PVH Corp (PVH) — Q4 2021 Earnings Call Transcript

Thank you, Operator. Good morning, everyone and welcome to the PVH Corp. fourth quarter and full year 2021 earnings conference call. Leading the call today will be Stefan Larsson, PVH’s Chief Executive Officer; and Jim Holmes, EVP, Interim Chief Financial Officer and Corporate Controller. 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 in any transcript or replay of this call. The information to be discussed includes forward-looking statements that reflect PVH’s view as of March 29, 2022 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 the 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 and global inflationary pressures and the war in Ukraine have begun to have impacts on the company's business, cash flow and results of operations. There is significant uncertainty about the duration and extent of the impact of these events. 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 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 fourth 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 Stefan Larsson.

Thank you, Dana, and good morning, everyone. Thank you for joining our call today. Looking back on my first year as CEO for PVH, I’m proud of the progress we’ve made and the strong performance of the business. In 2021, we intensified our focus on our two global iconic brands, Calvin Klein and Tommy Hilfiger, and drove an accelerated recovery while successfully navigating continued COVID-19 disruption. These efforts resulted in very strong financial performance for the fourth quarter and full year. For the year, we delivered double-digit consolidated revenue growth, led by international, which exceeded pre-pandemic levels. We also generated record gross margins and earnings per share, and delivered a non-GAAP EBIT margin of 10.7%, which is over 100 basis points above 2019 pre-pandemic levels, all while positioning PVH to win with the consumer in the new normal, and deliver sustainable, profitable, long-term growth. This was the first full year driven by the execution of our accelerated recovery priorities. And across PVH, we see time and time again that when we lean into our two iconic brands to continue to move closer to the consumer, deliver the most relevant products in the market, and supercharge digital to meet the consumer where they want to shop, we deliver top-tier market performance, and we do it in a high-quality and sustainable way. You can see it in Europe through our strong product execution and owned and operated e-commerce growth and in brand building partnerships with digital pure players. You can also see it increasingly in Asia, where we lean into big consumer moments like Chinese New Year, and win with strength in product on the most important e-commerce and social platforms. Step by step, you'll see more of that in North America as well, where we are focused on driving higher quality, digital-led growth, and improving product and channel execution. Our company-wide focus on key growth categories, Hero products and cutting the unproductive assortment tail is yielding strong results. We drove increased pricing power and margin expansion in both Calvin and Tommy across our largest markets and channels. We supercharged our digital business, which increased over 30% in 2021, on top of over 40% growth in 2020, with digital now representing 25% penetration, double pre-pandemic levels. We continue to invest in high growth, high return areas to support our future growth, while at the same time starting to drive cost efficiencies. In addition, underscoring our strong financial position and cash flow generation, we paid down over $1 billion of debt to reduce our leverage to below pre-pandemic levels. We reinstated our quarterly cash dividend and repurchased approximately $350 million of stock. Moving forward, we will continue investing in our business to fuel our growth, while at the same time deploying our excess cash to maximize shareholder returns. I want to thank all of our associates around the world for your hard work and critical contributions, which helped us to deliver on what we set out to do this year and more. As we continue to closely monitor the war in Ukraine, I also want to extend my gratitude to our associates for their continued support and compassion for each other in the face of this tragic humanitarian crisis. As we look ahead to 2022, we are excited by the strong momentum in the business but also mindful that the market is experiencing unprecedented volatility from the heightened impacts of a number of macroeconomic and geopolitical challenges. These include the war in Ukraine, as well as inflationary pressures which impact both our own business and overall consumer spending. We also continue to navigate ongoing pandemic headwinds, particularly supply chain and logistics delays, especially in North America, in addition to the recent virus resurgences in Asia. As such, we're even more focused on what we can control. Just like we demonstrated through our strong performance