 2021 outlook despite the significant uncertainty due to the pandemic and, as such, it could be subject to material change. Our outlook does not contemplate any new store closures, new lockdowns, or extensions of current lockdowns beyond what is already known. We continue to monitor industry-wide supply chain headwinds and our outlook contemplates certain inventory delays of approximately 4 to 6 weeks on average, which is expected to result in additional air freight and other costs in order to maintain our sales plan in the second half of the year. While we have been able to successfully react throughout the year to delayed shipments, thanks to the strength of our supply chain. The current volatility in the industry may further impact our results in ways that we cannot currently able to predict. Our actual 2021 results could differ materially from our current outlook, as a result of the occurrence of any uncompensated events. We continue to be encouraged by our international businesses, which have exceeded and are expected to continue to exceed pre-pandemic levels throughout the remainder of 2021. We expect North America to continue to face the ongoing challenge of reduced international tourism, which is the source of a significant amount of revenue, and not expected to return to pre-pandemic levels within the year. Additionally, our outlook reflects approximately $20 million of estimated operating losses associated with the wind down of the Heritage Brands Retail business in the first half of the year. For the full year, we are projecting revenue to grow approximately 24% to 26% as reported, and approximately 21% to 23% on a constant currency basis compared to 2020. We expect gross margin will continue to show improvements in 2021 compared to 2022, due to less promotional selling, though we did not expect a significant of improvements for the remainder of the year, as we experienced in the first quarter, due in part to a less favorable shift in regional sales mix, as growth in our international businesses, which generally carry higher gross margins was more pronounced in the first quarter relative to our lower margin businesses in North America. We continue to manage your cost structure proactively, including reducing operating expenses and reallocating resources to support growth areas of the business. We continue to expect the increase in gross margin percent in 2021 versus 2020. And the decrease in operating expenses as a percentage of revenue in 2021 versus 2020 will be relatively similar in magnitude, with each worth a few 100 basis points. We expect EBIT margin will continue to show improvement in 2021 compared to 2020. Although we do not expect a significant of improvements for the remainder of the year, as we experienced in the first quarter due to a less favorable shift in regional sales mix. We also did not expect the unprecedented strength we realized in our international businesses in the first quarter to continue with that level for the remainder of the year, as stores have reopened and our wholesale business becomes a smaller proportion of the business. We expect our interest expense decrease in 2021 to approximately $110 million. We are planning debt repayments of $700 million for the full year, which is equivalent to the incremental borrowings we took on in 2020 to manage through the pandemic. As of today, we have already made repayments of $600 million. This includes $500 million of repayments made in the first quarter and additional $100 million made after the quarter. Our tax rate for the year is estimated at 17.5% to 19%. As a reminder, when we think about our tax rate by quarter, we expect that rate for the first 3 quarters will be relatively similar with the fourth quarter expected to benefit from certain discrete items, which bring down the overall rate for the year. For the full year in 2021, we are projecting non-GAAP earnings per share to be approximately $6.50, which is an increase compared to our previous guidance of approximately $6. Our current projection reflects an increase from our previous guidance of approximately $0.69 due to the business outperformance experienced in the first quarter. And while we are cautiously optimistic, we are prudently planning the balance of the year, given supply chain disruptions and overall macro uncertainty. For the second quarter, our revenue is projected to increase 34% to 36% as reported and 29% to 31% on a constant currency basis. Second quarter non-GAAP earnings per share is planned in the range of $1.15 to $1.18 compared to $0.13 in the prior year period. We expect interest expense to be about $27 million and taxes to be in the range of 36% to 38% in the second quarter. And with that, operator, we'll open it up for questions.

[Operator:]

Thank you. And we can now take our first question from Erinn Murphy of Piper Sander. Please go ahead.

[Erinn Murphy:]

Great. Thanks, good morning. And Mike, you will be greatly missed. My question is for Stefan. Just on the overall acceleration in denim that you spoke to. Can you remind us what percent of the overall business is denim? And how sustainable is the traction that you are seeing in the overall category?

