PVH Corp.
Q3 2020 Earnings Call Transcript

Published: 3 Dec 2020

[Operator:]

Good day, everyone, and welcome to the PVH Third Quarter 2020 Earnings Call. Today's call is being recorded. And at this time I would like to turn the call over to Dana Perlman. Please go ahead.

[Dana Perlman:]

Thank you, Operator. Good morning, everyone, and welcome to the PVH Corp., third quarter 2020 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.

[Manny Chirico:]

Thank you. Good morning, everyone. Joining me on the call this morning is Stefan Larsson, our President; Mike Shaffer, our Chief Operating Officer and CFO; and Dana Perlman, our Head of Treasury and Senior Vice President of Business Development and Investor Relations. First of all, I'd like to thank you all for joining us for the third quarter call. It's hard to believe that this is the third earnings call since the pandemic started, and our associates in certain parts of the world have been working remotely for over nine months now. We truly like to thank all our associates for their hard work and flexibility, in particular, our dedicated retail store and distribution center associates, who will manage to keep running our business as usual despite the backdrop, which is far from normal. Our third quarter results were very strong, and significantly outperformed our top and bottom line expectations across all markets and channels despite the challenging environment.

[Stefan Larsson:]

Thank you, Manny, and good morning, everyone. First, let me start by saying that I'm deeply honored and humbled by the opportunity to succeed Manny in the CEO role for this great company. And I would like to thank Manny and the Board for their confidence and trust in me, as well as for a very strong partnership. Manny is one of the few iconic leaders of our industry. And having had the opportunity to work side-by-side with him over the last year and a half, has given me unique insights into how he and our team over the last 15 years have built PVH into one of the largest apparel groups in the world.

[Mike Shaffer:]

Thanks, Stefan. The comments I'm about to make are based on non-GAAP results and are reconciled in our press release. I'm going to discuss our third quarter 2020 results then move on to the current state of the business and our fourth quarter expectations. While our business continued to be negatively impacted compared to last year by COVID-19 pandemic, our overall results were an improvement compared to the second quarter, and exceeded our expectations driven by strong outperformance in Europe and China. Overall, our revenue was down 18% as reported, and 21% on a constant currency basis from last year. Tommy Hilfiger revenues were down 12% as reported and 16% on a constant currency basis, with international flat as reported and down 6% on a constant currency basis, and North America down 37%. Calvin Klein revenue was down 18% as reported, and 21% on the constant currency basis, with international flat as reported and down 4% on a constant currency basis, and North America down 39%. China continue to show positive year-over-year results in both Tommy Hilfiger and Calvin Klein. Our Heritage revenues were down 36%. Our third quarter reflected a 22% decline in revenue through our wholesale distribution channel, and an 11% decline in revenue from our total direct to consumer businesses, including a 70% increase in sales to our digital commerce business, driven by strong growth across all brands and regions. The lack of international tourist traffic coming to the U.S. continues to challenge our North America brick and mortar retail business. While we continue to be negatively impacted by the pandemic, our earnings exceeded our expectations and our earnings per share was $1.32 on a non-GAAP basis for the third quarter. Our gross margin reflected heavy promotional selling in the U.S., as we advanced markdowns from the fourth quarter into the third quarter in order to maximize the earlier holiday selling season. Inventories ended the quarter down 16% from last year. As of the end of fiscal 2020, we are now projecting to carry approximately $100 million of basic inventory into spring '21, which is a reduction compared to a prior projection of about $125 million. Earnings in the third quarter benefited from cost savings resulting from the North America workforce reduction announced in July 2020, and COVID-related government payroll subsidy programs in international jurisdictions, as well as reductions in all discretionary spending categories, partially offsetting these savings were increased ongoing expenses associated with health and safety measures to protect our associates, customers and business partners. These safety measures are expected to continue. We ended the quarter with $2.7 billion of liquidity, consisting of approximately $1.5 billion of cash on hand, and over $1.2 billion of available borrowings under our revolving credit facilities. Moving on to the current state of business and our expectations for the fourth quarter. Overall for the fourth quarter to-date is running down approximately 20% versus last year. And we currently expect that revenue for the full fourth quarter will be down approximately 20% versus last year as well. We continue to see strong growth in our owned and operated digital commerce business and experienced the strong positive consumer response to Singles' Day promotions, and the holiday season kickoff events globally. Additionally, we see continued overall positive trends in Asia, particularly in China. However, our retail stores in Europe and North America continue to face significant pressure as a result of resurgence of COVID-19 cases. Approximately 40% of stores in Europe were closed for the majority of November. As a result, our fourth quarter to-date direct to consumer business has declined compared to the third quarter, running down approximately 25% overall compared to last year. When we look at the total direct to consumer business by region, we are running up low single digits for total Asia, down high-20s for North America and running down low 30s in Europe, including the impact of the closed store as I mentioned. As of today, only about 10% of our stores in Europe are still closed, and within the next 10 days all of our stores are planned to reopen. We expect the trend in Europe to improve considerably as a result. Also, through November, all of our regions are running ahead of our current plans. We expected our fourth quarter gross margin percentage will be relatively flat compared to last year. And our expenses as a percent of revenue will be in the mid-50s. Overall for the second-half, our gross margin percentage is in line with our previous expectation, and our expenses as a percentage of revenue have improved by approximately 250 basis points. We're not in a position to issue detailed guidance due to the uncertainty related to the duration and severity of the pandemic. And with that operator, we'll open it up for questions.