in 2021, we are confident in the underlying strength across our business through the disciplined execution of our strategy priorities, driving underlying double-digit top and bottom-line growth for 2022, while maintaining our strong gross margins. Our international business continued to perform very well and will drive our growth this year. In North America, we're in the early phases of a multiyear positioning of the region to win more with the domestic consumer. As a reminder, the tourist consumer that was 30% to 40% of our total North America business pre-pandemic has not yet returned. We are taking proactive measures to set ourselves up for long-term sustainable and much more profitable growth in the region. As a result, we expect our business in the region to remain below pre-pandemic levels. Let me now turn to our regional update. Starting with Europe, despite COVID resurgences, which resulted in renewed restrictions, the region delivered another quarter of very strong execution, which completed an outstanding year of performance. Revenues increased double digits against pre-pandemic levels for both the quarter and year, combined with gross margin expansion driven by strong full-price sell-through. When we connect our brands as closely to the consumer as we do in Europe, we deliver market-leading performance and win with strength in product, increased pricing power across the digitally led marketplace. We continue to gain market share across both Tommy and Calvin, driven by strong consumer demand, including Tommy's focus on elevated casual, seasonal categories, and iconic must-haves. Combined with accelerating elevated Hero products at Calvin from the brand's lifestyle expansion. We remain focused on driving the digital business across our owned and operated sites as well as with pure players, with the region generating significantly stronger overall digital penetration well in excess of the company average. Our connected retail capabilities enabled us to capture digital demand, which mitigated lower brick-and-mortar trends driven by COVID. While reported revenue in the region in 2022 will be impacted by the lack of business in Ukraine and Russia, overall, consumer demand for our brands has remained on plan so far in the first quarter. Momentum in our future order book remains strong for both brands, with fall 2022 planned up double digits versus the prior year, which was on top of double-digit order books we experienced for spring. Moving on to Asia. We drove revenues above pre-pandemic levels for both the fourth quarter and full year. While certain cities in China are currently facing COVID measures, we are pleased with the recovery in markets such as Australia and Korea, where recovery trends are strong. We are seeing real strength from our efforts to accelerate the region's growth and remain excited about the progress and underlying performance. We saw considerable gains in brand awareness for both Tommy and Calvin, especially in China, compared to pre-pandemic levels, driven by our progress in creating strong Hero products with locally relevant capsules and collaborations supported by regional marketing. We continue to drive strong activations during key consumer moments in the region to generate engagement. For example, we experienced double-digit sales growth this past quarter for the Chinese Lunar New Year. We are driving comp growth through optimized product allocations and our spring Hero products supported by digital campaigns resonate with consumers in the region as highlighted by strong comps over Valentine's Day. We continue to connect with consumers wherever and however they want to shop. Our digital business drove double-digit growth in 2021, and we are leveraging CRM collaborations with pure players like Tmall, investing to expand with new digital platforms such as Douyin and growing our presence on WeChat with interactive gaming. Offline, we are engaging our consumers through in-store VIP events and unique pop-up store locations. Looking ahead, COVID resurgences in China are certainly impacting our growth near-term. But as markets reopen, we are seeing a strong bounce back in trends, which is evidence of the underlying strength of our business in China. We also see that in other markets such as Australia, Korea, and increasingly Japan. Overall, we remain optimistic about the region's ability to drive long-term growth. Turning to North America. As I mentioned, the lack of tourism has further highlighted the importance of our renewed efforts to win more with the domestic consumer in a more sustainable and more profitable way. We are currently navigating supply chain and logistics delays, which are more pronounced in North America and significantly negatively impacting our inventory flows across channels. Nevertheless, we are making sure that all decisions we take now are positioning our two iconic brands for the long-term. While for the fourth quarter, both Calvin and Tommy drove improved revenue trends sequentially compared to pre-pandemic