PVH Corp (PVH) — Q3 2024 Earnings Call Transcript

Thank you, operator. Good morning, everyone, and welcome to the PVH Corp. third quarter 2024 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 permission. 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 December 4, 2024 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, restructurings and similar plans such as the headcount cost reduction initiative announced in August 2022, the 2021 sale of assets of, and exit from its Heritage Brands menswear and retail businesses, the November 2023 sale of the Heritage Brands women's intimate apparel business to focus on its Calvin Klein and Tommy Hilfiger businesses and its current multi-year initiative to simplify its operating model. PVH does not undertake any obligation to update publicly any forward-looking statement, including without limitation, any estimates 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 2024 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, Sheryl, and good morning, everyone, and thank you for joining our call today. I want to start by thanking our teams around the world for all the hard work you do every day to bring our two globally iconic brands, Calvin Klein and Tommy Hilfiger, fully to life with the consumer. Through our disciplined execution of our brand-building growth plan, the PVH+ plan, for the third quarter, we again delivered on our revenue guidance with stronger-than-expected profitability and EPS. We drove significant gross margin expansion, up 170 basis points year-over-year, and we continue to drive strong expense discipline across the company. Consistent with our plan, direct-to-consumer revenue was flat on a reported basis and down 1% in constant currency. As we shared last quarter, we came out of the summer season with less old season clearance inventory and our new season inventory didn't fully compensate on the total top line. Since then, as planned in September and October, our D2C trends have come back up to positive for both months. And now, coming into the peak holiday season, we have a very good inventory composition with less old and more new season inventory than the same time last year. For wholesale, as a result of our proactive quality of sales actions, revenue declined 4% on a reported basis and 5% in constant currency, excluding the 4% negative impact of the Heritage Brand sale. We are in a really good sell-through position with our key partners which is driving sequential improvements in forward-looking orders. We continue to demonstrate that where we lean in to execute, we deliver, and in everything we do to drive the business here and now, we also position our brands for long-term increasingly profitable sales growth. One powerful example is our Fall 2024 product season which was the first season where we could fully influence product execution globally for both brands. We are seeing significantly stronger sell-throughs and a higher conversion for the fall season product across both brands and all regions versus last year. As an example, our sell-throughs in Europe for fall product are up over double digits across all channels. We just came out of Thanksgiving and the Black Friday week, one of the most important consumer moments of the holiday. This year we saw consumers start their holiday shopping earlier than last year and I'm pleased to share that we are on plan for our holiday performance in all regions. Looking ahead, for the full year, we are reaffirming our revenue and non-GAAP EBIT margin guidance and we are narrowing our EPS guidance to reflect the impact of recent exchange rate shifts, and we remain well positioned to deliver strong EPS growth on a non-GAAP basis. And looking out to 2025, we expect to return to modest growth and take another step towards our long-term 15% operating margin target. We now have important building blocks in place to make this happen. We can see it in the strongest sell-throughs for the Fall '24 product season for both brands which enabled improved D2C trends and then we combined that with improved inventory composition and the inventory levels needed to drive even stronger seasonal transitions. And finally, we continue to see sequentially improved European order books. We're starting to turn the brand-building flywheel where we'll keep the clarity of our direction in bringing Calvin and Tommy into their full potential and driving constant improvements within the consumer-facing parts of our brands in product, marketing and the marketplace, combined with further building out our data and demand-driven supply chain and we will amplify this by investing in growth and driving efficiencies. Now, let me share some highlights from the third quarter on how we executed across our two iconic brands and three regions. Starting with Calvin Klein. The brand continues to drive strong category offense that comes to life with high impact culturally relevant marketing campaigns amplified by mega talent like Jeremy Allen White in iconic Calvin underwear and hero denim styles, Greta Lee in signature underwear, Bollywood actress Disha Patani in Modern Cotton and K-pop stars, NewJeans, in denim and transitional outerwear. These are campaigns that repeatedly cut through in the marketplace. This fall, we also dressed Jeremy Allen White and Idris Elba at the Emmy's in classic Calvin Klein suiting. And in a special moment driven by product innovation, Calvin launched a limited edition collaboration with Nensi Dojaka