PVH Corp (PVH) — Q3 2023 Earnings Call Transcript

Thank you, operator. Good morning, everyone, and welcome to the PVH Corp. Third Quarter 2023 Earnings Conference Call. Leading the call today will be Stefan Larsson, Chief Executive Officer; and Zac Coughlin, Chief Financial Officer. 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 information. Your participation 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 November 30, 2023, 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 include PVH's right to change its strategies, objectives, expectations, and intentions and the company's ability to realize anticipated benefits and savings from divestitures, restructuring, and similar plans such as the planned cost efficiency action announced in August 2022, the 2021 sale of assets of, and exit from, its Heritage Brands menswear and retail businesses and the November 2023 sale of the Heritage Brands women's intimate apparel business to focus on its Calvin Klein and Tommy Hilfiger businesses. PVH does not undertake any obligation to update publicly any forward-looking statement, including, without limitation, any estimate 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 2023 earnings release which can be found on www.pvh.com and in the company's current report on 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, Sheryl, and good morning, everyone, and thank you for joining our call today. For the third quarter, we drove strong performance led by the strength of our two global iconic brands, Calvin Klein and Tommy Hilfiger. And our disciplined execution of the brand-building growth plan, the PVH+ Plan. Despite an increasingly choppy macro backdrop, particularly in Europe, we grew overall revenue in line with guidance, up 4% on a reported basis and up 1% in constant currency, while expanding our gross margins, and we beat our guidance for the bottom line. We drove high single-digit growth in our direct-to-consumer business with growth across both brands in all regions. This included double-digit growth in our owned and operated e-commerce and mid-single-digit growth in our stores. Partially offsetting the strength in B2C trends, we experienced incrementally more challenging trends in wholesale brought on by the tougher macro environment. As a company, we are driving a much more profitable business. On a non-GAAP basis, in Q3, we grew EBIT by 13% versus last year with strong margin expansion. And in Q4, we project to grow EBIT by over 30% versus last year, with an approximate 12% EBIT margin. Looking ahead, we are reaffirming our EBIT margin, and we are increasing our EPS guidance by $0.10 for the full year on a non-GAAP basis. By focusing on what's within our control for the full year 2023, we remain well-positioned to achieve meaningful margin expansion and double-digit EPS growth. We just came out of the important Thanksgiving and Black Friday week, one of the key consumer moments during the holiday period. And I'm pleased to share that in both North America and Europe, we beat our growth plans versus last year and delivered a strong start to the holiday season. We continue to make strong progress and gain increasing traction across all five growth drivers of the PVH+ Plan. And we relentlessly lean into the execution on winning with product, winning with consumer engagement, winning in the marketplace, as well as developing a data and demand-driven supply chain and investing in growth while driving efficiencies. And as I mentioned on our last call, each of our growth drivers plays an important role. And it's when we play them all together that something really powerful happens. And let me share some concrete examples of how we made that come to life this quarter. First, our strong DTC growth was fueled by increased product and supply chain strength that drove higher gross margins. The sales growth was supported by a nearly 20% increase in marketing investments with strong cut-through campaigns and global talent amplification. From a regional perspective, we drove constant currency revenue growth for our combined Calvin and Tommy businesses for all regions. Our outperformance in the quarter was driven by North America, which is a very important proof point for how we are already positioning both Calvin and Tommy for long-term sustainable growth in the region through strong execution of the PVH+ Plan. For the second consecutive quarter, our EBIT margin for our Calvin and Tommy businesses in North America together took a sizable step forward and expanded to 13.1% in the quarter, with significant gross margin expansion in both our direct-to-consumer and wholesale business. Inventory continues to be in great shape, both in composition and in levels, down 19% at the end of the quarter, as we made significant progress increasing overall inventory productivity as part of our actions to lower inventory in relation to sales by 25% by the end of fiscal 2024, all while improving availability. For the first half of 2024, we also see decreases in our AUC of more than 5%. This is partly driven by favorable macro but, even more importantly, it's driven by an improved approach to our costing process, the initial results of a better raw material strategy, and early returns on a much sharper assortment productivity. We continue to invest in growth while driving cost efficiencies and are improving our cash flow, increasing share buybacks, showing our confidence in our ability to execute over the long term. During the quarter, we further sharpened our focus on our two core brands with the divestiture of heritage brands. The proceeds from the transaction will be used to repurchase stock, and we now expect to repurchase approximately $550 million of our stock, up from $400 million previously. Finally, it will be the strength of our brands, our consistency in direction, and our relentless execution of the PVH+ Plan that will set us apart over time. And this will, in turn, be driven by the quality of the management team, which we have strengthened significantly over the past year. I'm happy to share the addition of Leah Goldman, who will join us as Global Brand President of Tommy Hilfiger in spring 2024. Leah is a uniquely strong and experienced brand and business builder with an outstanding track record building brands globally. Under Leah's leadership, the Tommy Hilfiger brand will operate in the same way our global Calvin Klein business operates today under Eva Serrano, creating a consistent and unified global brand structure. Each of our two brands now has one leader who sets the vision, leads product creation, brand marketing, and consumer experience globally, working closely with our regional teams who inform those strategies and lead the brand to win in the marketplace. Now let me share a bit more of what drove our performance in the quarter, both from a global brand and regional perspective. Starting with Calvin Klein. Throughout the third quarter, Calvin continued to focus on driving very strong consumer engagement globally through our most important hero products and driving a strong category offer with growth across our refined performance and underwear categories. It was another quarter where we delivered cut-through campaigns globally and continued to amplify our talent partnerships. When we last spoke, the brand had just launched its fall campaign, which included our long-term ambassadors, Jennicam, John Cook, and Kendall Jenner, wearing our most essential underwear, denim, and refined women's wear styles. Cut through with nearly 4 million average video views on TikTok and over 20% engagement rate on Instagram. As part of the fall campaign, the brand also launched a surprise performance with John Cook in Times Square, New York. The concept was announced only 30 minutes beforehand and tens of thousands of fans gathered within minutes. John Cook and his whole crew were dressed in iconic Calvin Klein, and their locks were immediately shoppable on our site. It was a perfect example of how we amplify global talent to win with consumer engagement. For holiday, the brand campaign features Hailey Bieber in iconic Calvin Klein stars, where our hero products are prominently featured on social through shoppable content to drive commercial impact. Finally, I'm excited about the progress we are making to align Calvin Klein to one global brand vision. Since joining, Eva has been focused on tapping into Calvin's core DNA to make the brand more current than ever. As part of this work, we are expanding the capabilities of our global product teams here in New York to drive a more unified product vision across key categories to win serving all markets. Let me now share a few examples from Tommy Hilfiger. This fall, the Tommy brand reinforced its core DNA, going back to classic American cool and iconic Tommy lifestyle through our family-focused seasonal campaign. As part of this campaign, with a special focus on Asia, we celebrated the K-Pop