[Stefan Larsson:]

Yeah. So we see - hi, Erinn, good morning. So as I mentioned in my remarks, we see increasing demand, consumer demand in denim for both Calvin and Tommy. And what we see is the mix between - we see the mix between the consumer continuing to shop casual essential categories for the at-home piece of their life. And now when - especially in the markets where the restrictions are opened up from COVID, we see the consumer excited and increasingly going out. And so it's a mix, we see this hybrid lifestyle, and denim is an important part there. So we see the strength in casual essentials and then we see denim, we see colors. So we - overall, as I mentioned is we see strength for that being positive for the industry as a whole and for us in particular.

[Erinn Murphy:]

Great. And then just a follow-up for Mike. Could you share a little bit more about what you're seeing with input costs right now? And then are there price increases that need to be contemplated to offset any potential pressure? Thanks so much.

[Mike Shaffer:]

Yeah. Look, for 4 '21 we're seeing low single digit kind of increases. But as we look to spring and the future, we're seeing mid single digit kind of increases. So the supply chain is under pressure to some degree. At this point, we're working through it, Erinn, and we're trying to understand what we can do on the product side to mitigate against those costs. Also looking at what we can do on the country of origin side to see where we can go to mitigate those costs. So it's a work-in-process. But yes, if we don't see the - if we cannot mitigate those costs, we will have to see some sort of increases as we move through into next year and beyond. But for this year, I think the impact to be relatively minimal.

[Erinn Murphy:]

Great. Very helpful. Thank you.

[Stefan Larsson:]

Thank you, Erinn.

[Operator:]

And we can now take our next question from Michael Binetti of Credit Suisse. Please go ahead.

[Michael Binetti:]

Hey, guys. Thanks for taking our questions. And Mike, I'll add my congrats and thanks so much on all the help over the years. Stefan, we talked about this a bit last quarter. But I think that, you know, in the US, Tommy and Calvin were lower than first quarter of '19 by roughly 40% each. I think you pointed to tourism, so maybe that explains some of the downside to that 2019 watermark. But can you talk to us a little bit more about where you see the US business over the next few years? Should we think about it as revenue is lower than the 2019 mark for a few years and the bigger focus is on profitability or should this really be approaching those 2019 revenues over the next year or two? Maybe some of just your bigger picture thinking on the region? And then I'll have a follow-up after that.

[Stefan Larsson:]

Okay. Thanks, Michael. So starting with North America. So yes, to your point, we have a big negative tourism effect. So a normal year, we have 30% to 40% of our business across Calvin and Tommy driven by tourism. And a big part of that is temporarily gone. And we are - over time, we will see that come back. Question is how soon it will come back. Then we have had 50% of Canada, it's worth mentioning as well that has had a negative effect. But underneath there, we have a lot of work to do with the domestic consumer in North America. So we're already leaning into this opportunity, as you know. So big important part was Trish, the leadership, Trish came in. Trish Donnelly as our CEO for PVH North America. She has a high performance experience from 6, 7 years as the CEO of Urban Outfitters, winning with the young consumer, winning with product, pricing power, driving digital to best-in-class shares. So, under the surface of the negative tourism effect and the Canada closures, we see some important proof points. So we see that digital, we were able to drive digital sales 60% up. We were able to drive product strength. So we were able to drive sales to the domestic consumer with higher pricing power, increased gross margins, less discounting. But this is an opportunity that we will continue to lean into. And when it comes to the future years, we'll come back to that, the more clarity we get from navigating through COVID.