during London Fashion Week with an underwear-focused capsule that drove strong engagement and sell-out. For holiday, we are showcasing seasonal Calvin essentials across all consumer touchpoints from social and e-commerce to stores, all amplified by global mega talent like Alexander Skarsgard and Kendall Jenner. And today I'm excited to announce that Calvin Klein will open a flagship store here in New York in the heart of SoHo, one of the best brand-building and foot traffic locations in the world, as part of Calvin's brand-building strategy in key markets. We look forward to sharing more details with you about this in coming months. Turning to Tommy. When we last spoke, we were just a few weeks out from hosting our Spring '25 fashion show, which drove record engagement. Tommy ranked number one at New York Fashion Week, accounting for almost half of the total earned media value from the whole week and ranked second-highest in earned media value across all participating brands of all of the four global fashion weeks combined. Over 150 global talents sat front row, all dressed in Tommy Fall '24 products, amplifying the show message and driving our consumers globally to want to shop their looks. We could see this cut through commercially, driving traffic to both e-commerce and stores. Tommy is always evolving with culture by tapping into its unique brand DNA and making it current, partnering with the most relevant talent across fashion, art, music, entertainment and sports, as some of the most exciting cultural moments around the world. Highlights of the fall campaign included actor, Patrick Schwarzenegger; and model, Abby Champion; Olympian and gold medalist, Armand Duplantis; and Formula One superstars, Lewis Hamilton and George Russell. In addition, K-pop superstars, Stray Kids and Jisoo, are driving very strong engagement for our iconic hero products as global brand ambassadors. Tommy continues to be highly engaged in sports, both in Formula One and most recently as a key partner to the US SailGP Team. For holiday, our campaign starring Sofia Richie and Damson Idris, puts a new twist on the Hilfiger Holiday, delivering classic American style and sophistication with the spirit of giving. Now, let me turn to our regional performance, starting with North America. The significantly improved profitability for the region continues to be a great proof point of our PVH+ execution. In the quarter, our Calvin and Tommy businesses together delivered a 13% EBIT margin, our fifth consecutive quarter of a double-digit EBIT margin in the region, both on a non-GAAP basis. The tougher macro combined with our focus on driving more full-price sales and less clearance led to revenue in the quarter for our combined Tommy and Calvin businesses to decrease low-single digits in D2C with a high-single digit decline in wholesale, which was driven by the timing of shipments last year. We expect the full year of North America wholesale revenue to be up low-single digits compared to 2023. D2C store revenue in the quarter declined on lower traffic, although conversion continued to improve and e-commerce grew double-digits. Fall '24 product was up double-digits too, as we continue to drive strength in our category offerings for both brands and our D2C trends improved to positive in October. Within wholesale, our fall product performance was strong and we see that what cuts through with the consumer is refined style icons made current. We continue to work closely with key accounts to elevate the product and in-store experiences in key doors and are generating outperformance as a result. A key leader behind the region's strong performance is Donald Kohler, and I'm excited to share that he has been promoted to CEO of PVH Americas. Donald has done a great job over the past two years, unlocking profitable brand accretive growth as President of Calvin Klein, North America. And I'm excited to see him step into this expanded role as we unlock the full growth potential of both brands in the region. All three regions now have a consistent leadership structure led by one regional CEO. And turning to our International business. In Europe, our next-level PVH+ execution underpinned by our quality of sales initiative has translated into significantly improved performance. Overall revenue declined 1% on a reported basis and 4% in euros, which included a 6% impact from our quality of sales actions. As a reminder, for the full year, we continue to expect the revenue impact from our quality of sales initiative to be approximately 5%. For our fall product, we continue to see very strong performance across all channels and both brands, supported by newness and innovation, improved delivery timing and global marketing campaigns. We drove strong sell-out performance, as I mentioned earlier, up over double-digits year-over-year across all channels. D2C declined low-single digits with growth in stores, offset by declines in e-commerce due to our quality of sales actions. The quarter featured a very successful fall member suite focused on customer acquisition, engagement and conversion. We saw strong performance exceeding targets in new member sign-ups, driving increased traffic and increased spend across all channels. Building on our Spring '25 order book, which finalized down low-single digits, as we previously shared. When we look ahead to Fall '25, we are well positioned to drive further sequential improvements with our wholesale partners continuing to share