band Stray Kids' VMA win with a warm welcome to the Tommy family, breaking our record of social media engagement in the first 30 minutes. When we connect the brand in authentic ways with global talent like this, our fans respond, and we expand our reach and influence. We combined another culturally relevant moment with aspirational talent when Tommy campaign star CISA hosted a New York Fashion Week brunch with over 100 VIP guests and influencers generating over 800 million impressions on social. And just two weeks ago, at the Las Vegas Formula One Grand Prix, we expanded our partnership with Formula One by welcoming one of Hollywood's biggest rising stars, Damson Idris, to the Tommy Hilfiger brand family as our newest men's ambassador. Together with Damson, Tommy hosted a number of events with key influencers featuring day and night Tommy looks. For the holiday, our Tommy campaign celebrates the happiness of returning home, families, and friends captured in Tommy's classic American prep with a twist as they unite to celebrate the season, all amplified by very strong talent. Now let me turn to our regional performance. I'd like to start with North America, which is a big proof point for us this quarter. As I mentioned earlier, we made significant progress building the foundation for sustainable, increasingly profitable, brand-accretive growth for the region, and I'm very encouraged by the major initial traction we are gaining. Our Tommy and Calvin businesses together delivered high-quality, low single-digit revenue growth and most importantly, a 13.1% EBIT margin in the quarter, including higher gross margins and higher AURs. We drove outperformance for both our direct-to-consumer businesses and our wholesale business, which showed meaningful sequential improvement, and this is with still a big part of the pre-pandemic tourism not yet back. Let me share a few highlights. For Tommy, our DTC growth continues to be driven by our best premium Style Essentials, which increased by over 50% compared to last year, supported by elevated in-store execution. For Calvin, leading with our category offense, we delivered our third consecutive quarter of double-digit growth in the refined category, the expanded Essentials focus was also once again a standout, supported by an integrated marketing campaign and elevated execution on CK.com. Across both brands, we drove another quarter of double-digit growth in our owned and operated e-commerce businesses. This was driven by the elevation of our brands through stronger storytelling, improved site merchandising, and new conversion tools. Within wholesale, while our partners remain cautious, we continue to see strong gains resulting from our efforts to build a much stronger business with our key partners such as Macy's. Let me share some examples. We drove double-digit year-over-year growth in Tommy test stores, where we have invested together with Macy's in stronger field team coverage. And we are driving double-digit AUR growth at Macy's through the ongoing success with our improved product assortment, including our Polo offense and seasonal categories. For Calvin, our men's Essentials business increased by over 50% at Macy's with investments in the right premium essential base assortment. We also saw strength in refined categories, which grew 25%. I'm very proud of our North American team's execution this past quarter, and we now have the team, the plan, and the disciplined execution in place to unlock our full potential in the region. Turning to Europe, we continue to drive growth this quarter, building on our historically large business, market-leading awareness, and overall brand strength in the region. In the third quarter, we delivered high single-digit revenue growth on a reported basis and low single-digit growth in euros against a record-breaking quarter last year. Our revenue exceeded EUR 1 billion, led by mid-single-digit growth in DTC for each brand. In wholesale, we confirmed our pre-spring '24 order book at low single-digit growth on a constant currency basis with pre-spring already shipping in Q3, leading to timing differences versus Q4 last year. Like others, we have seen a more challenging macroeconomic backdrop in Europe, and that is impacting consumer confidence and the wholesale channel. Additionally, this quarter, just as we were about to kick off the fall season, we saw the longest streak of record-setting warm weather in Europe since the 1800s. Both factors have driven an increasingly promotional environment in the marketplace. And for us, the heatwave in September was a double whammy, given our historical strength in outerwear, sweaters, and heavyweight nets. Weather aside, going forward, we anticipate this challenging macro backdrop and an increasingly cautious wholesale channel to continue into 2024. In this environment, we are not sitting still. We are leveraging our market-leading strength and driving much-increased profitability and proactively adjusting how we operate. We're taking our PVH+ Plan execution to the next level, and we are doing this in two main ways. First, against the current macro backdrop in the wholesale channel, we feel that it's critically important to avoid having too much inventory in the market. Even if that means less selling in to secure strong sellout with high margin and less discounting. Our main priority independent of macro for both brands will always be to strengthen our position for long-term sustainable brand-accretive growth. Second, we will lean into the next level of PVH+ execution through DTC and with our key wholesale partners, leveraging our key strengths in product, consumer engagement, and marketplace management. I'll highlight a few examples of how you will see this in action. Across both brands, we have product innovation coming for 2024. In technical fabrics, dress casual, more choice of our best premium essentials, more transitional products to become less weather-dependent, and all while we continue to cut the unproductive assortment tail. In consumer engagement, we just shot very strong cut-through campaigns for both Tommy and Calvin that we launch for Spring 2024. And in the marketplace, you will see us continue to invest in our stores, shop-in-shops, and digital experiences to keep elevating the consumer experience. You can already see the positive effects of our next level PVH+ execution in our DTC channels, where we have more control between product and consumer, and can execute with impact more quickly. And in wholesale, thanks to the much-improved inventory management this season, despite the tougher conditions, you will already see in Q4 a significantly improved profitability versus the same quarter last year. I have personally spent more time in Europe over the past few months. I visited over 50 stores in six countries to work with our teams as we adjust to market conditions and put the next level of PVH+ execution into action. Standing out the most from this work is the foundational strength we have in both brands with consumers across the region and the opportunity to continue leveraging this as we navigate the current environment. Moving on to Asia Pacific. We continue to drive strong performance, which included double-digit constant currency growth in our direct-to-consumer businesses across the region, including China. We continue to win in key consumer moments such as Chinese Valentine's Day and Tmall membership day, fueled by strong hero products and successful capsule launches. And both Calvin and Tommy continue to move up in rankings on Tmall. Most recently, we delivered double-digit growth in GMV during China's important 11-11 activation. Leading with product category offers, we focused on growing live stream sales and leveraging talent in innovative and engaging ways. We also captured market share on Douyin as consumers increase spending on these newer formats of shopping. We leveraged our global mega talent to expand brand awareness in the region. In October, Calvin celebrated its fall 2023 collection in Tokyo, featuring brand ambassador John Cook, who generated strong brand awareness across the region and globally. And Tommy's fall campaign reached a total fan base of over 130 million with regionally relevant ambassadors, including top group kids, in addition to new ambassadors Lee Chen and Greg Su, who drove over 430 million impressions in China alone during the campaign period. Overall, we are doing a great job executing the PVH+ Plan in the region, and we are very optimistic about the long-term growth opportunity for both of our brands. In closing, I feel very good about the strong performance we delivered in the quarter and how we keep gaining traction through our brand-building PVH+ execution. Before I turn the call over to Zac, I would like to thank all of our associates around the world for their hard work and important contributions this year. And I wish everyone a happy and healthy holiday season.

