PVH Corp (PVH) — Q2 2021 Earnings Call Transcript

Thank you, operator. Good morning, everyone. And welcome to the PVH Corp. Second 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. The information to be discussed includes forward-looking statements that reflect PVH's view as of August 31st, 2021, of future events and financial performances. 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 these 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 or current descriptions, estimates, and suggestions. PVH does not undertake any obligation to update publicly any forward-looking statement, including without limitation any 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 Second Quarter 2021 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. Stefan Larsson, CEO of PVH.

Good morning. And thank you for joining. With me on the call today are Mike Shaffer, COO and CFO, Dana Perlman, EVP, Chief Strategy Officer and Treasurer, and Jim Holmes our Corporate Controller, who we announced will be Interim CFO effective September 10th. Let me start by sharing that we delivered a very strong second-quarter performance and significantly outperformed our plans from a revenue, EBITDA margin, and EPS perspective, all despite the ongoing challenges from COVID. We're also taking up our guidance for the year. I would like to thank our associates around the world for their hard work and critical contributions to the great second quarter, a very strong first half of the year. Our results in the quarter included strong double-digit revenue growth against last year, which was relatively in line with pre-pandemic levels. And this was led by our international business, specifically Europe. Our performance was underpinned by meaningful gross margin expansion and operating expense efficiencies, which drove significant EBITDA margin expansion of several hundred basis points compared to 2019. For several quarters now, we have shown great progress in driving an accelerated recovery through the disciplined execution against our strategic priorities. These include increasing our focus on our two iconic global power brands, Calvin Klein and Tommy Hilfiger. Building on the strength in international, delivering on product strength, pricing power, and gross margin expansion, while winning in the marketplace through supercharged e-commerce growth. And at the same time, driving operating efficiencies. Looking ahead, our strong performance in the quarter combined with the strength of the underlying growth drivers in our business has led us to increase our top and bottom line full-year guidance. Our EBITDA margin guidance now assumes a return to a margin similar to our 2019 levels. We're confident in our ability to continue to drive an accelerated recovery while also prudently planning our business for the remainder of the year as we navigate pandemic-related uncertainties, including market and supply chain disruptions. I will now share some of the key proof points on how we're executing our accelerated recovery priorities. Mike will then share more of the financial details. First, we have continued to supercharge e-commerce with digital revenue growing approximately 35% in the quarter. A strong result, particularly when compared to our outside growth last year, when stores were closed or under restrictions, which are now open. Importantly, our digital penetration remained consistent at 25%, which is double pre-pandemic levels. We continue to ramp up the investment in digital while at the same time, growth in our brick-and-mortar retail stores is accelerating, demonstrating our increasing strength in connecting with the consumer across channels. Next, we're driving product strength across our brands and regions. The trends we saw last quarter have continued. With consumers excited to come out of COVID restrictions and adopting a hybrid lifestyle, towards an increasing mix of wearing occasions, this is still very much grounded in a casual lifestyle that fits both Calvin and Tommy really well. In the quarter, we saw continued strength in key essential product categories like underwear, T-shirts, Polos, hoodies, active sneakers, and a rising demand for Denim and categories like dresses. We continue to lean into the strength of our key essentials and hero products, which represent a must-have product silhouette in key product categories. Through this work, we saw an improvement in AURs during the quarter, including double-digit increases in some of our biggest investments. We also continue to cut more unproductive SKUs, including a 20% comp on average for full 2021. Through this work and by taking a more data on demand-driven approach, we're driving revenue growth with AUR increases and gross margin expansion. Overall, our inventory levels across the board are in very good shape, down 13% versus last year. And as we further improve the way we plan and buy our inventory, we will be able to read and react more quickly to demand. In addition, we continue to invest in our key strategic focus areas. And at the same time, we continue to drive efficiencies across our business as part of our work to operate with more speed and agility to better follow the consumer in this dynamic environment. Lastly, we successfully sold our Heritage Brands as planned. This has already enabled an increased focus on Calvin and Tommy, which are higher return businesses with global growth potential. So turning to our regional update, while each of our regions is in varying stages of recovery, we drove performance significantly above plan for both revenue and profitability. Let me start with Europe this time. Our European team delivered another quarter of exceptional performance through very strong execution of our accelerated recovery priorities. Both Tommy and Calvin performed significantly above plan, including double-digit growth versus pre-pandemic levels. The strength in our European business is a very good example of the kind of performance we are able to drive when we execute really well. And it offers a proof point and a blueprint for what's possible in our other regions as well. Across both brands, we are winning with the consumer, driving brand relevance through leaning into the strength of our hero products. And we continue to supercharge our digital and omnichannel capabilities. Building on our success in the first quarter, as lockdowns were lifted, we saw great demand for our products, both in our own channels as well as in wholesale. We delivered strong revenue trends supported by significant margin expansion, which included gross margins above 2019 levels, driven by pricing power, lower promotions, and higher retail productivity. We also continued to drive operating expense efficiency. We generated strong digital sales growth of 45%, even against the backdrop of stores reopening, driven by our expanded business with digital pure players. Europe represents our highest e-commerce penetration, well above the Company's overall rate of 25%. In our D2C channel, we continued to accelerate our omnichannel capabilities by investing in connected retail technologies. Paired with the e-commerce performance, we generated very strong retail