positive feedback about the improved product assortment across both brands. On Monday, this week, we welcomed our new CEO of Europe, Fredrik Olsson, who will build on this momentum and further strengthen our market-leading position in the region. Fredrik, who spent over 15 years as a key leader on the team that doubled the size of H&M globally and most recently served as the CEO at Max Fashion, was our top choice for this important role. Together with the entire Europe team and our key partners, Fredrik will lead the region's next growth chapter. Finally, I want to thank David Savman for stepping in to lead our Europe business in the interim and doing an incredible job taking our PVH execution there to the next level. Now, moving on to Asia Pacific. In the third quarter, we delivered mid-single-digit growth for the region on a reported basis and low-single-digit growth in constant currency, with growth for both brands and in all channels. Growth was led by Japan, while China increased 7% in local currency, benefiting from an earlier and very well-executed 11/11 activation. From a channel perspective, we delivered double-digit e-commerce growth in the region and low-single-digit increases in stores. We continue to drive strong consumer engagement with regionally relevant mega talent. Both brands announced new brand ambassadors for this quarter, NewJeans for Calvin and Jisoo for Tommy, bringing continued energy and engagement with our consumer and strengthening our brand positioning to drive sustainable growth across the region. Looking ahead, we are well prepared for the upcoming holiday consumer moments where we have a number of strong activations planned for both brands. Before I close, I would like to briefly mention the investigation of PVH by China's Ministry of Commerce, which was announced in September. Since then, we have cooperated fully, including as requested, submitting our written response back to them within the deadline. And at this point in time, it's not known when it will be concluded. What's important for us to share is that PVH has operated in China for more than 20 years, proudly serving our Chinese consumers and contributing to the Chinese economy. And we look forward to doing that for many years to come. As a company, our policy is to conduct business in compliance with both local and international laws and regulations and in line with established industry standards and practices. We look forward to continuing to engage with MOFCOM and our business partners in China. In the meantime, we remain committed to drive our business forward in China, where we generated approximately 6% of our revenue and approximately 16% of our EBIT in 2023. We appreciate your understanding that given that this matter is ongoing, we are limited in the details we can share at this time. In closing, for the third quarter, we again delivered on our plan. We continue to strengthen our PVH+ execution across both Calvin and Tommy, highly visible in our improved Fall 2024 product sell-throughs and improved D2C trends with strong gross margin rate improvements. We have taken North America to a new level on consistent delivery and profitability on an annual basis. And our quality of sales execution in Europe is working very well, leading to sequential improvements of forward-looking wholesale demand. And in Asia, in a tough macro, we are focused on driving strong consumer engagement to win in key shopping moments. Going into 2025, we expect to return to modest growth and are steadfast in our PVH+ Plan execution focus, a step-by-step building Calvin and Tommy into the most desirable lifestyle brands in the world and making PVH one of the highest-performing brand groups in our sector. And before I turn the call over to Zac, I would like to again thank all our associates and partners for all your 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 third quarter financial results, driven by our iconic brands and disciplined execution of the PVH+ Plan. We exceeded both our top-line and bottom-line guidance largely due to timing of wholesale shipments in Europe and an acceleration of expense efficiencies. We delivered operating margin of 10.5%, better-than-planned and flat versus last year, as higher gross margins and strong expense management offset the loss of leverage due to the decline in revenue. Looking forward, following our solid third quarter performance, we are reaffirming our full-year revenue and operating margin guidance. We are updating our full-year EPS guidance to $11.55 to $11.70 per share from previously $11.55 to $11.80 to tighten the range as we head into the fourth quarter and reflect a $0.10 negative impact from exchange at the top-end. I will now discuss our third quarter results in more detail and then move onto our outlook. Revenue for the third quarter was down 5% versus last year, including a 2% decline from the sale of the Heritage Intimates business. On a constant currency basis, revenue was down 6%. We delivered our revenue plan for the quarter, beating our guidance by 1% due to a small shift in timing of wholesale shipments in Europe from the fourth quarter into the third quarter as inventory received earlier than planned. Starting from a regional perspective, third quarter revenue for our International businesses was down 2% on a constant currency basis. Sales in our Asia Pacific business were up 3% on a constant currency basis driven by growth in our digital channel due to the early start