levels, the significant COVID-related supply chain challenges resulted in inventory delays that we will be navigating through with the biggest impact in the first half of 2022. As I just shared, we are doubling down on our engagement with the domestic consumer by driving increased product strength with pricing power and focusing on growth in the digitally led marketplace in a balanced way across channels. We are sharpening our execution with more targeted assortments across key accounts and channels and ensuring our brands are appropriately positioned in brand-enhancing channels. Despite the challenges the region is facing, we are seeing green shoots of progress, including controlled inventory levels and lower promotions enabled us to drive higher gross margins and AURs in the fourth quarter. As we further expand our assortment of Hero products, we see positive reads on new updated products, although the inventory challenges are impacting trends. For Calvin, Hero products in underwear continue to outperform, and we’ve seen sequential improving trends in key men's apparel categories. For Tommy, focused categories and seasonal key items are driving performance. Looking ahead for the region, we remain focused on positioning and strengthening our business in North America for more sustainable and more profitable growth over time, all while we are step by step making progress. 2022 will be a year of transition in a multiyear effort to unlock our full potential in the market. Next, I will share a few brief global brand highlights, beginning with Calvin Klein. Brand awareness remains very high, and we continue to see increases in relevance and consideration. We are deepening our engagement with consumers with culturally relevant talent. During the holiday season, we had a few surprise guests hack our regularly scheduled content for Calvin Klein on Instagram, including Squid Game's Ho-yeon Jung, who set a record for our Instagram post with over 6 million likes. Last month, we launched our spring collection and altogether campaign, featuring an international cast, including Jenny Kim and Euphoria Star, Dominic Fike. The collection reinterprets the brand's iconic past for the future, refreshing archival pieces. Looking ahead, the brand will continue to build out our collaboration strategy with the announcement of a second global collaboration partner already in April this year, further driving our connection to the consumer and driving cultural relevance. Moving on to Tommy Hilfiger. Similar to Calvin, brand awareness remains strong and above pre-pandemic levels. Our product strategies drive relevance with aspirational and younger consumers. Through our collaborations, we continue to drive brand appeal. Our global Tommy Jeans collaboration with AAPE by A BATHING APE generated strong performance across regions, as highlighted by a sell-through rate of over 90% in Europe and North America within the first week of tommy.com, with high AURs. In addition, we saw very strong media coverage. Tommy also stepped into the metaverse with the online game platform, Roblox, through the capsule launch of must-have digital fashion items that people can use to dress their avatars within their Roblox virtual world. Lastly, for spring, the brand's Make Your Move campaign recently launched, featuring our first hashtag challenge on TikTok, #movewithTommy, led by Anthony Ramos, bringing together the world of music and pop culture. With increased media investments, the campaign spans multiple consumer touchpoints in innovative ways. In closing, we had a very strong 2021, where we showed that our increased focus on our two globally iconic brands, Calvin Klein and Tommy Hilfiger, and connecting them closer to where the consumer is going than any time before is paying off. When we do that really well, like we do today in our international markets, we are able to deliver market-leading performance. We are continuing to build on that strength in both Europe and Asia and will over time unlock the same type of strength in North America. While there are regional differences, the key value drivers are the same. Brand and product relevance with pricing power, combined with strong consumer engagement and a focus on winning in the digitally-led marketplace. We are looking forward to sharing our multiyear growth plan with you at our Investor Day in just a couple of weeks on April 13. It will be our first Investor Day in over 10 years, and you can imagine how much we're looking forward to it. I'm also pleased to welcome Zac Coughlin to PVH as our new CFO, effective April 4. Zac comes most recently from DFS, part of the LVMH Group, and brings over 20 years of high-performance financial and operational leadership with best-in-class global brands, and he will be a key leader as we build out our next growth chapter. Before I hand it over to Jim for the financial update, I want to thank him for his critical leadership and strong support during the transition period as Interim CFO. You did a great job, Jim. Thank you.