store sales. The traffic levels improved sequentially versus 2019, as stores reopened. Highlighting the strength of our product in the marketplace, we drove higher conversion, stronger full-price sell-throughs, and higher AURs. In addition, the strong consumer demand drove significant core replenishment and our spring and summer products sold through much faster than expected, leading us to transition earlier to pre-fall collections. Demand in our future order books across both brands continued to be very strong, with spring 2022 planned up double-digits following double-digit growth for fall holiday 2021. Moving on to Asia, our Asia team continues to execute really well. Although COVID resurgences across the region in markets such as Japan, Korea, and most recently Australia, make it difficult to see the real underlying strength of how we are improving our execution in the markets. Overall, revenues were relatively in line with pre-pandemic levels and our plans, led by China. Despite the current COVID-related challenges, what excites me the most is the strength we're seeing against our strategic focus areas. As we continue to drive increased product strength, pricing power, inventory efficiencies from better inventory management, and higher gross margins, all driven by the same hero product focus. China remains a significant growth opportunity for both Tommy and Calvin. As we continue to invest in the market, we're driving brand heat and relevance through our integrated marketing and capsules around key shopping moments, including 618 this quarter. And most recently, Chinese Valentine's Day. We're creating unique content and activations to win with the consumer in these key moments. We have also leaned into our most successful hero products, which are delivering strong KPIs, including higher conversion, higher sell-throughs, and higher AURs, and we continue to drive comparable store sales increases in retail stores. And as we supercharge e-commerce, we're leveraging data analytics and utilizing new tools and channels to drive performance. We are focused on developing new creative ways to engage with consumers, including expanding our work with WeChat. Lastly, inventory levels continue to be very lean as we focus on buying closer to demand. Overall, while we're still navigating COVID challenges like others in the region, we remain confident about the long-term strength and growth opportunities for both of our core brands. Turning to North America, the region is still under the most pressure, with the lack of tourism remaining our biggest challenge. Tourism continues to trend down significantly versus 2019 levels, which in a normal year made up 30% to 40% of our total business in the region. Our North American teams are leaning into what's within our control, focusing on the domestic consumer, supercharging e-commerce, and driving product strength with AUR and margin improvements. I am pleased that we saw a number of green shoots during the quarter. Importantly, we drove sequential improvements in top and bottom-line performance across brands and channels. Some of the proof points of our progress this past quarter include that we drove double-digit growth in our digital business, led by a combination of continuously improving our own and operated e-commerce sites and strong partnerships with our key wholesale partners, including pure players. In stores, with the domestic consumer, we saw improved traffic with higher AURs. We're also better optimizing inventory across our channels and improving our ability to react to demand changes. For example, in Canada, where the country's reopening has been slower than in other markets, we proactively redirected inventory to the U.S. Overall, in North America, we have a lot of work still to do. And we are focused on building the business for long-term growth. This work is focused on the same key value drivers that enabled our international businesses to perform so strongly to continuously drive brand relevance through product strength, pricing power, and winning across channels digitally led. Next, I'll share a few brief global brand highlights beginning with Calvin Klein. Global brand health remains very strong with consistent high levels of global awareness. Our pride campaign this year was successful in further building brand awareness. The campaign celebrated defining moments connecting to global LGBTQIA+ communities with a diverse international cast. It resulted in global reach that was up over 30% on last year, drove a 300% increase in traffic to our site, and delivered strong product sell-through driven by hero underwear products with limited edition pride collaborations. In the spring, we launched the brand's first designer collaboration with Heron Preston, which has been very well received by the consumer. This quarter, we will release a second chapter of this collaboration across denim, underwear, and other wardrobe essentials. Looking ahead, we will continue to build out our collaboration strategy, connecting the iconic strength of Calvin Klein with creators and brands from around the world to express their unique perspective of the brand. This includes the second installment of our underwear collaboration with a premium retailer that taps into the power of Calvin with the Gen Z audience. Moving on to Tommy Hilfiger, global brand health KPIs for Tommy also remain very strong. Expansion of our purpose-oriented product offer continues to resonate with consumers, with more than 50% of the global summer pre-fall collection being sustainable. As we focus on Tommy jeans' growth potential with younger consumers, we continue to drive brand heat through successful capsules. From our blast from the past capsule, inspired by pop culture cartoon icons, to a recent capsule that drove very strong engagement and sell-throughs, the brand also launched collaborations that amplified our efforts to increase opportunities and visibility for underrepresented communities within the fashion and apparel industries. In July, we launched the first collaboration with a non-gendered capsule featuring Indya Moore. The brand also launched two capsules with emerging Brooklyn designer Romeo Hunt, following his mentorship with Mr. Hilfiger. The capsule reimagines iconic Tommy pieces. These collaborations have increased traffic to our sites in the U.S. and Europe, with more than 40% driven by new consumers and with significantly higher average retail prices. In closing, I feel very good about how we came together and drove yet another strong quarter of accelerated recovery. Our increased focus on winning with the consumer through our two global power brands, Calvin Klein and Tommy Hilfiger, is driving results. We're still early days in building our next growth chapter, and I continue to be very optimistic for the future as we lean further into our accelerated recovery priorities, leveraging our core strengths, and continuously following the consumer to position PVH for sustainable long-term profitable growth. And before I hand it over to Mike, since this is Mike's last earnings call, I would like to thank him again for his contributions of nearly 30 years to PVH. We're grateful