PVH Corp (PVH) — Q3 2020 Earnings Call Transcript

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. The information to be discussed includes forward-looking statements that reflect PVH's view as of December 2, 2020, of future events and financial performance. These statements are subject to risks and uncertainties indicated in the company's SEC filings and the Safe Harbor statement included in the press release that is a subject of this call. These risks and uncertainties include PVH's right to change its strategies, objectives, expectations and intentions, and its need to use significant cash flow to service its debt obligations. Significantly, at this time the COVID-19 pandemic continues to have a significant impact on the company's business, financial condition, cash flow and results of operations. There is significant uncertainty about the duration and extent of the impact of the pandemic. The dynamic nature of the circumstances means what is said on this call could change materially at any time. Therefore, the operation of the company's business and its future results of operations could differ materially from historical practices and results, our current descriptions, estimates and suggestions. PVH does not undertake any obligation to update publicly any forward-looking statement including without limitation, and the estimates or suggestions regarding revenue or earnings. Generally, the financial information and projections to be discussed will be on a non-GAAP basis, as defined under SEC rules. Reconciliations to GAAP amounts are included in PVH's third quarter 2020 earnings release, which can be found on www.pvh.com and in the company's current report on Form 8-K, furnished to the SEC in connection with the release. At this time, I'm pleased to turn the conference over to Mr. Manny Chirico, Chairman and CEO of PVH.

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 want to thank all our associates for their hard work and flexibility, particularly our dedicated retail store and distribution center associates, who have managed 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. I'm also very pleased to note that our fourth quarter is off to a very strong start, as we are outperforming our plans for our global holiday kickoff events, including Singles' Day in Asia and Black Friday, which is now being observed in many markets outside the U.S. And we feel great about the momentum behind our brands. There is clearly an unprecedented amount of change happening in the apparel industry, which the pandemic has only accelerated. To navigate this backdrop, our teams have been evolving our business model to compete in the new world of retail, and in particular, capture the younger consumer generation while continuing to serve our core consumer. We also addressed near-term challenges with a long-term approach to drive sustainable, profitable growth, including some difficult business decisions, as we recognized the need to adapt quickly to the realities that COVID-19 has presented to us. In this context, we have been accelerating our digital agenda and reallocating additional resources to drive growth in this highly important channel. We are seeing strong revenue growth and are pleased that our EBIT margins for our owned digital business are in line with those of our overall business, which as we continue to scale the business should continue to improve. We also continue to evolve our business towards the comfort and casual categories that are resonating with consumers today, especially the younger generations. Lastly, we continue to pivot towards our international businesses, where we continue to see a very significant revenue opportunity for both our Calvin Klein and Tommy Hilfiger businesses, while also contributing a higher overall operating margin. We believe that our focus on these aspects of the business will drive long-term revenue and margin growth for our stockholders, driven by gross margin expansion and SG&A leverage. Stefan and Mike will get into the specifics of the third quarter, as well as the current fourth quarter sales and margins trends, which are all very positive. I'm also extremely pleased with the tremendous liquidity that we have in place in order to expand any potential disruption from the pandemic. We are cautiously optimistic about this year's unique holiday season. Clearly, the shift to digital is the narrative for this holiday season, and we have positioned our business to succeed in this context. With strong digital events planned, inventory investments to fuel the demand in the channel, and adjustments to the in-store experience to adapt to the capacity constraints in stores. We believe that we are positioned to capture market share for holiday while also selling through any carryover inventories. We'll continue to monitor how the virus ebbs and flows, as well as its impact on our business. Before I pass things over to Stefan, I'd like to just acknowledge what a privilege it has been to lead PVH as CEO for the last 15 years. I truly want to thank the PVH board and all our amazing associates worldwide for all their contributions, and most importantly their partnership and support. I'm quite amazed at how PVH has grown and transformed during my 15-year career at PVH. We've evolved from a North American-based dress shirt business with sales of $1.5 billion to a portfolio of global iconic brands with about 70% of our EBIT coming from outside the U.S., over 40,000 associates employed worldwide, and close to $10 billion in revenues last year. We've also developed one of the industry's leading corporate responsibility platforms. And our vision to drive fashion forward for good motivates and guides the way we operate our business every day. In my new role as Chairman, I look forward to seeing PVH continue to drive this vision forward and deliver the company's next chapter of growth and profit recovery. I have great confidence in Stefan as he assumes the role of CEO in February. His global experience, consumer focus, and high-performance track record, especially in this unprecedented time of disruption, are tremendous assets to PVH. As Stefan continues to partner with our incredible team of senior leaders, many of whom have been here for over a decade, I believe that their expertise and collective knowledge of our industry and consumer base will help maximize the growth potential for PVH. Overall, I'm very optimistic about future opportunities ahead for PVH. We have unique competitive advantages, our incredible people, our iconic global brands, and our strong financial and operating fundamentals, which I believe will position us to continue to deliver sustainable long-term growth for all of our stakeholders. With that, I turn it over to Stefan for comments about the quarter and the fourth quarter as well.