Thanks, Stefan. The comments I'm about to make are based on non-GAAP results and are reconciled in our press release. 2021 was a year of very strong financial performance, driven by the disciplined execution of our accelerated recovery priorities. We successfully navigated the COVID-19 pandemic to drive double-digit revenue growth versus 2020, led by our international businesses, which significantly exceeded 2019 pre-pandemic levels. We ended the year with revenue over $9 billion and drove record financial performance in gross margin and earnings per share, with very strong operating margins, which significantly exceeded 2019 pre-pandemic levels. While we continue to navigate unprecedented macroeconomic volatility as we enter 2022, we remain confident in the power of our two global brands, Calvin Klein and Tommy Hilfiger, and in the fundamental strength of our business. We believe that the disciplined execution of our strategic priorities will drive underlying double-digit top and bottom-line growth for 2022 while maintaining our strong gross margins. I will begin by discussing our 2021 results in more detail and then we will move on to our outlook for 2022. Overall, revenues for the fourth quarter were up 16% compared to the prior year as reported, and 20% on a constant currency basis, and above the top end of our guidance, despite continued supply chain and logistics disruptions and the ongoing impacts of the COVID-19 pandemic, particularly the Omicron variant. While our underlying business performance was relatively flat compared to 2019 pre-pandemic levels, our overall revenues for the fourth quarter were down 7% versus 2019. Due to the Heritage Brands transaction, the exit from our Heritage retail business, and the sale of Speedo, our results reflected strong performance in our international businesses across both brands, primarily driven by Europe. Our international businesses exceeded 2019 pre-pandemic levels in all regions. While our North America businesses showed sequential improvement in the fourth quarter compared to pre-pandemic levels, the business remains challenged due to the lack of international tourism, which was a source of approximately 30% to 40% of pre-pandemic revenue for the region. In addition, North America has been and continues to be the region most challenged by supply chain disruptions, including higher airfreight costs and suppressed inventory levels. Gross margin continued to be very strong at 58.3% for the fourth quarter, which is an increase of over 400 basis points compared to the prior year and 2019 pre-pandemic levels. The improvement was primarily due to more full-price selling and a favorable shift in regional sales mix, which more than offset higher freight costs, including an increase in air freight to mitigate supply chain and logistics delays. Inventory was down 5% at the end of the quarter compared to the prior year, due in part to the Heritage brand sale and the exit from the Heritage Brands retail business. However, within our total inventory, our in-transit inventory levels increased over 30%, primarily due to ongoing supply chain logistics disruptions. SG&A expense as a percentage of revenue for the fourth quarter was down almost 150 basis points versus 2020 as we leverage the increase in revenue but remained elevated compared to 2019. When comparing to 2019, we continue to drive cost efficiencies across the business. However, these benefits are more than offset by the mix shift in regional sales toward our international businesses, which, although favorable to our overall results, carry higher expenses as well as planned increases in marketing and other investments to fuel our growth in 2022. Earnings before interest and taxes in the fourth quarter significantly exceeded 2020 and was up 16% compared to 2019 pre-pandemic levels, driven by the strength in our international businesses. Operating margin was 7.2% for the quarter, exceeding 2019 pre-pandemic levels by almost 150 basis points. Earnings per share was $2.84 for the fourth quarter compared to a loss per share of $0.38 in the prior year period, also significantly exceeding the 2019 pre-pandemic amount and the top end of our previous guidance by $0.90. We ended the full year 2021 with revenue of $9.2 billion, an increase of 28% versus 2020, led by strength in our international businesses, which exceeded 2019 pre-pandemic levels, particularly Europe. Earnings before interest and taxes was $983 million in 2021 compared to a loss in 2020 and was up over $50 million or 6% compared to 2019 pre-pandemic levels. Operating margin was 10.7%, which significantly exceeded our expectations and was 130 basis points higher than 2019 pre-pandemic levels, driven by record gross margins of 58.2% and a successful execution of our accelerated recovery priorities. Our tax rate for the year was 17.1% and included the benefit of a favorable tax agreement in the Netherlands as well as benefits from tax treatments related to the purchase of Calvin Klein, both of which expired at the end of 2021. Overall, we delivered record earnings per share of $10.15 compared to a loss in 2020 and $9.54 in 2019. Additionally, to further strengthen our balance sheet, we made over $1 billion of voluntary term loan payments for the full year of 2021. Moving on to our outlook. We are providing our 2022 outlook despite the significant uncertainty due to the war in Ukraine and its broader macroeconomic implications. Inflationary pressures, the pandemic, and supply chain and logistics disruptions. Our outlook assumes no material worsening of current