for his guidance and leadership over the years. I'm also pleased to introduce Jim Holmes as our interim CFO. Jim has been with PVH for over 20 years and has played a critical role on our finance team, working very closely with Mike to build our strong financial foundation. So 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. Overall, revenues for the second quarter were up 46% as reported, and up 40% on a constant currency basis compared to the prior year, and significantly exceeded our prior revenue guidance. Our international businesses significantly exceeded 2019 pre-pandemic levels, driven by Europe. When we compared 2021 second-quarter results to the previous year, it's important to remember that during the second quarter of 2020, virtually all of our retail stores and the majority of our wholesale customer stores were closed globally during the first month of the quarter and were operating at a significantly reduced capacity for the remainder of the quarter as a result of the pandemic. Our total direct-to-consumer business was up 19% versus the prior year, and owned and operated digital commerce was flat despite exceptionally strong growth in the prior year and significant traffic improvement in brick-and-mortar this year as stores have reopened and capacity restrictions have lessened. Our retail stores faced some continued pressure during the second quarter, although to a much lesser extent than in the previous year, with certain stores temporarily closed in Europe, Australia, and Japan for various periods of time. Our wholesale revenues were up 77% versus the prior year, driven by strong performance in Europe. In addition, we experienced a significant increase in sales to the digital businesses of our traditional and pure play wholesale customers. Our overall revenue through our digital channels grew approximately 35% versus the prior year, and our digital penetration as a percentage of total revenue continues to be approximately 25% even as stores have reopened. Looking at our segments, Tommy Hilfiger revenues were up 41% as reported, and 35% on a constant currency basis, with international up 40% as reported, and 32% on a constant currency basis. North America was up 45%. Calvin Klein revenue was up 56% as reported, and 50% on a constant currency basis, with international up 47% as reported and 37% on a constant currency basis. North America was up 75%, our Heritage revenues were up 37%. Gross margin was 57.7% for the quarter as compared to 55.9% in the prior year, which reflected substantial improvements across all regions due to less promotional selling. Our inventory is lean, down 13% as of the end of the quarter compared to the prior year. Earnings per share was $2.72 on a non-GAAP basis for the second quarter of 2021 compared to $0.13 in the prior year period, and $2.10 in 2019. This beat the top-end of previous guidance by $1.54. The beat was primarily due to the business outperformance largely in Europe for $1.19, as well as the favorable impact of taxes for $0.35, of which $0.25 is timing. Notably, our EBITDA margin continued to be very strong at 12.7% for the quarter, driven by continued strength in our international business. Moving onto our outlook, we're 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 significant new store closures, new lockdowns, or extensions of current lockdowns beyond what is already known. In addition, the 2021 outlook contemplates higher freight and other logistic costs in the second half of the year to mitigate delays of approximately 4 to 6 weeks on average for certain inventory orders, but does not contemplate any greater supply chain disruptions beyond that. Our actual 2021 results could differ materially from our current outlook as a result of the occurrence of any of these or any other uncontemplated events. We continue to be encouraged by our international businesses, which are expected to continue to exceed pre-pandemic levels through 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 is not expected to return to pre-pandemic levels within the year. Additionally, our full-year outlook includes the sale of certain of our Heritage Brands, which will result in a decrease in revenue of 2% versus 2020 and have a slightly dilutive impact on earnings. For the full year, we are projecting revenue to grow approximately 26% to 28% as reported, and approximately 24% to 26% on a constant currency basis compared to 2020. We expect gross margin will continue to show improvements for the remainder of the year due to less promotional selling and a favorable shift in regional sales mix compared to the prior year with our higher-margin international businesses making up a larger portion of total revenue. While we continue to manage our cost structure proactively by reducing operating expenses and reallocating resources to support strategic growth areas of the business, we expect higher expenses in the second half of the year than the first half. The incremental expenses in the second half include increases in marketing and other investments, which were planned in the second half of the year to coincide with when we expected our stores to be mostly open and to drive momentum as we hopefully exit the pandemic. We expect our EBITDA margin will be nearly flat to a 2019 pre-pandemic level. We continue to expect that the increase in gross margin 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. However, as compared to the first half of 2021, our EBITDA margin in the second half will be impacted by the incremental expenses I noted previously, as well as freight costs of approximately $0.35 to mitigate supply chain delays. We expect our interest expense to decrease in 2021 to approximately 105 million compared to 116 million in 2020. We have made $200 million of voluntary debt repayments in the second quarter, bringing our total for the first half of the year to 700 million, which is equivalent to the incremental borrowings we took on in 2020 to manage through the pandemic. Our tax rate for the year is estimated at 17% to 18%, with the favorable impact we benefited from in the second quarter largely offset in the second half due to timing. As a reminder, when we think about our tax rate by quarter, the fourth quarter is expected to benefit from certain discrete items which bring down the overall rate for the full year. For the full year in 2021, we are projecting non-GAAP earnings per share to be approximately $8.50, which is an increase compared to our previous guidance of approximately $6.50 and compared to a loss per share of $1.97 in 2020. The beat was primarily due to business outperformance, largely in Europe for a $1.85 along with an improvement in taxes of $0.10 and an improvement of $0.05 from reduced interest expense. For the third quarter, our revenue is projected to increase 11% to 13%, both as reported and on a constant currency basis. Third-quarter non-GAAP earnings per share is expected to be in the range of $1.95 to $2 compared to $1.32 in the prior-year period. We expect interest expense to be about $25 million and taxes to be in the range of 26% to 28% in the third quarter. And with that, we'll open it up for questions.