Thanks, Stefan, and good morning. My comments are based on non-GAAP results and are reconciled in our press release. As Stefan discussed, we are pleased with our results for the quarter, driven by our iconic brands and disciplined execution of the PVH+ Plan. We continue to build on our track record of performance, delivering our top-line guidance while exceeding bottom-line guidance as we compete to win in this highly dynamic global environment. We delivered revenue growth of 4% on a reported basis and 1% on a constant currency basis, in line with our guidance with significant strength in DTC and in spite of an increasingly challenging macroeconomic environment, especially in Europe. On the bottom line, we once again exceeded our earnings guidance with earnings per share of $2.90, driven by strong expense management. We delivered an operating margin of 10.5% for the quarter, up 90 basis points versus last year, delivering on our commitment of sequential second-half improvement. Also, importantly, our inventory at quarter end is down 19% compared to last year as we continue to proactively manage our inventory levels. As I mentioned last quarter, we expect to end the year with inventory significantly lower than last year, with improvement to continue through 2024 as we make progress on our previously announced goal of a 25% reduction in inventory as a percentage of sales. We also completed the sale of our Heritage Brands intimate apparel business earlier this week for $160 million in cash, which was yet another important step as we accelerate our focus on our core global brands, Calvin Klein and Tommy Hilfiger. We plan to utilize approximately $150 million of net proceeds from the sale for share repurchases in 2023. This increases our planned share buybacks for the year to approximately $550 million compared to up to $400 million previously. We expect the sale to be slightly accretive to our operating margin in 2024. As we head into the fourth quarter, we see continued strength in our DTC business and also expect pressure in the wholesale business to continue. This is especially true in Europe as the macro environment continues to be challenging, exacerbated by record-high temperatures in September, as Stefan discussed, causing retailers to take a cautious approach. This, as well as the impact from the sale of our Heritage Brands intimate apparel business, is reflected in our revised revenue outlook of 1% growth for the year on both a reported and constant currency basis. Our prior guidance was an increase of 3% to 4% as reported and 2% to 3% on a constant currency basis. On the bottom line, we are reaffirming our approximately 10% operating margin outlook and increasing our non-GAAP EPS outlook for the year to a record high $10.45 compared to $10.35 previously, despite our lower revenue outlook, as we further strengthen our focus on driving profitable sales and disciplined cost management. I will now discuss third quarter results in more detail and then move on to our outlook. Revenue was up 4% for the quarter, which reflected a 3% positive impact from exchange. Third quarter revenue for our international businesses was up 1% on a constant currency basis. Revenue in our European business was up 1% in euros despite the increasingly challenging macroeconomic environment, with mid-single-digit growth in the DTC business, partially offset by pressures in wholesale and an unseasonably warm start to the fall season. Revenues for Asia Pacific were up 1% on a constant currency and down 2% on a reported basis. Strong demand across the region drove low double-digit constant currency growth in the DTC business, which was largely offset by the timing of wholesale shipments compared to last year. In North America, revenue for our Tommy Hilfiger and Calvin Klein brand businesses combined grew 2% as we delivered another quarter of growth in both our retail stores and owned and operated e-commerce business with total DTC up low single digits. Our owned and operated e-commerce sales were up double digits for both brands again this quarter as the investments we have made in the platform and overall site experience continue to resonate with consumers. Wholesale sales for our Tommy Hilfiger and Calvin Klein brand businesses combined in North America were also up low single digits. Although retailers continue to take a cautious approach, retail sales trends improved sequentially compared to the second quarter, particularly at Macy's as we focus on driving sell-through and healthy inventory across the channel. Importantly, our quality of sales is improving significantly in North America as we grow that business. Gross margins were up over 500 basis points with increases across both brands and all channels. Looking at our overall third quarter revenue from a channel perspective, we continue to drive strong performance across all regions in our direct-to-consumer business. Our total DTC revenue was up 6% on a constant currency basis and up 8% on a reported basis in the quarter and up approximately 150 basis points as a percentage of our total revenue compared to last year. We delivered another quarter of strong growth in both our stores and our owned and operated e-commerce business with constant currency revenues up 4% and 12%, respectively, compared to last year. Total wholesale revenue was down 3% on a constant currency basis for the reasons I previously outlined. On a reported basis, wholesale revenue was up 1%. Our Global Brands delivered another solid quarter with Calvin Klein revenues up 6% and Tommy Hilfiger revenues up 4% as reported. On a constant currency basis, revenue for Calvin Klein was up 3%, and Tommy Hilfiger was flat as macroeconomic challenges impacting Europe weigh more heavily on the Tommy business. Importantly, our DTC business was up in both brands and in all regions. In the third quarter, we delivered a gross margin of 56.7%, an increase of 80 basis points compared to last year despite a 100-basis point negative impact on product costs due to exchange. Gross margin reflects a significant favorable shift in mix with our higher gross margin DTC and international businesses making up a larger portion of total revenue, and the favorable impact from lower ocean freight rates compared to last year. SG&A expense as a percentage of revenue for the third quarter was better than planned at 46.2% and flat versus the prior year. We continue to take a disciplined approach to managing expenses while making targeted investments to drive the PVH+ Plan, including a nearly 20% increase in marketing compared to last year to fund cut-through brand campaigns. These investments and the impact of the shift in mix to our DTC and international businesses were offset by an approximately 150 basis point improvement in expenses versus last year due to savings realized from the actions we have taken to reduce people costs and prudent management of expenses. In total, EBIT for the quarter was $249 