conditions. Our international businesses continued to demonstrate strength and are expected to build on strong growth from 2021, underpinned by systematic execution of our strategic priorities. Momentum continues in our Europe business. And while COVID is currently most severely impacting our business in China, we are encouraged by the underlying performance of our overall business in Asia. North America remains challenged due to the lack of international tourism and ongoing supply chain pressures, and we do not assume international tourism will return to any meaningful levels in 2022. Supply chain and logistics disruptions are expected to continue to impact our business, primarily in North America through most of the year, with the first half being most severely impacted. For the full year, while we are projecting double-digit revenue growth in our underlying businesses, our overall revenue is projected to grow approximately 2% to 3% as reported at approximately 6% to 7% on a constant currency basis compared to 2021. Our overall revenue projection reflects a 2% reduction resulting from the Heritage Brands transaction and the exit from the Heritage Brands retail business and a 2% reduction from our decision to temporarily close our stores and pause commercial activity in Russia and Belarus, along with a reduction in wholesale shipments to Ukraine as a result of the war. While we are projecting underlying growth in both our international and North America businesses versus 2021, our international businesses are projected to significantly exceed 2019 pre-pandemic levels while our North America businesses remain challenged and are not expected to return to 2019 pre-pandemic levels in 2022. We expect our full-year gross margin rate to remain at record levels and flat to 2021 despite rising inflationary costs in all regions, including higher cost of commodities and raw materials and increased freight. We plan to mostly mitigate inflationary pressures with price increases and continued less promotional activity. Additionally, we expect a favorable shift in regional sales mix compared to 2021 with our higher-margin international businesses making up a larger portion of total revenue. SG&A expense as a percentage of revenue for the full year is expected to increase approximately 70 basis points compared to 2021. We continue to drive cost efficiencies across the business. However, these benefits are being offset by the mix shift in regional sales toward our international businesses, which, although favorable to our overall results, carry higher expenses, as well as benefits from 2021 from temporary store closures that are not expected to repeat in 2022. We expect our full-year operating margin will continue to exceed 2019 pre-pandemic levels and will be approximately 10%. While we are projecting double-digit growth in our underlying business earnings, as we execute against our accelerated recovery priorities, we expect that our overall earnings before interest and taxes in 2022 will decrease low single digits versus 2021. Our overall EBIT expectation reflects negative impacts due to FX translation of 7% and a 6% reduction from our decision to temporarily close our stores and pause commercial activity in Russia and Belarus, along with the reduction in wholesale shipments to Ukraine as a result of the war. Our tax rate for the year is estimated at 29% to 30% compared to 17.1% in 2021. The increase is explained by the expiration of a favorable tax agreement in the Netherlands, the conclusion of tax treatments related to the purchase of Calvin Klein, and the shift in our geographic earnings mix. The result is a tax rate consistent with the statutory rates where we do business. For the full year in 2022, we are projecting earnings per share to be approximately $9. While we are projecting underlying double-digit growth in revenue and business earnings, our overall earnings per share reflects a decrease compared to $10.15 in 2021 due to the negative impact of approximately $1.35 per share due to FX translation and our decision to temporarily close our stores and pause commercial activity in Russia and Belarus, along with a reduction in wholesale shipments to Ukraine. Additionally, negatively impacting 2022 is $1.55 from taxes. Partially offsetting these negative impacts is a positive impact of approximately $0.70 due to lower interest in shares. For the first quarter, while we are projecting double-digit revenue growth in our underlying businesses, our overall revenue is projected to be relatively flat as reported and to increase approximately 4% on a constant currency basis compared to the prior year. Our overall revenue projection reflects a 5% reduction resulting from the Heritage Brands transaction and the exit from the Heritage Brands retail business, and a 1% reduction from our decision to temporarily close our stores and pause commercial activity in Russia and Belarus, along with a reduction in wholesale shipments to Ukraine. First quarter earnings per share is expected to be between $1.55 to $1.60, which reflects negative impacts of approximately $0.35 due to FX translation and our decision to temporarily close our stores and pause commercial activity in Russia and Belarus, along with a reduction in wholesale shipments to Ukraine. As stated earlier, supply chain disruptions are expected to most significantly impact the North America business in the first half of the year. Our tax rate for the first quarter is estimated at 29% to 30%, consistent with the full year. And with that, operator, we would like to open it up to questions.