[Michael Binetti:]

Okay. And then I guess you raised the operating margin guidance for the year 7.5% to 8%. I think that pegs about 800, 850 basis points above 2020. And I think when we talked, you said about half of that improvement will come from gross margin and half from SG&A on the basis points there. That puts gross margin about 57%, so you know, well above the 54.7 you had in 2019. But I think that still points to SG&A around $4.4 billion, and that's maybe just a touch lower than where you were in 2019. And I think the revenues are planned about 9% lower than 2019. So I wanted - I'd love to hear your thoughts on the sustainability of that, just the cost structure on the level is being very similar to 2019, you mentioned the focus on efficiency and managing costs tightly a few times here in the last few conference calls. So how do you think about where, you know, how to plan the SG&A going forward? Is that a sustainable budget for where you see the revenues over the next few quarters and years?

[Stefan Larsson:]

So when it comes to - I'll start and then hand it over to Mike. But when it comes to operating efficiencies, we'll start with - there is a mix shift in the operating efficiencies. So within each region we are driving more efficiencies than what you see in the total. What we already have done is we set out to save $250 million where, on a yearly annualized basis that we have secured and we have reinvested $100 million of that. So, we have 100 - so far, we have $150 million run rate net yearly savings. And we will continue to drive efficiencies and we will find ways to simplify how we do business. So, with that, I'll hand it over to Mike if you want to give some more details.

[Mike Shaffer:]

No, I think you hit most of the highlights, Stefan. I think as we grow that international - if the international business continues to grow fast in the North America business, you have a higher gross margin, higher operating margin – higher operating expense, higher operating margin business. So part of what you're seeing is this mix shift. If the tourism comes back, I think you'll start to see more of a shift back to North America and a lower operating expense margin. So, it's - part of this is significantly driven by the shift in where the business is being done.

[Stefan Larsson:]

And just to build on what Mike just said, Michael, we've got to continue to drive efficiencies year-over-year and reinvest to make sure that at the same time reinvest in the growth areas.

[Michael Binetti:]

Okay. Thanks a lot guys for the help.

[Stefan Larsson:]

Thank you, Michael.

[Operator:]

We can now take our next question from Jay Sole of UBS. Please go ahead.

[Jay Sole:]

Great. Thank you so much. And Mike, let me add my congratulations as well on a great career at PVH. I want to ask a little bit about Europe because I think there's a question about you know, was the strength in Europe this quarter driven by restocking or some sort of opportunistic opportunities based on maybe what you were able to deliver versus other companies? Or was it really about strong sell-through, you know, product and brand strength? And can you tell us a little about the order books and how they build up for fall of '21.

[Stefan Larsson:]

Yeah. So I'll start. Jay, which is - thank you. So Europe had a really, really strong quarter. So, there was a one-time effect from the timing of the wholesale shipments. And Mike will be able to give you a little bit more details around that. But when we looked underneath that was very, very strong performance. So, the brand relevance that we are able to execute in Europe, the product strength, and the pricing power, the margin expansion and then how we have been able to, for a long period of time now, follow the consumer in how we win in the marketplace. So, we see Europe's strength continue and we see Europe opening up again after the lockdown from COVID. And we have full confidence in our team's ability to continue to build on the strength we already see. So, with that, I'll hand it over to Mike to describe a little bit more of the one-time effect. But what excites me the most and what I'm interested in is, what's the long-term strength of the business, and it's very, very strong. And when we break it down into the underlying value drivers of what drives profitable market share growth, sustainable profitable market share growth, Europe ticks all the boxes there. So, very, very strong performance from the team.

[Mike Shaffer:]

Yeah. Look, it was a great quarter, as Stefan said, and we beat the top end of our guidance overall by $140 million. Europe was a big piece of the beat. Coming into the quarter, there were lockdowns, there were store closures and there was a lot of uncertainty around how stores would open. We had goods planned for early shipment in May. It was about $40 million worth of product sales that we were pleasantly surprised there was demand and the customers asked for the goods in April, so the good shift. So - and that was part of our beat for the quarter. So out of the $140 million, about $40 million of the beat was Europe wholesale sales. And then for the balance of the year, we basically held to our previous guide, really didn't reflect any changes on revenue and we flowed through the other $100 million in revenue beat for the year.

[Stefan Larsson:]

And Europe - yeah, go ahead, Mike.