[Operator:]

Thank you, sir. We'll take our first question from Erinn Murphy with Piper Sandler.

[Erinn Murphy:]

Great. Thanks. Good morning. And Manny, it really is an end of an era, so wishing you all the best in whatever the next chapter holds for you.

[Manny Chirico:]

Thanks, Erinn.

[Erinn Murphy:]

You're welcome. I guess my question first is just on your own digital margin. Manny, you spoke to in your prepared remarks that it's now in line with overall margin. Can you just speak to some of the changes that you've made to see that materialize? And then where should digital margins go over time?

[Mike Shaffer:]

Yes, Erinn. It's Mike, I'll take it. Look, I think one of the benefits we've seen this year has been the scaling of the business. So in each region, we've seen increasing gains on the topline and we've gotten significant benefit to leverage in the expenses. We have done deep dives, we've reviewed expenses in every region, we look at how we ship, how we manage, where we do free shipping, and our teams are getting a cadence and rhythm around the business, which they didn't have before. So it's all those things put together, it's truly detailed work that truly getting the benefit of that scaling of the business. As we look forward, the business in terms of digital is overall across our region is now approaching the profitability level of our brick and mortar business. So we're really happy with the way that business is evolving and where we felt pressure in North America, we're now seeing significant improvement there on the bottom line. And just a reminder that Europe and Asia are and have been profitable businesses for us and continue to just be very profitable for us.

[Erinn Murphy:]

Got it. Okay. And then I guess my second question is, really just on your comments, I guess maybe more for Stefan or Manny to tag team. You talked about supercharging e-commerce and that was definitely a thread throughout the comments this morning. There's also been a lack of tourism here domestically. So I'm curious how you're thinking about reevaluating your store fleet, particularly in the domestic market. But if you had any comments on Europe as well, that would be most helpful. Thank you.

[Stefan Larsson:]

Thanks, Erinn. This is Stefan. As you mentioned, correctly, we have been very successful in pivoting towards e-commerce and then parallel to that we're working on rightsizing the brick and mortar fleet to match where the consumer is going. It's an extreme case now given that we're in the middle of the pandemic. So we are tracking where we are going right now and optimizing what we can hear right now. And then we're following where the consumer is going coming out of the new norm, but it’s going to be an important work for us to make sure that we right size the brick and mortar portfolio North America, Asia, Europe. What we do see though, in this quarter, which is very exciting in both Asia and Europe is when we execute really well cross channel, the consumer shops cross channel. So during the Tmall activation where we drove a 50% comp, we were also at the same time able to drive cost in the stores. And the same in Europe that when we see pivoting -- an extreme pivoting to 40% of the stores closed, we are able to connect to use our connected inventory. So we see a future where the consumer continues to shift more and more into digital, but very much an omni-channel consumer.

[Mike Shaffer:]

And Erinn, it's Mike. I'd just add in North America, just a reminder at least it tends to be relatively short, the average three years with lesser performances was being less than that. So we do have some significant flexibility.

[Erinn Murphy:]

Thank you, all.

[Operator:]

We'll take our next question from Bob Drbul with Guggenheim.

[Bob Drbul:]

Good morning. Manny, I have to say, look, it's been a real honor and pleasure. I think you talked about a 15-year career as a CEO, but you go back to your CFO days and how far it's common and where we've been together and I'm going to miss you. Congratulations. You've been an amazing leader over the last 20-plus years. Stefan, you got some big shoes to fill. I wish you luck.

[Stefan Larsson:]

Thank you, Bob. I agree with you.

[Bob Drbul:]

So Manny, the first question that I do have is for you. In your agreement as Chairman, have you arranged like an exclusivity with Jim Cramer on Mad Money to be the guest for PVH ongoing in the quarter?