of China's important 11/11 events, which more than offset the continued challenging macro conditions in the region, particularly in China and Australia. Sales for Asia Pacific were up 5% on a reported basis. Sales in our European business were down 4% in euros and slightly better-than-planned due to the wholesale timing shift I mentioned previously. Sales were up low-single digits in our retail stores, a sequential improvement versus Q2, which was more than offset by a decline in wholesale driven by our strategic decision to focus on higher-quality sales. Importantly, our stronger product and improved assortment are driving improved sell-through in the region with sell-through for Fall '24 product up double-digits, reflecting growth in both Tommy and Calvin and across both our wholesale partner stores and in our own DTC. As Stefan mentioned, we are encouraged by the positive feedback from our wholesale partners in the region and are well-positioned to drive another sequential improvement in order books for the Fall '25 season. In North America, revenue for our Tommy Hilfiger and Calvin Klein businesses combined decreased 6% versus last year, which is largely explained by the timing of wholesale shipments within the second half of this year compared to last year. Last year, we shipped more wholesale in Q3 than in Q4, but this year, we will ship more in Q4 than in Q3. When we normalize timing and compare our projection for the second half of this year to the second half last year, wholesale sales were up low-single digits, relatively in line with the first half of this year and a reflection of the overall business trend. From an overall PVH channel perspective, our direct-to-consumer revenue was flat on a reported basis and down 1% on a constant currency basis in the quarter as expected. Sales in our retail stores were down 1% in constant currency, with trends continuing in line with what we communicated at the start of the quarter. In our owned and operated e-commerce business, revenue was down 3% on a constant currency basis. Growth in North America driven by customer experience enhancements on both brand sites and in APAC due to the timing of 11/11 was more than offset by the planned reduction in Europe. Within wholesale, we remain focused on strong quality of sales and winning with our key wholesale partners. Total wholesale revenue was down 8% versus last year, including a 4% decline from the sale of the Heritage Intimates business. The remaining decline reflects the continued strategic reduction in revenue in Europe to drive overall higher-quality sales in the region, the previously communicated lower Fall order books in Europe, and the shift in timing of wholesale shipments in North America that benefited us last year. On a constant currency basis, wholesale revenue was down 9%. Turning to our global brands, Calvin Klein revenues were down 3% on a reported basis and down 4% on a constant currency basis. Tommy Hilfiger revenues were down 1% on a reported basis and down 2% on a constant currency basis. The timing of wholesale shipments in North America that I mentioned previously weighed more heavily on our Calvin Klein business. In 3Q, we delivered another strong quarter of gross margin improvement with gross margin of 58.4%, up 170 basis points compared to last year. Approximately half of the increase was due to higher DTC mix and our focus on driving higher-quality sales and the remaining increase was due to lower product costs. As a reminder, we have now fully anniversaried the improvements in raw material costs that we realized beginning in the second half of last year. Our inventory at quarter-end was up 9% compared to last year due to a combination of overly lean inventory levels last year and early receipts of inventory this year in advance of the holiday selling season. Additionally, we chose to strategically increase our investment in our most essential products to support our goal of having these timeless items in stock at a target of 95% of the time. Importantly, the vast majority of our inventory is current season and core, and we have reduced our inventory as a percent of sales by low-double digits versus last year. SG&A expense as a percent of revenue was 47.9%, an increase of 170 basis points versus last year and importantly, lower than planned as we accelerated efficiencies previously planned for Q4. The increase versus last year is comprised of approximately 140 basis points due to the higher DTC mix and 140 basis points from the deleveraging expenses on lower revenues, partially offset by an over 100 basis point improvement due to cost efficiencies realized from actions we have taken to reduce people costs and prudently manage expenses. Notably, while SG&A expense as a percent of revenue increased, overall SG&A dollars were down versus last year again this quarter. In total, EBIT for the quarter was $236 million compared to $249 million in the prior year as the gross margin improvement was more than offset by the impact of the revenue decline. Operating margin was 10.5%, in line with the prior year and better-than-planned, primarily due to the favorable shift in timing of wholesale revenue and acceleration of expense efficiencies I mentioned earlier. Earnings per share increased 4% versus last year to $3.03, exceeding our earnings guidance by $0.53 due to improvements in EBIT. Our tax rate for the quarter was approximately 23%. And now moving onto our outlook, starting with the