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. My focus will be to build on the core strengths that brought us here and connect them closer to where the consumer is going than any time before, which will form the foundation to successfully deliver our next chapter of growth. As we enter the critical start for the holiday season, our teams have been doing a great job in pivoting to optimize our consumer offering in this very different kind of environment. Supercharging digital and our omni-channel capabilities and leaning into our casual essential products led to our strongest ever digital holiday sales results, and above-planned performance for the digital holiday period overall. Our strong execution, including our events for Amazon Prime Day, Singles' Day, and Black Friday in Asia, Europe, and North America, reflects the hard work and flexibility of our talented teams around the world. I would like to thank everyone for their critical contributions. I will now share some key insights on how we drove performance in the third quarter and the fourth quarter to date. As Manny mentioned, Mike will then share more financial details and current trends. The focus for our brands and regions has remained to navigate successfully through the pandemic, capture market share in the holiday period, and sell through seasonal inventory to enter spring 2021 with a clean inventory position. In parallel to the focus on driving the business here and now, we continue to lean into drive an accelerated recovery to win with a consumer coming out of COVID. I'd like to share proof points demonstrating our progress against three value-creating areas that we outlined last quarter. First, we continue to supercharge the e-commerce channel through our owned and operated, as well as third-party digital partners. As a result, for the quarter, we grew total digital sales by 36%, including 70% growth on our owned side. We're seeing strong new user growth, particularly with the younger consumers as we expanded our casual assortments and offer digital innovation, such as live streams and targeted activations with the pure players. Improved in-stock levels and enhancements to our own sites are also resonating well, including ship-from-store and additional payment options, which are all important to attract and convert younger consumers. Next, we continue to increase our focus on driving product relevance, which led to stronger than expected demand and margin in our key cash flow categories. Within these categories, we increased our focus on the essential products that have the highest demand and at the same time, rationalized unproductive SKUs, resulting in higher AURs in many of our most important products. Lastly, we are realizing the savings from our recent workforce reductions in North America, and we continue to evaluate further measures to drive cost efficiencies across the company. While our regions are all in various stages of their recovery, these focus areas continue to guide our teams with clear objectives to operate against to drive an accelerated recovery. As I provide the regional update, you will see that the third-quarter operating environment had stores open for the majority of the quarter. However, in late October, the virus resurgence intensified, resulting in temporary store closures in Europe and further weakening of our store traffic in North America. Let me start with Asia, specifically with China. Overall, China remains the furthest ahead in terms of recovery, with sales up 6% in the third quarter, and total digital sales up 63% as well as improving traffic in our brick-and-mortar stores. Our teams in Asia have been doing a great job planning and executing the back half of this year. They have supercharged e-commerce, leaned into our big casual categories, the most relevant casual and athleisure products, and based on our selling trends, cut many unproductive styles, all leading to improved sell-throughs and markdown rates. They have also been effective with our brand marketing and consumer engagement. During the third quarter, we experienced very strong performance in China during Golden Week, and we were also pleased with the start of the fourth quarter, including Singles' Day sales, which now spans several weeks, where we grew over 50% on Tmall and drove positive comp store sales in our brick-and-mortar stores at the same time, all with increased pricing power. Our strong execution, including live streaming activations with top Chinese live streamers, resulted in market share gains against the competition, with Tommy's ranking in Tmall flagship store rising 14 places. And lastly, our marketing activations resonated very well with the consumer, including Calvin's virtual events with Ambassador Lay Zhang, which we live streamed from our Shanghai store, resulting in 48% growth that day on Tmall and 2.6 million views on Weibo. Overall, while there has been some infection resurgence in Japan and parts of Southeast Asia, we continue to make good progress towards a continued strong recovery in the region as a whole, driven largely by China and digital strength. Moving on to Europe, our business across both brands outperformed despite the tough backdrop, with revenues declining only 4% versus last year in local currency. Just like in Asia, our management team in Europe has been very effective in taking sustainable profitable market share in a very difficult environment. We drove a strong recovery for the majority of the quarter, including in our brick-and-mortar stores. However, since late October, we have been negatively affected by the resurgence of the virus with an increasing number of lockdowns imposed towards the end of the quarter. Overall, strong brand product and channel execution drove higher consumer and retailer demand for our Tommy Hilfiger and Calvin Klein products, to the point where we were chasing goods in select categories to fuel consumer demand, while also achieving strong margins. Our well-developed, scalable digital distribution network continues to be a real competitive advantage. We grew total digital sales by 33% as we continue to post outside growth through our owned and operated site, as well as through our partnerships with Zalando, Asos, and About You. With approximately 