Great, thank you. Good morning and congratulations on the second quarter. My question, Stefan, is for you: the second quarter operating margins are at record levels. I would love to hear a little bit more about the cost discipline that you're seeing in the business across the different workstreams. And then I recognize in the back half, you spoke to added freight and marketing. But if sales were to come in ahead of plan, could you just talk about your philosophy around flowing through the upside versus reinvesting?

Thank you, Erinn. So when we look at the Q2 performance from an EBITDA perspective and an EBITDA margin perspective, we see the upside coming from a combination of the gross margin rate going up because it is mainly driven by our key products focus, our hero products focus, and that we are able to sell through our products at a higher AUR. We see that continue. This is a multi-year journey where we drive brand relevance through focusing on winning with product and being very focused on the key categories that matter most to consumers. And then we build hero products around that. And then we connect those hero products with consumers, increasing the connection to where the consumer wants to shop, channel-wise. And that's where we have doubled down on e-commerce. So we see that continue. On an operating efficiency perspective, that's the other driver of the EBITDA rate improvement in Q2. We see that it's coming from being increasingly focused on investing in the accelerated recovery priorities and looking at efficiencies that we can free up that's outside of that. So you will see us continue to drive gross margin rate improvements over time, and you will see us continue to drive operating efficiencies over time.