million, exceeding our expectations. Operating margin was 10.5% and expanded 90 basis points compared to last year despite the 100-basis point negative impact of exchange on our gross margin. And importantly, our operating margin for the quarter reflects a significant improvement in our North America business to 13.1% for Tommy Hilfiger and Calvin Klein combined. Earnings per share increased 12% to $2.90 compared to $2.60 in last year's third quarter and exceeded our guidance by $0.20, driven by the improvement in EBIT. Our tax rate for the quarter was approximately 22%. And now moving on to our outlook. Starting with the fourth quarter. We are projecting fourth quarter revenue to decline 3% to 4% compared to last year on both a reported and constant currency basis, with projected strong high single-digit growth in our direct-to-consumer businesses more than offset by a decline in wholesale revenue, including the revenue reduction from the sale of the Heritage Brands intimate apparel business. Excluding the sale, the decline in wholesale revenue is mostly in Europe, where the wholesale revenues are projected to be down approximately 15% versus last year. Approximately two-thirds of that decrease is due to one-time shipment timing differences compared to last year when supply chains were still normalizing and about one-third is due to a decrease in sales to lower-margin accounts as we remain focused on quality of sales. Looking forward, as Stefan mentioned, we do expect the tough macros to continue into 2024. As a result, and combined with our continued focus on quality of sales, we now expect lower sell-in for wholesale next year with a higher quality sell-through. The benefit to the fourth quarter from the 53rd week in 2023 to our overall revenue is mostly offset by the revenue reduction from the sale of the Heritage Brands intimate apparel business. While fourth quarter revenue is projected to be lower than last year, importantly, profitability is expected to be significantly higher. EBIT is expected to increase over 30% compared to last year, and operating margin is expected to expand to approximately 12%, up nearly 350 basis points compared to last year. And importantly, Europe profit has planned up significantly as well with regional margin up over 500 basis points versus last year and close to all-time highs. The overall increase in operating margin is almost entirely due to an approximately 400 basis point improvement in gross margin. The improvement is comprised of an approximately 150 basis point benefit due to a favorable shift in channel and regional mix, approximately 125 basis point improvement in freight expense, and approximately 125 basis point improvement due to the raw material costs for spring '24 product being significantly lower. We expect all of these impacts to carry forward beyond the end of 2023. We also expect a modest increase in SG&A expense as a percentage of revenue in the fourth quarter compared to last year, with the higher expenses of DTC mostly offset by the significant efficiencies we're driving in spending. Our fourth quarter earnings per share is projected to be approximately $3.45, up approximately 45% compared to $2.38 in the prior year, driven almost entirely by higher EBIT due to the significant profitability improvement. Our tax rate for the fourth quarter is estimated at approximately 22%, and interest expense is projected to be approximately $25 million. And now bringing that all together for the full year 2023. As I mentioned, we are updating our full-year revenue outlook and now project revenue to increase by approximately 1% on both a reported and constant currency basis. We are reaffirming our operating margin guidance for the year of approximately 10% and raising our non-GAAP EPS guidance by $0.10 to approximately $10.45, up 16% compared to 2022 and a record high for PVH. Regionally, our full-year revenue outlook for North America for Tommy Hilfiger and Calvin Klein combined is unchanged. But our overall outlook for the region is now planned down mid-single digits compared to down low single digits previously, due entirely to the impact from the sale of the Heritage Brands intimate apparel business. Our outlook for Asia Pacific on a constant currency basis is also unchanged, planned up mid-teens. While on a reported basis, our revenue outlook for Asia Pacific has been negatively impacted by exchange, with growth on a reported basis now planned up high single digits compared to up low teens previously. In Europe, we are now planning full-year revenue approximately flat in euros compared to last year. This compares to our prior guidance of up-low single digits in euros. Our DTC business in Europe continued to be planned up mid-single digits but is mostly offset by a decrease in wholesale versus last year given the macroeconomic challenges I mentioned earlier. On a reported basis, Europe was planned up low single digits compared to up mid-single digits previously. We continue to expect our full-year gross margin rate to increase over 100 basis points compared to 2022, despite approximately 100 basis points of higher cost due to exchange. As we've indicated previously, the improvement in our gross margin reflects an approximately 100 basis point benefit from a favorable shift in mix and approximately 100 basis points of improvement due to lower freight costs. We also continue to expect that SG&A expense as a percentage of revenue for the full year will increase approximately 70 basis points compared to 2022, with our investments in DTC and mix of international business driving higher expenses. Additionally, as I've discussed in prior quarters, we continue to invest in key areas that drive growth, including increased marketing with our full-year target continuing to be approximately 6% of revenue. These impacts are partially offset by cost efficiencies, primarily due to the people cost actions we have taken. As a reminder, in the third quarter, we completed our targeted 10% people cost reduction with annual savings ahead of our targeted $100 million of savings. Our full-year operating margin projection continues to be approximately 10% and continues to reflect high single-digit EBIT growth. Interest expense is projected to be approximately $93 million versus approximately $100 million previously, and we continue to expect our tax rate will be approximately 22%. Before we open up for questions, I want to reiterate that we are pleased with our third quarter results. We continue to work relentlessly to drive results. And as Stefan talked about earlier, we are laser-focused on delivering our commitments by executing the five key growth drivers of the PVH+ Plan, bringing together the consumer-facing value drivers of product, consumer engagement, and marketplace with our underlying operating engines to deliver consistent results in a systematic and repeatable way. And with that, operator, we would like to open it up to questions.