40% of our stores temporarily closed in Europe during November, we quickly pivoted our operations to best leverage our digital distribution network, and we were also able to leverage our connected store inventory to meet the stronger than expected inventory demand online. In recent weeks, the lockdowns have started to ease, and we expect all doors to be opened within the next 10 days, assuming no further government restrictions. We feel very good about our future order book, with spring and summer order books actualized up high single digits versus last year, and the first indications for pre-fall 2021 are very positive. All these factors give us great confidence in our ability to continue to gain market share in Europe. Lastly, our North American business continues to feel the most pressure relative to our other regions, driven by a combination of the lack of international tourism, increasing resurgence of the virus across the region, and greater dependency on brick-and-mortar than our other regions. Our teams in North America are working very hard and navigating through the COVID-related challenges. While our overall sales in North America declined 38%, digital remained the true highlight, with our owned sites growing over 100% enabled by our site enhancements, inventory investments, and logistical improvements to fuel demand. We had another strong quarter with Amazon, including Calvin and Tommy posting their highest Prime Day sales ever achieved, with a significant increase in new consumers. At the same time, tourism is currently down 95% and not expected to return in a while, presenting a significant challenge for our brick-and-mortar business. Losing the tourist business that's usually 35% to 40% of our total retail business in North America has put pressure on clearing through inventory, which, in combination with an unusually early start to the holiday season, led us to be more proactive with driving early promotions, moving some of them from Q4 to Q3. Our main focus remains to enter spring clean from an inventory perspective. Moving on to our fourth quarter outlook. So far, we've performed better than expected over Black Friday week and Cyber Monday across all channels in North America. While we still have a significant amount of business ahead of us for the holiday, we're expecting the current business trend to continue through the final holiday stretch. Looking ahead for North America, having navigated through the most challenging parts of the pandemic, while the lack of tourism is by far the biggest challenge we’re facing, it's clear that we have our own work to do coming out of the pandemic. We will increase our focus on our domestic consumer. We will continue to take on the significant opportunities to further expand our e-commerce business, both our owned and operated and third-party, and we will also improve how we plan and buy inventory to demand. As our performance across regions demonstrates, we have taken a very deliberate approach for each brand to get even closer to the consumer as we continue to enhance our brand relevance and positioning. I'd like to share a few brief global highlights from the quarter beginning with Calvin. We're seeing Calvin Klein continue to register strong 86% global brand awareness with increasing consumer consideration to purchase across all regions. Our increased focus on creating product consumers desire was captured through Calvin Klein's underwear collaboration with Kith, featuring Gigi Hadid, where we sold out 75% of the collection in just four days, highlighting incredible results with younger consumers both from an engagement and sales perspective, which we will continue to build upon as we head into 2021. Lastly, I'm excited to say that we strengthened Calvin's global brand leadership team during the quarter, announcing our new key hires across design, merchandising, and marketing, which will enable their execution in product and marketing of Calvin's evolved brand vision. Moving on to Tommy, I'm excited to welcome Avery Baker back to Tommy in a newly established role of President and Chief Brand Officer, with global responsibility for the brand's products, marketing, and experiences. Avery was the driving force behind many of the brand's transformational programs including Tommy Now and has experience and real strength in connecting the Tommy DNA to culture and what the consumer desires today. Tommy also celebrated its 35th anniversary as an iconic brand with global editorial coverage and brand activation on Tmall, and we continue to see improving global awareness, including in key growth markets like China. The brand also continued to further its sustainability agenda, launching Tommy jeans recycled denim line for fall 2020. Finally, our heritage brands business continued to be under pressure during the third quarter, as the mid-tier department stores experienced traffic challenges and dress furnishing categories remained under pressure. We are continuing to actively address the business challenges by managing inventory levels aggressively, lowering our cost base, and reviewing additional ways to optimize and streamline the business. Before I hand it over to Mike, I would like to reiterate that the actions we're taking now to successfully navigate the pandemic and drive an accelerated recovery are also positioning us to win with a consumer coming into a new normal post-COVID. The proof points that I just shared with you from our strong digital growth to our increasing brand engagement and enhanced product strategies to our strong performance internationally demonstrate the global brand power behind Calvin Klein and Tommy Hilfiger, and the strong relationships that we are building with our consumers, particularly the next generation. As we leverage the power of PVH focusing in on our core strengths and connecting them to where the consumer is going, I'm confident that we will drive brand relevance, cost efficiencies, and deliver long-term sustainable growth while driving fashion forward for good. Looking ahead, we are working on our long-term plan for PVH's next chapter of growth, and we look forward to sharing more details with you at an Investor Day we're planning for May 2021. And with that, I would like to hand it over to Mike.