Great. Thank you. And then I guess relatedly, if we zoom out and look at 2022, it sounds like you already have some good visibility on Europe and order books up double-digits. I know there's several puts and takes with just lapping stimulus as well as supply chain that could linger. But how are you thinking big picture about 2022 just given those comments on gross margin as well as your operating efficiencies that you expect to continue?

Yeah, Erinn, we continue to lean into our accelerated recovery priorities and seeing the effect this year from them and continue to see the effects when we lean into the first one being supercharging e-commerce. When the markets open up, that increasingly includes the comeback for brick-and-mortar. So it's about continuing to supercharge e-commerce for 2022 to win in the marketplace across channels, but being digitally-led, and then continue to drive product strength and continue to drive efficiencies.

Yeah. And Erinn, this is Jim. I would just add that based on our guidance for 2021, our operating margins are aligned with the pre-pandemic levels of 2019. We're pleased with our current trajectory, but as we plan for next year, it's still early in the process, so it's too soon to share more details at this time.

Great. Thank you so much. And Mike, all the best.

Thank you, Erinn.

Hi. Good morning. Mike, it's interesting to see you did all the script, but Jim answering all the questions, it's definitely a new era for us here. But he's got the heavy lifting now. Jim, I just have a question for you, and then I have a follow-up for Stefan. Jim, can you talk a little bit on inventory levels? Inventory levels were down at the end of Q2, how you're thinking about inventory in Q3 and Q4, how you're planning it in terms of deliveries, and your ability to actually get the receipts and everything from that perspective, that would be helpful. Thanks.