Good morning. Great progress in North America this quarter, especially around the profitability. Can you just walk us through how we should think about the trajectory of North America going forward? Thanks.

Thank you, Bob. North America truly stood out this quarter due to the focus we placed on PVH+ over a year ago and the team's efforts to build the brands and engage effectively with domestic consumers. The strength of our products is evident, as we're seeing growth in key categories and hero items. This is reflected in an increase in gross margin rates and pricing power. For instance, Tommy's best essentials saw a 50% increase compared to last year, and Calvin's fall essentials have shown significantly better performance in terms of sell-through and average unit retail. Product strength continues to resonate with consumers, and we expect to see ongoing improvements in this area. Consumer engagement with both Calvin and Tommy is being enhanced through impactful campaigns featuring relevant talent, leading to stronger product visibility. Notable figures like Jon Cook, Hailey Bieber, Kendall Jenner, Lewis Hamilton, George Russell, and Damson Idris have been instrumental in this process. We are executing consistently on the PVH+ growth strategy by enhancing our products and engaging consumers effectively, which has resulted in much stronger performances in both stores and e-commerce. Additionally, our strategy of strengthening relationships with our top wholesale partners is yielding positive results. Macy's serves as a great example where we collaborate closely on test stores, implementing improved product offerings, better presentation, and co-funding more staffing, leading to very strong and encouraging outcomes. The results in North America, reflected in a 13.1% operating margin, reaffirm our belief in the PVH+ Plan. By emphasizing the iconic strength of our beloved brands, Calvin and Tommy, and executing in a systematic and repeatable manner, we are capable of sustained growth in both direct-to-consumer and wholesale channels.