[Manny Chirico:]

No, but I think maybe it will be best to talk about retail in general, but not deviate specifically. I'll leave that to Stefan, Dana and Mike and the team. But thanks for the kind words, Bob. It's really nice of you.

[Bob Drbul:]

And I guess the second question then is, can you guys talk about -- I think you talked about the improvement in the European order book. I just wondered if you can elaborate a little bit with the business trends to-date with the store closures how much the store closures have impacted the fourth quarter? How it should shift when they reopen? And then, just real curious on the order book over the next few quarters, I think spring definitely firmed up from the last time you talked about it, some comments on summer and fall. If you could just talk to how the retailers are planning and/or envisioning the coming quarters as things hopefully come back to some sort of normalization. Thanks.

[Stefan Larsson:]

Bob, it's Stefan. I'll start and then hand it over to Mike. So we experienced very strong performance, strong market share gains in Q3 until the temporary store closures hit. So Mike can give you more of the details of those trends. But then, when we look at the order books, what's exciting to us is that they're very strong and they kept strong throughout the resurgence. And it keeps coming back. Our team is very, very good at executing in terms of brand relevance, product strength, working, driving their owned and operated e-commerce, their own stores, and also strong partnerships with third players and other wholesale partners. So very strong trends, and then disrupted by 40% of the stores being closed and then very strong indications on the order books. But Mike, I'll leave it for you to provide some additional details.

[Mike Shaffer:]

Yes, sure. So I guess I’d add just some color around the third quarter these stores were all plus. We were running up 7% for all of Europe. And even with 40% of the stores closed, we were down 30%. So what we actually have seen is the stores that will remaining open, we're actually running less comps and the stores that are opening and opening strong. I actually think there's pent-up demand and we may get some business back from the closure. So that would be the hope.

[Bob Drbul:]

Great. Thank you.

[Operator:]

Our next question comes from Michael Binetti with Credit Suisse.

[Michael Binetti:]

Hey, guys. Manny, let me first of all, thank you so much for the dialogue all these years also, it's been a pleasure. And obviously wish you the best in the next chapter. And Stefan cannot wait to pick it up with you here as you start the next adventure in your career, this will be very fun. Very excited to work with you. I just want to ask you quickly on the -- I don't know Manny or Stefan who wants to jump on this. But with the revenues down today and 20% and the B2C down 25%, but 40% of the stores in Europe closed and now reopening. Is there a piece of the business you expect to slow from here that holds you at negative 20% revenues in the fourth quarter? If the Europe stores are going to be opening in the contribution should be improving. I'm just curious what you're thinking about or if it's just conservatism. And I had a follow-up.

[Mike Shaffer:]

I'll start and then let Stefan jump up in. I guess from my perspective, it's just an incredibly uncertain time. So we had stores that were closed. We've obviously seen most of those stores open and hope balance and are planning the balance open over the next 10 days. We've seen resurgence in the U.S. pretty much no closures a very, very few. So it's just uncertainty in the business, while we are outperforming our plans to-date, we were just prudent in how we projected.

[Stefan Larsson:]

I agree with Mike. Looking at Europe as an example, we were on fire and then within a few weeks, 40% of the stores were closed down and now within a few weeks later, we are fully open again. So the underlying trends are very strong in both Europe and Asia.

[Michael Binetti:]

It's pretty easy to navigate, Stefan. I don't know what the uncertainty is, I'm just kidding. Can you help me -- thank you for that -- can you help us understand a few of the pieces of the puts and takes on the gross margin in the third quarter? Any numbers you could give us to understand the 260 basis points of pressure in the quarter. I'm most curious about how that pull forward of markdowns as you saw the incremental store closures coming and you said you move some markdowns in the third quarter. Any number you can help on that would be helpful. I think that's the most important thing to understand. And then any of the other relative buckets, if you just mind rank ordering them for us as far as what the pressures were?

[Stefan Larsson:]

Yes. So look, I think it really was driven by North America. We have work to do here, and we were promotional on the business. So we got the advanced markdowns, we saw this holiday season being earlier. It clearly paid off. We were able to deliver an increase to the year in terms of profit. We've remained consistent in our gross margin plan, as we reported from last quarter to this quarter. So I think we're feeling good about the business. We're feeling good about the decision we made. And we think we got rewarded for doing it. So that was really what the change was.

[Michael Binetti:]

Thanks again, guys.

[Operator:]

Our next question comes from Dana Telsey with TAG Advisors.