Sure, Bob. A couple of things to point out. First, is the exit of our Heritage business is having a benefit on the inventory line. One from exiting the Heritage retail business, but also just the way the held-for-sale accounting works. We closed on selling our Heritage wholesale business. Those inventories at the end of Q2 are not on the inventory lines; we have a benefit from that. But apart from that, our current inventory levels are lean. As Stefan mentioned, partly our disciplined inventory management, buying closer to demand, and cutting the unproductive SKUs is really having a benefit. Also, at the end of Q2, as we've called out, we are experiencing supply chain delays of 4 to 6 weeks, which is also benefiting a little bit. And as we move through the second half, we called out, we are going to be incurring about $0.35 worth of airfreight expense really to make sure that the inventories are keeping in line with our sales forecast. And Bob, if you just if you look at the inventory this year versus last year, last year comparisons get difficult. This time last year, we really have been canceling a lot of orders. So if we were to compare it to 2019, which is probably a better comparison, we expect our inventory levels pretty much to get back in line with future sales growth projections by the end of the year.

And just a bit Bob, just to build on what Jim was speaking about in terms of inventory levels. One thing I've seen throughout my career is that finding a systematic, repeatable way to create value from products and how we plan and buy inventory is that when we have demand above what we expected, we tend to be able to sell more with less inventory. So we take this as an opportunity to learn as a team to say how do we better plan and buy inventory to demand and how can we have an inventory level in average that's lower in relation to sales than what we historically have had. So this past quarter is a good example of that where we can sell more at a higher pricing power with a lower inventory level. So that is something, again, it's a multi-year journey, but this quarter was a proof point on how much of a flow-through down to EBIT rate we can have from lower inventory to demand.

Great. And if I could just do one more question. Can you talk a little bit about the expansion in the Kohl's for Tommy and Calvin, sort of how that's going, how the market is receiving it? Thanks.

Absolutely, Bob. So far we launched with Calvin underwear at Kohl's just a few weeks ago. So it's very early days, but so far, we've had a very strong start, both from a consumer demand and pricing power perspective.

Great. Thank you very much. Mike, congratulations. Best of luck, thanks for everything.

Thanks, Bob.

Hey guys. Good morning. I'll add my congrats. Mike, it's been really great to work with you. Jim, welcome to the crew. Stefan, I want to ask you, Europe as we look a little bit beyond 2021, as we look at the margins for the international business, obviously Europe being the biggest piece. We looked at pre-COVID, the combined international EBITDA margins were in that 13.5%, almost 14% range. Again, Europe being the biggest piece. They look like they're running about 500 basis points above 2019 in the first half. You said the order books are positive for spring and summer double-digits. Can you talk a little bit about how sustainable the margins are that we've seen in the international business in the first half of this year as we think about what to apply next year, which will hopefully be a little bit of more of a normal year that we can try to compare to pre-pandemic business levels?

Thank you, Michael. In the second quarter, we have another example of the strong execution by our European team. This performance serves as a model for successful execution at Calvin and Tommy, closely aligning with consumer needs. Their focus on the consumer and on the brand is resulting in increasingly robust product assortments. From a channel perspective, they are adapting to consumer shifts and enhancing their pricing power across various channels. I am very confident in their ability to continue achieving success with consumers in Europe and to expand further. We consider this a multi-year growth opportunity. Regarding Asia, we are encouraged by the improved execution from our Asia team, although the effects of COVID have made it difficult to fully assess their performance in Q2. However, we can observe their commitment to understanding consumer trends, boosting e-commerce, and driving growth. Despite the ongoing challenges from COVID, we see them achieving pricing power, lower discount rates, and higher sell-throughs. This also presents a multi-year growth opportunity for us in both Europe and Asia.

Mike, I just want to add. The second quarter did benefit somewhat. In Mike's notes, he mentioned we planned the marketing to be more second-half weighted than the first half, so that is benefiting the operating margins. As well, the first month of the second quarter in May, we did have still a lot of store closures in Europe, so we don't have that expense base, as well as we are still receiving rent concessions and some government subsidies on payroll that benefited Q2.

Okay. And then maybe I could just follow with North America. I would love to hear, Stefan, some of your thoughts on the past recovery for North American retail. You've talked to us a lot about how impactful tourism is there, that's pretty clear. I'm just more curious about where that business goes until we know the pace and timing of tourism coming back. Thank you.