Yes. Bob, it's a great question. We're really proud of North America. The EBIT margin in North America is 13%, which is up 800 basis points compared to last year. What’s exciting is that this strength comes from all areas of the business. Revenue increased significantly, particularly in direct-to-consumer. Gross margin was a key contributor, up 600 basis points due to better inventory management, improved product assortments, and some macroeconomic factors beginning to provide tailwinds. SG&A as a percentage also decreased as we make progress on headcount efficiency. Overall, it was a great quarter. Looking ahead, we expect typical profit fluctuations from quarter to quarter, but we anticipate full-year profitability for North America to be in the high single-digit operating margin range, with a much stronger second half compared to the first. This shows a clear path to achieving low teens for the full year, as we committed in the PVH+ Plan by 2025.

To expand on what Zac mentioned, we are navigating a challenging macroeconomic environment in North America. However, we are leveraging the strength and affection consumers have for our brands through improved product engagement and marketplace execution despite these tough conditions. We are particularly encouraged by the strong start to the holiday season, with Black Friday now extending into Black Friday week and Thanksgiving week. We achieved a better-than-expected start for both Calvin and Tommy in North America.

Congrats on the next quarter and a really tough macro. Stefan, I want to ask you a little bit more specifically about some of the initiatives David is putting in on the ground as he's working on supply chain and inventory maybe within the context of the 25% reduction in the inventory to sales ratio that you talked about that's going to keep going for the next five quarters, I think. What are some of the examples of work that he's doing that's really starting to land already? And then Zac, the 12% operating margin in the fourth quarter, that's very, very different. I think the margins in the fourth quarter have been high single digits in the past. So, you're way above that. It seems like a new level. How should we think about margins after '23 through the lens of what looks like a step change in the business in the fourth quarter? And maybe you could frame the 15% margin target you spoke about for 2025 at the Analyst Day. I know you joined the company maybe 20 minutes before that target went out. So now you had some time to think about it, maybe we can get some perspective on it.