[Dana Telsey:]

Hi, good morning, everyone. And Manny, congratulations on a wonderful career and have a wonderful next chapter. And hopefully, we can all still stay connected. Stefan, as you think about the business, and as already mentioned, supercharging e-commerce, with each of the brands of Tommy and Calvin, and your motto of that sustainable, repeatable process. How do you see that for each of those brands and continuing to capture the younger consumer on a fashion forward basis? And then Mike, just on the inventory levels, how you are thinking about them ending the fourth quarter going into '21? Thank you.

[Stefan Larsson:]

Thank you, Dana. And it's an important question, and this year coming back through the pandemic year. But what's exciting is that our pivot to e-commerce following the consumer really works. So in one year, we have grown penetration from roughly 10% to over 20%. So can the growth rate continues this way? Probably not when the stores, but this is the long-term growth potential coming back to systematic repeatable value creation in e-commerce. Is it beyond 20% penetration? Absolutely. And I have the benefit of spending a year next to Manny and really learning in depth and looking at our core strengths. And I see very big opportunities over the long-term to continue to grow in e-commerce.

[Mike Shaffer:]

And Dana, on inventories, we called it out in the release the third quarter we were down 16%. And that includes about $100 million of carryover product that we've now chosen to pull into next year basic product no liability. As we look at the fourth quarter the year end, I think what we'll see is inventory reduction call it mid-single digits, and then that carryover inventory is worth about 6% or 7%. So something in the low teens in terms of a reduction excluding that $100 million of carryover. Our inventories are very clean. Obviously, with the beat we had on the topline in the third quarter and the way the business is trending ahead of our plans, we're in a very good shape at the moment.

[Dana Telsey:]

Thank you.

[Operator:]

Next question comes from Jay Sole with UBS.

[Jay Sole:]

Great, thanks so much. So my question is about what percent of the business you think has been impacted by COVID in terms of the categories? So if you think about fragrance or women's dresses, or bottoms, or some of the things that maybe consumers are shifting away from just in the stay at home environment. Can you give us an idea of what's been impacted and sort of with an eye towards next year and those businesses probably coming back as things get back to normal? Thank you.

[Stefan Larsson:]

Well, before I hand it over to Mike, who might have more facts or details behind it. I mean, the biggest change is the formal wear to casual, the COVID and having everybody work from home around the whole world is a big move to casualization. That's the biggest trend change we see.

[Mike Shaffer:]

Yes, and that's exactly where I am. I think it's clearly going to be -- we're going to be chasing inventories. We don't know when certain so we'll play it cautious, when we buy more of the casual product less of the dress of product. And I think we're moving as quickly as we can into the categories that are outperforming.

[Jay Sole:]

Yes. And maybe one more. I think you mentioned that you expect current business trends continue in North America if I heard that right. How did you see the business trend as you went from the September, October into November? And sort of what does that imply about where the current business stands today?

[Mike Shaffer:]

So right now in North America running down in the high 20s, which is ahead of our plan. And if you think about it, the beginning of this Black Friday season is where I think we still have the most risk in the business, the capacity issues, the stores, not opening for the post-Thanksgiving period, but opening the Friday instead. So, I think a lot of that risk is behind this way. So that's where we are today.

[Jay Sole:]

Got it. Okay. Thank you so much.

[Operator:]

Our next question comes from Jamie Merriman with Bernstein.

[Jamie Merriman:]

Thanks very much. Stefan and Manny, I wonder as you talk about some of these omni-channel initiatives, can you just give us a sense of where you are in terms of those capabilities? What you would still like to do on that front that could potentially be another driver of that customer acquisition? And then, to what extent are you working with some of your e-commerce partners, whether it's the platforms like an Amazon or Zalando, or some of your larger brick and mortar partners to have a more integrated inventory position, like you've worked on with your owned channels? Thank you.

[Stefan Larsson:]

Thank you, Jamie. It's a continuous work to follow the consumer and the consumer shops our owned and operated site, I just could see, we drove a 70% growth, and then they shop increasingly with the big platforms as well. So our partnership with Amazon, Zalando, Tmall is very, very close and also with the traditional department stores and their e-commerce platform capability. So we see the consumer increasing the shopping and browsing through the branded sites our owned and operated and third-party. So, that's the work that we will continue to do. We saw it pay off Tmall, the collaboration with Tmall that we really doubled down on a year ago, roughly. And we planned into this Singles' Day event, which is now two, three weeks. And we planned in and came together with them and really won with the consumer. And then when it comes to underwear, very strong partnership with them, and also connect our inventory in stores. So we were able to pivot. When the stores were closed, we were still driving significant sales through fulfilling online. So this is continuous work and we have some ship from store capabilities that we were able to stand up within just a few months coming into the crisis. It's a continuous work, but those are just a few examples of what we are doing and what we will continue to do and the most exciting with that is that it resonates with the consumer.