Thanks, Michael. So yes, there is a big unreal tourism effect. In a normal year, as I mentioned, 30% to 40% of the business is tourism, now mostly temporarily gone. So what we're doing there with Trisha's leadership, she's still relatively new coming in, but I'm excited, seeing her increased focus, and with the teams on the domestic consumer, focusing on executing the accelerated recovery priorities across both Tommy and Calvin. So proof points this quarter is as we see digitally, with digital e-commerce own and operate really taking off. We see Calvin being ahead there and those learnings we can share, and we are sharing with Tommy immediately. We see that we're starting to lean in, even if it's early days on the hero product execution. We see AURs are up. We see discount rates are down. Our focus is on the domestic consumer and the same accelerated recovery priorities as we see in Europe and in Asia. But from a regional perspective, from our three regions, we have the most work to do in North America. What excites me today though, is that we're starting to lean into the areas that really matter and starting to connect with that domestic consumer and really leverage the strength we have in Calvin and Tommy in North America. The underlying customer strength with Calvin and Tommy is for us to improve our execution.

Thanks a lot, guys. Congrats again.

Thank you.

Great. Thank you so much. I wanted to see if we can follow up a little bit on the sourcing issue because there's a lot of talk about factory shutdowns, and you mentioned that there's 4 to 6-week delays in getting product. Could you just give us a little bit more information about how you're managing through this? Because it sounds like you're still able to get the units that you need and probably in time for the holiday because of airfreight. Is that the case? And how are you managing that? It seems like you're doing a better job than a lot of companies being able to make sure that you get the inventory you need for the key seasons.

Yeah. So we have been doing a really good job through our sourcing and supply teams and brand teams, and regional teams to really stay on top of what's happening because it's changing week by week. So today, as we mentioned, we are experiencing 4 to 6-week delays on average, and we are able to prioritize our key categories and hero products. So we have the inventory, and that's included in our guidance. The guidance we are taking up for the rest of the year includes the supply chain disruption we're seeing right now.

Yeah. And just to add, it's getting back to our inventory disciplines, really cutting some of the unproductive SKUs is helping because our focus on more basic and core products is allowing us to fill back in perhaps a little quicker, particularly in the underwear category, we're able to airfreight that in fairly quickly to sort of keep us in line.

Understood. Maybe we can follow up just on the impact of the airfreight expense. I think you said it's going to $0.35, versus it was $0.19 before. Can you just talk about how that — what the impact was to the overall margins in Q2 from just airfreight and overall supply chain congestion? And maybe what the incremental change will be in Q3, and how that'll impact sort of gross margin in SG&A?

Yeah, Jay. For Q2, it's not very - I mean, it was very minimal basically. And then if you were to take, so to speak, in Q3, it's probably worth about — it's probably worth — it's 20, 30 basis points or so. It's pretty much spread evenly almost for the second half of the year between the two quarters.

Good morning, everyone. And congratulations, Mike. Very terrific to work with you. Stefan, you've mentioned a lot of times about the Hero products. What percentage of the business is the Hero Products? And I know you were focused on calling SKUs; where are you in that SKU journey? Then I just have a quick follow-up.

Thanks, Dana. So from a Hero product perspective, share of business, it's increasing and it's really increased season by season. Because what we're doing is that we're translating the aspirational power of our brands into the key categories and then increasingly focus on the products that are the most essential for the consumer. There are year-round hero products, there are seasonal hero products, and then we can paint those seasonal and year-round products through our collaborations. You're going to see an increasing share of focus when it comes to our hero products. And then where we are on the SKU rationalization, that's ongoing work as well. But it starts with the focus, the way we effectively cut unproductive SKUs is that we start to focus on the hero price, and then we look at the ongoing demand from the assortment we have. My experience over the years there is that when we continuously do that in a systematic way, we can keep cutting unproductive SKUs. So every product needs to have an intent that goes into our line. And for fall, as I mentioned, we're cutting 20% of the assortment. So it sounds a lot, but it's just the beginning because we have a history of overproducing SKUs. Now when we focus in on what really matters to consumers, then we will have, over the next few years, a continuous opportunity to tighten the assortment to the SKUs that really matter to win with the consumer.