Thank you, Michael. Let's address the first question regarding the progress of the demand-driven supply chain. It's encouraging to see what David has accomplished with his team in a short timeframe. Last quarter, we established a target to reduce inventory relative to sales by 25% by the end of 2024 while enhancing availability, which is crucial. Currently, our inventory is in excellent condition, down 18% from last year, coupled with improved availability. This success can be attributed to significantly better upfront planning, particularly in assortment planning. The demand-driven supply chain relies on the early involvement of supply chain teams with product teams for improved planning, and we are beginning to leverage this effectively. This is why we have managed to achieve an 18% reduction in inventory alongside better availability. We are also observing a decrease in Average Unit Cost (AUC), projected to drop by over 5% in the first half of 2024, not merely due to favorable macros but also through enhanced raw material management. This has enabled us to obtain better quality fabric at a lower cost and improve our costing processes, which are now more data-driven and disciplined. Our assortment productivity has greatly improved. We're focused on creating a strong assortment featuring essential items that embody the DNA of brands like Calvin Klein and Tommy Hilfiger. We are committed to ensuring we have the best must-have essentials on the market. Our assortment is structured to include appropriate new products while also eliminating less productive items. These combined efforts are starting to show results, and we are progressing faster than anticipated. Expect to see ongoing sequential improvements.

Yes. Michael, for the fourth quarter, we anticipate an operating margin of around 12%, an increase from 8.6% last year, reflecting a rise of approximately 350 basis points. Of that, 125 basis points are due to the full realization of freight improvements, including better rates and a lower reliance on air freight. Another 125 basis points are linked to reductions in product costs. As Stefan mentioned, macroeconomic factors are shifting to positive as raw material prices decrease, and David's team has consistently outperformed market expectations, a trend we expect to continue into 2024. Additionally, about 125 basis points of the margin improvement comes from the headcount reductions in SG&A. While we are not providing guidance for 2024, we believe the gross margin improvements are firmly in place, both structurally and from market conditions, and we expect these to persist into 2024. Regarding our targets, as I stated alongside Stefan and the leadership team, we are committed to achieving a 15% margin, irrespective of the macro environment. The 12% margin for the fourth quarter illustrates our progress, even amidst uncertain macroeconomic conditions, and we aim to maintain this momentum as we move towards our 2025 targets.

Yes. In terms of inventory and a demand-driven supply chain, I want to highlight the impact of having Eva Serrano join us to strengthen our global product engine in Calvin, and now in Tommy. Both are very experienced in brand building and product development. David Salmon and his team are collaborating closely with them to leverage that product strength. We are integrating our supply chain expertise with our two global brands and regional execution. The supply chain is central to our strategy, working alongside global brands and regions. Eva may appear to have been here for a long time, but she actually joined us in the first half of this year. The spring assortment for 2024 is showing slight improvements, and we anticipate more significant enhancements in the fall, continuing to progress from there. I’m very pleased with how the team is uniting and moving away from outdated sequential handover practices, beginning to work together cross-functionally. This approach has led to value growth in various settings, such as the early days of H&M, the turnaround of Old Navy, and the repositioning of RAP.

Great. Thanks. So, two-part question. Stefan, could you just elaborate on underlying demand trends for Tommy and Calvin in Europe? Maybe if we parse through some of this near-term noise, which sounds like it was weather-related? And then for Zac, just maybe on sensitivity, could you just help lay out given all of the self-help drivers and the uncertain backdrop from a revenue perspective? Could you see operating margin expansion next year in a scenario of maybe flat revenues? Or just what would that picture look like?

Thank you, Matt. To begin, the underlying demand trends for Calvin and Tommy in Europe remain strong. In the third quarter, we are experiencing growth following a record quarter last year, with low single-digit growth on top of a solid foundation, showing a 25% increase compared to pre-pandemic levels. Additionally, we are seeing strong direct-to-consumer growth despite difficult macroeconomic conditions. In September, we recorded the warmest start to fall since the 1800s, which affected demand that month. However, the market showed a recovery in October in terms of demand trends. Nonetheless, due to the significance of September, we are now operating in a more promotional environment. Throughout the third quarter, we have observed a more cautious economic backdrop in Europe, which has particularly impacted the wholesale channel. In response, we are proactively implementing our PVH+ strategy in two key ways. Firstly, in challenging macro conditions, it is crucial to emphasize the quality of sales. Therefore, we are focusing on ensuring high-quality sales, even if that means reducing wholesale sales while maintaining strong sell-out margins and preventing excess inventory. The second approach involves enhancing our PVH+ execution, which plays a vital role, particularly in tough economic times. For instance, in 2024, we are introducing stronger product innovations, including technical components, diverse premium essentials, and transitional products. Considering that unusual weather patterns seem to start every season, we recognize the need for more transitional offerings, which will be reflected in our 2024 lineup. In terms of consumer engagement, having leading brands during tough economic times is a significant advantage. We are capitalizing on this engagement through two robust marketing campaigns for spring 2024, featuring prominent talent that highlights our improved product offerings. Furthermore, it is essential to continue investing in the consumer experience, which will include enhancements to our stores, shop-in-shop formats, and our digital interactions. Overall, we are navigating the challenging macro environment in Europe by leveraging our market strength, especially for Tommy, while benefiting from having Calvin, one of the fastest-growing brands in Europe.