[Jamie Merriman:]

Thank you.

[Operator:]

Our next question comes from Kimberly Greenberger with Morgan Stanley.

[Kimberly Greenberger:]

Great. Thank you so much. Good morning. Stefan, I heard you say that this year your digital penetration is going to run over 20%. I think that's owned and partner digital. Could you just remind us within that what piece is the owned piece of digital commerce? And then I was looking at your international business, both Calvin Klein and Tommy Hilfiger performed fairly consistently in aggregate internationally. I'm wondering, if you look at each geography Europe and Asia, are they performing similarly as well within those geographies? And then Mike, any sort of color you might have on Q4 gross margin and how we ought to think about that? Thank you so much.

[Stefan Larsson:]

So let's start with the tail end of your questions. One, when it comes to our brands and the geographical performance. So where we see strength in both Europe and Asia, predominantly in driven by China, in Asia, we see strength in both brands. And Mike?

[Mike Shaffer:]

In terms of the percentage our owned business is about 10% of the total business this year. And it is the fastest growing piece of the business. And it's over double the size from the prior year. I believe you had a gross margin question on the fourth quarter, when you think about the fourth quarter, we are right now planning the gross margin basically flat to the prior year for the overall company. And if the trends continue, there is an opportunity there to outperform.

[Kimberly Greenberger:]

Fantastic. Thank you.

[Operator:]

Our next question comes from Heather Balsky with Bank of America.

[Heather Balsky:]

Hi, thanks for taking my question. Stefan a question for you. As you step into your role as a new CEO, what are you most excited about? And what do you view as the biggest opportunities for PVH?

[Stefan Larsson:]

So thank you, Heather. What I'm most excited about this by far again, coming back to that I've had the opportunity to work a year next to Manny is the strength of the many strengths that we have, and the strength of our brands. The strength of our global brands. The strength of our global capabilities. The strength in Europe and Asia and opportunity to continue to grow with where the consumer is going. So that what excites me the most is the opportunity to take the strengths we have. Really assume into the core strengths and connect them closer to where the consumers go. And then underlying all that is the strength of our people. So connecting to where Manny has always been consistently speaking about our biggest strengths being our people, our team and our brands is the combination of those two.

[Heather Balsky:]

Great. Thank you.

[Operator:]

All right.

[Stefan Larsson:]

Okay. We have a time for one last question.

[Operator:]

All right, thank you. We'll take our last question from Matthew Boss with JP Morgan.

[Matthew Boss:]

Great. Thanks. Stefan, you mentioned one of the company's key priorities is further improvement in the product offering an increased relevance. Maybe could you just elaborate on the opportunity you see to improve the product and the assortment across both Calvin and Tommy multiyear?

[Stefan Larsson:]

Yes. So high level, we live in the most disruptive time of our industry that at least I've seen, and I've been around for over 20 years. And the consumer has more choice than any time before. So the strength of having iconic brands with global brand awareness, it's a tremendous asset. And then that strength, what our job is on the execution side is to take the brand awareness and the brand love and execute relevance in product. So being very focused on the core essentials, and we call it the hero products that the products that really makes a difference that sets us apart, versus the sea of generic products that are out there in the market. That's what we are going after.

[Matthew Boss:]

Great. And then maybe just as a follow-up. As you dug into the cost structure of the organization, where do you see opportunity for continued cost efficiencies? And any material investments that you see necessary to drive the next chapter of growth, as you take the helm?

[Stefan Larsson:]

As we mentioned, the consumer has shifted more in the last 12 months than in the previous four or five years. So when it comes to the cost side, we have to make sure that we run leaner and more data-driven and with more speed than any time before. So there when I look at cost and investments going forward, the first priority is to connect the investments and the costs to what really drives winning with a consumer and then continuously drive efficiencies.

[Matthew Boss:]

Right. Best of luck, and congrats on a great run, Manny.

[Manny Chirico:]

Thank you. That closes the third quarter earnings conference call. I want to thank everyone for joining us. I'd like to take a moment to thank the analyst community that followed us over the years, me personally, thank you for the time you spent to understand PVH business model and the time is taken to really work with us to get that message out to our shareholders. I wish everyone a safe and healthy holiday season, Christmas. Hanukkah coming up, enjoy with your families. And wishing you all the best for a happy, healthy and prosperous new year. So have a great day everyone. Thank you.

[Operator:]

And that does conclude today's presentation. Thank you for your presentation. You may now disconnect.