[Mike Shaffer:]

No, I just wanted to mention the order books. The order books for the fall holiday season are up double-digits. Those are not frozen. So we are really happy with the performance there and just shows continued strength and the beats were of course really all categories. We're seeing super strength in that business.

[Stefan Larsson:]

Just to build on what Mike was just saying and building out on your question, Jay, when it comes to Europe's performance and the sustainability we see in that performance. And we also see that the accelerated recovery priorities that we set out as a company to drive when we hit COVID are really driving the performance now and will continue to drive the performance. So when we have focused in on our core strength, Calvin and Tommy is over 90% of our revenues. International, which Europe is a big part, it's over 60% of our business. And we see strength in Europe, strength in Asia. And then we focus in on product strength, and we see AUR growth, gross margin rate improvements across the board. And then we focused in on connecting even closer to where the consumer is going in the marketplace. And Europe is leading there, as you know, from an e-commerce contribution. But overall, as a company, we are now 25% e-commerce contribution and drove almost 100% growth. So that - and then you layer on the efficiencies of $250 million savings. So that's where I keep my focus, which is as a management team that what we - how we said we were going to drive the business is how we are driving the business, and we see the strength continue and that's why we take the year out.

[Jay Sole:]

Got it. Thank you so much.

[Operator:]

We can now take our next question from Omar Saad of Evercore. Please go ahead.

[Omar Saad:]

Good morning. Thanks for all the information. Mike, congratulations and best wishes. I'd love to ask a broader question for your thoughts on you know, 1the strong gross margin trends industry-wide, lower promotions is something we've been hearing consistently. What's your view on the sustainability of that element of the gross margin strength, as the industry rebuild inventories, do you expect the promos to return over time? And I have a quick follow-up. Thanks.

[Stefan Larsson:]

So thanks, Omar. So the way we look at it is a big part of how we're going to drive the P&L going forward is through the gross margin rate expansion. And part of that is mix shift from doubling down on international and part of it is a result of how we drive product strength. So that we focus in on key growth categories, hero products, we cut - continuously cut down productive SKUs. So we see that we're just in the beginning of that journey. So over the coming few years, we see that gross margin rate will be a very important component in how we deliver value.

[Mike Shaffer:]

Yeah. Omar, I would just add on the in the sector, we all plan - we came out of the pandemic with inventories down, not just us, but our customers, our competitors. I do think there was a significant amount of clearance that wasn't in the sector. I do think as time goes on, we probably will see some increase in that level of clearance in our customers and how the business just operates normally day to day. But I hope that there was a lesson learned about levels of clearance and that we see some opportunities in the future to just have less clearance and higher gross margins.

[Stefan Larsson:]

And that connects to just what - building on what Mike just said, that connects to our focus on planning and buying inventory closer to demand. And that is a journey we just started on, but there is real value creating potential in that.

[Omar Saad:]

Understood. That's actually really helpful. And then, what is the role, and where are you on data analytics and your ability to use data analytics, not just to engage with consumers directly, but in things like inventory planning and merchandising?

[Stefan Larsson:]

Yeah. So we are quite far ahead when it comes to having the tools and the methodologies to use data to become more demand driven. Then it's the journey we are on is to adjust the way we create assortment, plan the assortment, buy it, allocate it to really take full advantage of those data capabilities. So I've been coming into PVH. I've been positively surprised by the data capabilities that we have. The work we have to do now is to apply that to how we plan and buy the business.

[Omar Saad:]

Thanks. Staf.

[Operator:]

And we can now take our next question from Kimberly Greenberger of Morgan Stanley. Please go ahead.

[Kimberly Greenberger:]

Great. Thank you so much. Good morning. I wanted to just ask about how you're thinking about strategies to manage through the supply chain disruptions that you're seeing. I think, Mike, you mentioned higher use of air freight, but I would imagine that you've got a sort of wide range of strategies that you are looking at to try to ensure that you can deliver goods and as timely a manner as possible. So I was wondering if you could just outline those for us. And then secondarily, Mike, just a clarification on your international margin discussion, we understand its higher gross margin that comes with higher SG&A is the aggregate EBIT margin internationally higher as well? Thank you.