Yes. And I think just to add some color to Stefan's comments about how disruptive the September heat wave was in Europe, we can look at our own DTC sales. We don't typically provide intra-quarter numbers, but I think it's really important context. Coming out of summer, our August DTC revenue was up 10% in Europe. Then the heat wave hit in September, right as us and all of our competitors were setting fall season, and sales were down 7% in September. Then in October, things have recovered to being up 10%, but in a significantly more promotional environment. So, in our DTC channels, we can move more quickly. The economics of our wholesalers are more difficult. And so, we see that coming through with regard to a more cautious sell-in outlook that they're putting into place, and we're preparing for that potential to carry forward in 2024. But I think that what's important is that readiness shows up in profitability. Even with a lower European revenue outlook for 4Q, we expect European profit to be up over 30% versus last year in the fourth quarter. So, I think that ability to manage profitability moving into 2024 remains strong. Even with flat revenues, we absolutely can see operating margin expansion next year.

And just building on what Zac was saying here because across the world in all our regions in a tough macro, we have the strength of having in Calvin and Tommy two of the most iconic beloved brands in the marketplace. And we have the brand-building plan in PVH+ and we gain increased traction when we lean into the PVH+ execution. So, from that, you will see continuously that what's within our control, we will continue to improve step by step by step. And the margin is the most in our control. That's why you hear the confidence from Zac.

Thank you very much. Stefan, I wanted to follow up on your comments regarding the success at Macy's. Can you connect that to the ongoing transition with G3? Does what you are seeing give you confidence that you are building the teams and capabilities needed to replace the revenues that G3 currently generates within PVH as this transition continues? How do you plan to build a significant business and take advantage of all the financial opportunities available during this transition?

Thank you, Jay. I'm very encouraged by the progress we are seeing with Macy's, which builds on my experience with repositioning Ralph for sustainable growth. A few years ago, we partnered with Macy's and established it as our best full-price expression, and we are pursuing the same approach now. We've seen success in our controlled men's and underwear categories with both Calvin and Tommy. We are equally confident about reclaiming the licenses from G3 over the next few years. We are focused on ensuring product strength, category performance, and competitive pricing. Our confidence extends to both men's and women's segments and the strength of Calvin and Tommy among Macy's consumers. We are currently conducting a thorough global consumer and brand study. Initial results for North America and Macy's show incredible strength for Calvin and Tommy, with high consumer awareness, strong consideration, and significant brand loyalty. We have everything in place to support our brands and are well-positioned to successfully take back the licenses, which is very encouraging.

Nice to see the progress. Just continuing on the thought of the wholesale business, which is so important in the progress that you've made in America, as you mentioned with Macy's, during this time period in Europe where the macro is more a little bit more challenging. Are there relationship enhancements or business enhancements that are being done on the wholesale side in Europe that can mirror North America? And are there partners like Macy's that you see as dominant in Europe is what you see here in North America? Just can put some color on the wholesale in Europe and that potential. Thank you.

Thank you, Dana. It's an important question. We have significant strength in Europe and strong partnerships with leading wholesale retailers. Reflecting on the past few months, I noted that we have over 50 stores across five or six countries, and we've also engaged with key partners like Peak & Cloppenburg and Zalando. Our focus remains on executing the next-level PVH+ strategy. In terms of brand strength and consumer loyalty, we are experiencing unprecedented support in Europe. Additionally, our emphasis on essentials and expanding our selection of must-have products is strong, especially when we introduce the right new items and effective campaigns. Collaborating with our wholesalers enhances this strength, along with the capabilities of our products and talent, which is very encouraging. Overall... Overall, thank you very much for joining our call today. As you can hear from us, we feel very strong about the increased traction we get on the PVH+ Plan. We recognize the tough macro we are navigating. We also recognize the strength that we have in our hands with these two very strong brands. The plan and the execution strength that comes out of that plan that we are just in the beginning of. So looking forward to catching up next quarter on the progress that we will be relentless in driving. And then ahead of that, I just wish everybody a really happy holiday. Thank you.