fourth quarter. We are projecting fourth quarter revenue to decline 4% to 5% on a constant currency basis and 6% to 7% as reported compared to the prior year, including a 1% decline due to the sale of the Heritage Intimates business and a 3% decline due to the 53rd week in 2023. Excluding those two impacts, we are forecasting constant currency revenue will be flat to down 1% compared to last year, further evidence of our sequential improvement as we move towards 2025. In our DTC business, excluding the 53rd week impact, we are projecting revenue to be approximately flat in constant currency, in line with the trends in Q3. On a reported basis, including the 53rd week impact, DTC revenue is projected down mid-single digits. In wholesale, excluding the 53rd week impact, we are projecting a mid-single-digit revenue decline in constant currency in the quarter, including a 2% decline from the sale of the Heritage Intimates business. The remaining decline reflects the continued quality of sales focus in Europe, partially offset by the benefit from the shift in timing of wholesale shipments in North America that I discussed earlier. On a reported basis, including the 53rd week impact, wholesale revenue is projected down high-single digits. We are projecting gross margin to decline approximately 200 basis points, driven by a moderately more promotional environment than last year in the U.S. and China, an increase in freight costs due to the recent disruptions in a couple of our key sourcing locations as well as Red Sea surcharges and the mix of wholesale shipments within the second half of the year, which negatively impacts our gross margin, but does not impact our overall profitability. We expect SG&A expenses as a percentage of revenue to be approximately flat compared to last year, despite the loss of leverage due to the decline in revenue, due to the favorable impact of region and channel mix, including the mix of wholesale shipments and continued cost efficiencies. Overall, we are projecting our fourth quarter operating margin to be approximately 10%, down approximately 200 basis points compared to last year, including an over 100 basis point decline driven by the impact of the 53rd week in 2023. The remaining decline is driven by the more promotional environment and increases in freight costs I mentioned, partly offset by cost efficiencies. Earnings per share is projected to be in the range of $3.05 to $3.20 compared to $3.72 in the prior year. The decrease primarily due to the decline in profitability. Our tax rate for the fourth quarter is estimated at 20% and interest expense is projected to be approximately $15 million. And now, bringing it all together for the full year 2024. If you go back to our commitments at the start of the year, we projected revenue to decline 6% to 7% on both a reported and constant currency basis with operating margin approximately flat to 10.1% last year and an increase in EPS despite the top-line pressures. We remain on track to deliver that plan. Within our revenue guidance, our outlook for Europe is unchanged from last quarter, planned down high-single digits in euros. In Asia Pacific, we expect full-year sales to be up slightly in constant currency. And for the North America Calvin Klein and Tommy Hilfiger businesses combined, we continue to plan sales to be relatively flat versus last year. Our overall operating margin guidance for the year is also unchanged. But within that, we have updated our gross margin projection to reflect the more promotional environment and the increase in freight costs in the fourth quarter that I mentioned earlier. We now expect our full-year gross margin rate to increase approximately 120 basis points compared to 2023, still reaching an all-time high for us compared to an increase of approximately 150 basis points previously. And for SG&A, we continue to proactively manage costs and drive efficiencies and as such, expect the change in our gross margin projection will be fully offset by an improvement in SG&A, which as a percentage of revenue is now planned to increase approximately 120 basis points versus an increase of approximately 150 basis points previously. We continue to plan SG&A expense dollars down for the full year 2024 as compared to 2023, with the expected increase in SG&A as a percentage of revenue more than explained by DTC mix and the impact of lower revenue. Interest expense is projected to be approximately $68 million compared to approximately $70 million previously, and we continue to expect our tax rate will be approximately 16%. We are updating our EPS guidance to $11.55 to $11.70 compared to $11.55 to $11.80 previously to tighten the range as we head into the fourth quarter and to reflect a $0.10 negative impact from exchange on the top-end. Additionally, we continue to deliver on our commitment under the PVH+ Plan to return excess cash to shareholders with our strong cash flow funding approximately $254 million of repurchases completed year-to-date. We remain committed to our plan to complete $400 million of total share buybacks for the full year. Before we open it up for questions, I want to reiterate that we continue to work relentlessly to drive results and deliver our full-year financial commitments regardless of the macro environment. We remain laser-focused on 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 sustainable, long-term profitable growth. And with that, operator, we would like to open it up to questions.