Good morning. Just a couple of questions. Really, can you expand upon the underlying strength of the business in Europe, around Europe? And really just how you're planning the business with so much uncertainty there this year? Thanks.

Yes, good morning and thank you, Bob. As we alluded to in our prepared remarks, we see incredible strength in Europe. We come out of 2021 where we had to navigate a lot of COVID disruption and executed truly market-leading performance, and we see that business trend continues. What drives that will be the strength of Calvin and Tommy in Europe and how closely we connect those two brands to the European consumer and how we are able to drive product strength, consumer engagement, and winning digitally led – that’s what makes the difference. That’s why we are taking market share. When we look a number of years back and looking forward, we see the strength of our ability to navigate even tougher macro times. We also have, looking forward, we see the order books being very strong for the rest of the year as far out as we can see. Lots of reasons to be positive when it comes to Europe.

Thank you. Good luck.

Thanks.

Hey, guys. Good morning. Thanks for taking our questions here. I have one question, and then I have a follow-up. I just want to ask a simple question, Stefan. I know we will talk about this in a few days at the Analyst Day. But as you look at the business, what are the key factors that result in the profitability in North America when we exclude the licensed businesses, which were very high margin being well below industry averages?

Thank you, Michael. Currently, in North America, we are still experiencing the impact of the delayed return of tourism, which is about 30%-40% of pre-pandemic levels. We noticed some recovery starting in November, but then Omicron affected that timeline, leading to further delays. Additionally, significant supply chain challenges persist in North America. Our primary focus is on the domestic consumer and enhancing our performance with this group. This involves product execution, pricing power, and maintaining a balanced, high-quality distribution channel.

Do you want to follow that? How much progress do you think you can make on the margins in North America without knowing when tourism will come back?

We see green shoots already, Michael, in terms of our focus on the key growth categories. The categories that matter most to the consumer, and our development of Hero products within those categories. We already see very strong sell-throughs, we see pricing power increasing. There are significant improvement opportunities over time when it comes to operating margin in North America.

Okay. Thanks. Thanks a lot, and congrats again.

Thanks.

Great. Thank you so much for taking the question. I wanted to know if it would be possible to elaborate a little bit on the gross margin guidance for this year. You mentioned some positive factors around mix. Can you just talk about how inflation, specifically on raw materials and supply chain might negatively impact the gross margin? And if you can sort of quantify some of the puts and takes, that would be super helpful. Thank you so much.

Yes, I will take that, Jay. On average, we are seeing costs increasing from raw materials, freight, all included, about 10%. Our gross margin plans is we are going to pass those costs on to the consumer. Particularly in Europe and Asia, where we have great strength and demand for the brands, we are not necessarily seeing any resistance at all from the consumer. So, we feel confident in that. When we turn to North America, the supply chain delays cloud it a little bit. We are planning on passing the majority of those costs on to the consumer; we are not seeing resistance to date. But we are not going to be able to pass all of it through, particularly for the air freight that we are deploying due to the supply chain delay. So, a little bit in North America, the gross margins will decrease.

Okay, got it. And then maybe, Jim, if I can follow-up. Can you give us an idea of what your free cash flow outlook for this year is based on your guidance and sort of what the primary uses of the free cash will be sort of after CapEx?