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, exceeding 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%. Sales from 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 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 2021, 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 American 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. 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 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 the 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 stores 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 expect our fourth quarter gross margin percentage will be relatively flat compared to last year. Our expenses as a percentage 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.

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.

Thanks, Erinn.

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?

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 is driving the benefit of that scaling of the business. As we look forward, the business in terms of digital is overall across our regions 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.

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.

Thanks, Erinn. This is Stefan. As you mentioned, correctly, we have been very successful in pivoting towards e-commerce and in 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 do here right now. 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 in North America, Asia, and 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 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.

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 being less than that. So we do have some significant flexibility.

Thank you, all.

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've got some big shoes to fill. I wish you luck.

Thank you, Bob. I agree with you.

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?

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.

Can you discuss the improvement in the European order book? I would like to know more about the business trends to date, particularly how the store closures have affected the fourth quarter. How do you anticipate things will change once they reopen? I'm also interested in the order book for the next few quarters, especially since it seems spring has improved since the last update. Could you provide some insights on summer and fall? Additionally, how are the retailers planning for the upcoming quarters as we hope for a return to normalcy? Thank you.

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, and 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 were 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.

Yes, sure. 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. Even with 40% of the stores closed, we were down 30%. So what we actually have seen is the stores that remained open, we're actually running fewer comps and the stores that are opening are 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.