Great. Thanks. So, two questions. Stefan, maybe first, could you elaborate on customer demand for fall product assortments, maybe both the impact you're seeing at global DTC and lead indicators for global wholesale orders? And then Zac, on the path to mid-teens operating margins multi-year, what's your comfort today with Street consensus at 10.7% next year?

Yes. So thank you, Matt. And what was really great to see in Q3 was that Fall '24 product season was the first season that we were able to fully influence the product execution across both brands under PVH+. So, what we have seen so far is double-digit sell-through improvements versus last year in both brands, all regions and across channels. So, to your point, starting with D2C. So we could see how the improved sell-through of the fall product led to D2C trends up significantly from August to September. So, with September and October now being back to growth versus last year. You can also see the in the gross margin rate up 170 basis points. Then to your point in wholesale and especially in Europe, very encouraging and exciting to see that same increased sell-through there increased over double-digits in wholesale in Europe, which bodes really well for the upcoming sell-in for Fall '25. So we kicked that off Fall '25 in January. We have the market launch first week when we are back in January. So the double-digit sell-through improvement in wholesale in Europe will be a really good starting point to sell in Fall 2025. And when it comes to, so switching gears then to the outlook and I'll leave it for Zac to comment on the exact margin, whether we comment or not at this time on the exact margin target for '25. But let me just share what we see, Zac and I when we look out at '25. So as I shared in my prepared remarks, for 2025, we expect to return to growth and take another step towards our 15% long-term operating margin target. And we do that based on the parts of the PVH+ growth plan that are coming into place in 2024. So, some of the key building blocks of that are, we are coming into '25 with stronger D2C trends, fresher inventory composition, more optimized inventory levels. We're driving the strongest sell-throughs as I just mentioned on the new product assortment across both brands, all regions, all channels. In Europe, exciting to see that the targeted quality of sales action that we launched earlier this year already paying off double-digit sell-through across both Tommy and Calvin in Europe, D2C and wholesale. North America, we're holding our own in a tough macro with a much-improved profitability. APAC, we continue to deliver on our plans despite the setback in consumer sentiment we saw a few quarters ago. So, this then coming into '25 with the investments behind the growth initiatives and continued efficiencies are giving us the confidence to set out to not only come back to growth for '25 but also then take another step towards the 15% target. But over to you Zac.

Thank you, Stefan. As you mentioned regarding the early revenue outlook, I’ll discuss the remainder of the profit and loss statement. For gross margin, after significant enhancements over the past couple of years, we anticipate a shift to smaller incremental changes in the upcoming cycle. It's important to note that the first wave of G-III intake starts in 2025. While this won't have a significant profit impact in the long run, the transition from licensing revenue and gross margin to wholesale revenue and gross margin will present a gross margin percent headwind of about 50 basis points in 2025. Beyond this gross margin impact, we expect a stronger performance in the second half compared to the first half, driven by the momentum of our two global brand product kitchens. Regarding SG&A for next year, our target of improving by 20 to 30 basis points is still in progress. This will begin to reflect in the first half and become more pronounced in the second half of the year. Overall, while we are not providing complete guidance for 2025, we anticipate making strides toward our long-term PVH+ Plan target of 15% next year. I apologize for the oversight; we expect a 200 to 300 basis points improvement in operating expenses. Thank you for allowing me to clarify that point, which we have discussed previously.