Got it. And then on the digital side, digital has been accretive, any change to the level of digital accretion as it's maintained at this 25% rate now?

Dana, I just pointed out last year Q2 when we had significant store closures, we had really had a spike in our owned and operated e-commerce. So we're up against that in Q2, so we're pleased that we're at least, we're able to maintain that 25% overall digital penetration even with this year. The stores really reopened with a lot more traffic. So we're pleased about that.

And if we look at Q3, Q4, we see our own and operated continued to grow. We see our third-party e-commerce continues to grow, and e-commerce overall, as the penetration over the next few years will continue to grow the fastest.

Thank you.

Thank you. Good morning. I wanted to dig in a little bit more on the gross margin. The Company has been showing some strong gross margin momentum fueled by AUR. Can you provide some additional color on the components of this strength? How much of the benefit are you seeing between geographic channel and product mix shift on that hero product category momentum versus what you're seeing industry-wide with lower promotions? And as you look into next year, how much of the strength do you think will be sustainable into future years?

Thank you, Brooke. So starting with, we have a geographic component with the strength of international, for sure. And then on top of that, in each region, each brand, we drive pricing power. We drive margin expansion through our hero products focus. So it's a combination of there is a geographic effect, but the most important from a long-term growth perspective is the gross margin rate improvement in each brand in each region. When we look ahead for 2022, we are facing some headwinds when it comes to cost of goods, AUC, and from raw material prices going up that will affect us just like everybody else. But even when we include that, we remain positive about continuing to drive margin expansion.

Thank you. And just a follow-up on more of a strategic question here. The Europe business strength has been a key standout for a few quarters in a row now. And in your prepared remarks, you talked to utilizing this success as a blueprint for some of the other regions. Can you talk to maybe the one or two most important components of that blueprint that you are translating into North America and the timeline for seeing some of that success materialize?

Yes. Happy to, Brooke. If I were to just highlight a few drivers, is Europe's obsession with brand and consumer, starting with the consumer and then unlocking the power of the brand through product and through the right channel mix, and driving pricing power and high-quality sales growth. And that's something that they execute really well, and that's what I refer to in that we're seeing similar strength in Asia under the surface because of the COVID effects in Q2. But we are seeing the same type of FX positive performance coming out of Asia and China. Then we have the most work to do in North America, starting with the domestic consumers. Once we have that coming back, it's about winning more with the domestic consumer in the same way as we do in Europe and Asia. And then we have the benefit of international tourists returning.

Thank you.

Thank you. Good morning. I wanted to focus on marketing for a minute. You spoke about the increased investment in the second half. Is there a tilt to that towards a particular brand or geography? And then how has your marketing plan changed now that the digital penetration has remained so high?

Yes. Thank you, Lorraine. So from a marketing perspective, we are increasing our marketing investments in the back half, as Mike mentioned in his remarks, across both brands, and across regions, because we see the consumer — we are now in an accelerated recovery phase, and we see the consumer coming back. And the marketing is focused on the key consumer moments. Now we are starting to move into fall, and we are rapidly going to come into transition into holiday moments in North America, Asia, and Europe, which we are backing up with marketing. And it's a mix between digital marketing for e-commerce and marketing to drive our brick-and-mortar sales as well. One aspect that we see is driving increasing engagement is the collaborations, as I mentioned in my prepared remarks, and we're just beginning to experience that. When we look at Calvin and Tommy, as two of the most iconic global power brands in the sector, they in themselves work as a platform for creativity, and that's what we see with Heron Preston for Calvin Klein, or with the latest Romeo Hunt and what Mr. Hilfiger has connected us to. We see that the connection between our iconic brands and external creativity is really powerful to drive engagement with the consumer.

Thank you.

And with that, we want to thank you and look forward to connecting with you next quarter.