Yes. The guidance we gave is with our earnings, we are going to have EBITDA well over $1 billion. CapEx will be about $400 million. We are also planning on share buyback for the continued use of our remaining authorization for a little over $200 million. The one thing that’s going to happen as we work through 2021 is we are going to have a working capital build. In 2022, we are going to have a working capital build. We ended 2021 with just too low of inventory levels. As we work through the year, we are going to get back into a better inventory position, really to fuel the growth for 2023. There will be a little bit of a reversal from '21 into working capital. But all in, still generating lots of free cash flow. As I said in my notes, we paid down over $1 billion of debt in 2021. The balance sheet is in a strong position as in recent memory.

Got it. Okay. Thank you so much.

Hi. Good morning, everyone. As you think about the puts and takes of exiting Heritage and FX and the other headwinds, Jim, how do you foresee the underlying growth of the business, both on the top line and bottom line going forward? And then Stefan, any update on how you're thinking about, given the digital-first mindset, where you want digital as a percent of sales to be, and what it could mean for each of the brands? Thank you.

Thanks for the question, Dana. Ending 2021, we ended it with a lot of momentum and great strength. We see that continuing in the underlying businesses. It's somewhat masked by the macro challenges we are dealing with. We are guiding 2% to 3% on the revenue line. On a constant currency basis, that comes out to 6% to 7%. If you were to add back the exit of Heritage plus our temporary closure in Russia, we get to a 10% to 11% top line underlying growth. If you also look at EBIT, in my notes, I kind of said we expect the EBIT dollars to be down low single digits year-over-year. FX is worth about 7% of a decrease and Russia is worth about 6% on the profitability. That also gets us to a double-digit growth in underlying EBIT.

Thanks, Jim. And Dana, coming back to your question about digital, so supercharging digital has been one of our key priorities over the past year and one of the key drivers of the success of last year being a record year. Digital today, 25% penetration. Europe, where we are the closest connected with our brands to where the consumer is going, is well over that. Last year, we drove 30% growth on top of 40% growth. Digital penetration will continue to grow faster than the other channels, and penetration over time will continue to grow.

Thank you.

Great. Thank you so much. Stefan, I wanted to ask just about the supply chain impact here in the U.S. And obviously, we can't go back and change history. But knowing what you know now, are there any different strategies that you wish you had deployed perhaps last year just to get through the North American challenges? If you're talking about strategizing for supply chain here in 2022, what are the go-forward things that you're doing to try to impact the challenges in the supply chain, particularly in North America?

Thank you, Kimberly. When it comes to how we navigated through COVID last year, I’m really proud of how we drove to the record performance we did. Overall, when it comes to a crisis like COVID, it's about pivoting and making decisions that follows how the consumer reacts through the COVID pandemic, and I feel very good about how we did that. Regarding COVID-related supply chain challenges in North America, they are sourcing-related, originating in COVID-affected countries. Our focus is to navigate through these delays in North America; the impact is most significant in the first half.

Okay, great. That’s helpful color. Thank you. As a quick follow-up for Jim on the tax rate. Jim, can you just remind us what is happening in the tax rate in 2022 that’s causing that to go into the high 20s or 30%? Is this level we should think about for future years as well? Is this the new normal kind of tax rate? Thanks.

Yes. Thanks for the question, Kimberly. Two things, really. One is we had a favorable tax treatment on low rates in the Netherlands, that expired in 2021. We also had favorable treatment going back to our acquisition of Calvin Klein, which also expired in 2021. With those two things rolling off, our income is weighted more towards international. We are basically in a tax rate zone of 29% to 30%. We will provide further details at Investor Analyst Day, but the days of being in the teens may not happen again.

Understood. We can't wait for the Analyst Day. Thank you both so much.

Same. Thank you.

Hi. Thanks for taking my question. So, it sounds like your core business remains quite strong in Europe, excluding the impact in Eastern Europe. Does your full year revenue outlook assume any slowdown in European demand trends given the inflationary pressures we are seeing? And then can you talk to us about where you are in your pricing journey across both of your brands in Europe, particularly? Thank you.