[Mike Shaffer:]

I'll do the clarification first, yes. The international business is typically run with higher gross, expense and operating margins being higher, so that's been our - that's typically how we operate. On the supply side, we are seeing uncertainty. There are delays, but there is just some uncertainty surrounding the supply as well. So as we look at some of the countries where we do significant amounts of business, India for knits and Sri Lanka for underwear. Those countries are under lockdowns. India is closed. There are - we're not allowed to – our factories were not allowed to operate. And in Sri Lanka, we're partially open and factories are operating, but capacity is an issue. So it really - what's concerning to us is when these factories will come out of those lockdowns and how they will open and how fast. Scheduling is that they'll open in the first week of June. So it's coming up quickly, and we'll have greater visibility in the next couple of weeks. As some moving goods, it really isn't just airfreight. We have many different modes of expedited freight. So, we can use faster ships, believe it or not, our air freight. We have found air freight constrained. There were not a lot of flights, but we are looking on certain product categories. And underwear is particularly one where we can get goods in quicker and the cost is not great. The goods are smaller in scale in terms of size, and we can put quite a few into a path. So, each order is looked at individually and we manage just PO-by-PO.

[Kimberly Greenberger:]

Great. Thank you.

[Stefan Larsson:]

And to Mike's point, the projections of how we are taking up the year, the guidance for the year, the projections, what's in that guidance is the current view we have on the supply chain situation. And if it opens up sooner than what we expect, then we have upside.

[Kimberly Greenberger:]

Okay…

[Stefan Larsson:]

Let's take the last question.

[Operator:]

We can now take our final question from Ike Boruchow of Wells Fargo. Please go ahead.

[Unidentified Analyst:]

Hi. How are you? This is Will on for Ike. I just wanted to ask about - it sounds like you're taking price across the board, across Tommy, across Calvin. What inning do you guys think you're in? And how - what's sort of the average price increase for the products?

[Stefan Larsson:]

Well, it's hard to say we're changing because I see it as a continuous work that we have to - that when we continuously drive brand relevance with the young consumer, we are also driving our ability to drive revenue with increased pricing power. And then how we do that is that we break it down into the different product categories and different hero products. So, it's - that's overall, we are early on the journey of driving pricing power and margin expansion and this is a job that we will continue for many years. It's part of our growth algorithm.

[Unidentified Analyst:]

Got it. That's helpful. And just to dig in a little bit more on Omar's question, you obviously have these significant tailwinds like this outsized expansion in 1Q. Can you just frame how we should think about gross margin going forward? How much of these tailwinds are transitory, how much is structural? Is it half of it, is it half? Is it two-thirds? Can you just sort of frame out how we should think about gross margin and how sustainable it is?

[Mike Shaffer:]

Sure. Look, I think the guide on gross margin is a couple of 100 basis points up over the prior year. I think somebody called it out earlier, operating margins, call it, 7.5% to 8%. So pretty much flat to zero operating margins last year. So half of that is coming through as gross margin improvement, going from the zero to the 8%, so call it, 350 to 400 basis points kind of improvement. So, that's for the year. As you think about it by quarter, the first quarter was a big part, but we are going to be up in every quarter as we work through quarters two, three and four. So I think that puts in the box for you.

[Stefan Larsson:]

And just building on that is when we look at the gross margin rate improvements that we plan for the remainder of the year and onwards is there is an international piece, there is a product strength piece, and there is a planning and buying to and closer to demand piece.

[Unidentified Analyst:]

Understood. Thank you.

[Stefan Larsson:]

All right. So with that, we thank you all for joining. And we look forward to reconnecting next quarter.

[Operator:]

This concludes today's call. Thank you for your participation. You may now disconnect.