Hey, everyone. Manny, I want to start by thanking you for the conversations over the years; it’s been a pleasure. I wish you the best in your next chapter. Stefan, I'm eager to collaborate with you as you embark on this new adventure in your career. It’s going to be enjoyable, and I’m really excited to work together. I have a quick question regarding the revenues, which are down today by 20%, with the B2C segment declining by 25%. Additionally, with 40% of the stores in Europe closed and now reopening, do you anticipate any part of the business to continue slowing down, which would maintain that 20% decline in revenues in the fourth quarter? Given that the European stores are reopening, we would expect to see some improvement in contribution. I’m curious about your thoughts on this or if this reflects a more conservative outlook. I also have a follow-up question.

I'll start and then let Stefan jump 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 to open over the next 10 days. We’ve seen resurgence in the U.S. with pretty much no closures, 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.

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. Now within a few weeks later, we are fully open again. So the underlying trends are very strong in both Europe and Asia.

It's pretty easy to navigate, Stefan. I don't know what the uncertainty is, I'm just joking. Can you help us understand a few of the factors influencing the gross margin in the third quarter? Any numbers you can provide regarding the 260 basis points of pressure in that quarter would be helpful. I'm particularly interested in how the pull forward of markdowns, due to the anticipated store closures, impacted the results, as you mentioned moving some markdowns into the third quarter. Any information on that would be useful. I believe that’s the key aspect to comprehend. Additionally, if you could rank the other relevant factors for us in terms of what caused the pressures, that would be appreciated.

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 in profit on the year. 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.

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.

Thank you, Dana. 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 has really worked. So in one year, we have grown penetration from roughly 10% to over 20%. Can the growth rate continues this way? Probably not when the stores reopen, but this is the long-term growth potential coming back to systematic repeatable value creation in e-commerce. Is it beyond 20% penetration? Absolutely. I had the benefit of spending a year next to Manny and really learning in depth and looking at our core strengths. I see very big opportunities over the long-term to continue growing in e-commerce.

And Dana, on inventories, we called it out in the release. In the third quarter, we were down 16%. 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 and 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 very good shape at the moment.

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.

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.

Yes, that reflects my position. It's clear that we will be focused on managing inventory levels. We are uncertain about when some categories will adopt a cautious approach, leading us to purchase more casual items and fewer dress products. We are making efforts to quickly adapt to the categories that are performing well.

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

So right now in North America, we're running down in the high 20s, which is ahead of our plan. 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, stores not opening for the post-Thanksgiving period, but opening on Friday instead. A lot of that risk is behind us.

Got it. Okay. Thank you so much.

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 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.

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. Our partnership with Amazon, Zalando, Tmall is very, very close and also with the traditional department stores and their e-commerce platform capability. We see the consumer increasing the shopping and browsing through the branded sites, our owned and operated, and third-party. 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. And we planned into this Singles' Day event, which is now two, three weeks. We planned in and came together with them and really won with the consumer. And then when it comes to underwear, we have a very strong partnership with them, and also connect our inventory in stores. We were able to pivot. When the stores were closed, we were still driving significant sales through fulfilling online. 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 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 aspect of that is that it resonates with the consumer.

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.

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 driven by China, we see strength in both brands.

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. 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. If the trends continue, there’s an opportunity there to outperform.

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?

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 the opportunity to continue to grow with where the consumer is going. 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. Underlying all that is the strength of our people. 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.

Great. Thanks. Stefan, you mentioned one of the company's key priorities is further improvement in the product offering and 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?

Yes. 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. The consumer has more choice than any time before. The strength of having iconic brands with global brand awareness is a tremendous asset. 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, what we call hero products that really make a difference and set us apart versus the sea of generic products that are out there in the market. That's what we are going after. As we mentioned, the consumer has shifted more in the last 12 months than in the previous four or five years. When it comes to the cost side, we have to make sure that we run leaner, 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.

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. To me personally, thank you for the time you've spent to understand PVH's business model and the time you've 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. I'm wishing you all the best for a happy, healthy, and prosperous new year. So have a great day, everyone. Thank you.