Yes, Chris. Our estimates right now indicate that our demand in Europe remains strong, and we do not see any slowdown. We have not estimated for any slowdown. As for pricing, on average, our costs are up 10%, and we plan to pass that predominantly back to the consumer. We are not seeing any resistance to date.

Thank you.

Just to build on what Jim just said, in these inflationary times, brand strength and relevance make a difference, along with product strength and effective channel execution. That’s why we see such strength in these areas in Europe, positioning us well to face inflationary challenges.

Good morning, and thank you so much for taking our question. Stefan, in your prepared remarks, you mentioned 2022 is a year of transition for North America. Could you provide some additional context on your plans for the North America marketplace this year to improve the brand momentum that you have across both brands, especially with that domestic consumer? Thank you.

Thank you, Brooke. I will share the detailed approach at our Investor Day coming up in just 2 weeks. High level, we are facing pressures from the delayed return of the tourist consumer. Regarding the domestic consumer, our strength is the brand love for Calvin and Tommy. We have too heavily relied on the tourist consumer. We need to focus more on winning with the domestic consumer, tapping into brand strength and love. Both Calvin and Tommy are top two out of the top four or five brands in the sector, so it’s all about product strength, pricing power, and investing in where the consumer wants to shop our brands. We are currently under-penetrated in digital and executing a balanced channel strategy.

Great. Thank you. Just one quick follow-up on that. As you think about the full-price selling achieved in 2021, where do you see the biggest opportunities for improving that full-price selling and reducing discounting into 2022?

Overall, the key growth categories are most essential to the consumer's wardrobe. We have two lifestyle brands with a license to win in those categories. Our successful ability to develop Hero products and connect them to a replenishment system is essential. With our loyal consumers that shop Calvin and Tommy, we have the ability to drive pricing power, which we already observe, and it is expected to continue trending positively. In high inflation periods like this, efficiency is also key, driving efficiencies company-wide.

Thank you. I will pass it on.

Hey, thanks. Good morning, everyone. Stefan, you guys have given some great detail on the near-term next year. I guess bigger picture, you've been at the company for several years. I wanted to ask just about your view of the structure of the business in your eyes. Is there any need for any more meaningful changes? The thing that kind of comes to mind as you've got some pretty big licenses that expire with Calvin next year. Is there anything that you think the business could do more efficiently or any reason we should think that there might be some strategic changes that at least you're considering now that you’ve been in the seat for several years.

No. So I’ve been in the seat for a year, and the biggest structural change we made is the divestiture of Heritage. The intensified focus on Calvin and Tommy allows us to leverage our opportunity to drive systematic repeatable value creation over time. We will go into that in more detail at Investor Day.

Okay. Thanks.

Thanks. It's Tracy Kogan filling in for Paul. Two things. I was hoping you guys could quantify the impact of freight in 4Q and then quantify what you're building in for the full year? Additionally, looking at your inventories, could you give us a sense of inventories by brand? I assume also regionally that the U.S. being leaner. But if you could just give us a sense of inventory by brand if you're having more trouble at one brand than the other? Thanks.

On the first piece regarding freight, we had been projecting about a $20 million increase in 4Q in airfreight. We realized about $10 million of that. $10 million shifted into the first quarter of 2022. In 2022, year-over-year, we are estimating about $10 million to $20 million more in airfreight. Early 2022 will require more airfreight. As for the inventories, we won't speak specifically by brand. Our total inventory was down 5% at the end of 2021, related to the Heritage. If you went back to 2019 levels, we are even that much further down double digits. We should start to get back in, particularly closer to fall. It is a challenge across the board, but North America is more impacted. Within brands, inventory levels are looking better for Calvin Klein due to its replenishment business.

Great. Thanks very much.

Thank you. Operator, we have time for one last question. Thank you.

Thank you very much. Thank you, everyone for joining, and looking forward to seeing you at our Investor Day on April 13. Thank you.