Yes.

Thanks, guys, for taking our question here. Could you help us double-click on the fourth quarter gross margin guidance for a second, down 200 basis points, I think you said Zac. Can you help us maybe size some of the puts and takes and more importantly, help us isolate which ones are transitory roll-off as we look past the calendar a little here in the first half to try to connect to some of your longer-term comments there? And then, Stefan, I think bigger picture, you mentioned flywheel early in the in the call. Interesting to hear a flagship opening for Calvin Klein in SoHo. Moving your flywheel, we think about share gains or businesses outgrowing the category, gross margin drivers from new initiatives and then reinvesting at a high level. Could you help us think through where you are on the evolution of the brands as you look at important investments like a flagship in SoHo, what are some of the important investments that you think will put your brands on that flywheel next year?

Yes. Thank you, Michael. Maybe I'll start on that one. I think for gross margin, we had another strong 3Q, up 170 basis points, about half of that from DTC mix and our quality of sales work and about half from product cost improvements that we've now fully anniversaried some of those larger macro cost reductions at the end of third quarter. That was a little better-than-expected as our mix of North America wholesale shipments delivered higher gross margin percent, although that didn't really impact profitability. Now to 4Q specifically, gross margin percent is coming in lower than we had planned earlier this year, and as we've said earlier, down 200 basis points compared to last year. Three main drivers of that. The first, as we mentioned in the prepared remarks, we saw a more promotional holiday season here in the U.S. with the shorter period between Thanksgiving and Christmas, kicking off Black Friday started much earlier and we see that carrying through for the rest of the quarter. We see that impact as approximately 80 basis points of that. Second, we are forecasting some modest freight increases in 4Q as we're working through some temporary supply chain disruptions in a couple of our key locations and some lingering Red Sea impact. We see that as around 40 basis points approximately. And then lastly, as I just mentioned on 3Q, with our North America wholesale mix being higher from a gross margin, the timing effect of that rolls back out in 4Q. So we see that negative impact from gross margin of around 60 basis points, but again, no profit impact of that. So most of the 4Q impact that we're seeing here, it's predominantly transitory is how we would describe that. And so maybe then, Stefan, I'll turn it over to you.

Yes, absolutely. If we take a step back on gross margin and examine where we began with the PVH+ Plan and our current position, we have seen an improvement of nearly 300 basis points in gross margin. In 2024 alone, we managed to increase our gross margin by 120 basis points. Regarding the broader picture, we are very disciplined in maintaining the direction of the PVH+ Plan and systematically enhancing our execution power quarter by quarter. To address your question about the flywheel, it revolves around our incredibly iconic and globally cherished brands. We are focused on returning to the core essence of each brand, like Calvin Klein and Tommy Hilfiger, to ensure they remain relevant in everything we do. The flywheel begins with the product, which consumers see becoming stronger as we emphasize key categories, innovate with standout products, and introduce new elements. This leads to improved sell-through rates for Fall 2024, making it an exciting foundational step. The next foundational element involves increasing consumer engagement through impactful campaigns and fashion shows. For instance, Tommy Hilfiger has performed remarkably well, especially during New York Fashion Week, capturing half of the total earned media value and exceeding the closest competitor by two times. On a global scale during all fashion weeks, Tommy ranks second among luxury brands, illustrating the potential we are unlocking. We are building these foundations around product development, consumer engagement, and execution in the marketplace, including wholesale and store operations. Consumers are recognizing the brands they love as more current, which enhances their engagement and shopping frequency, ultimately fueling the flywheel. We are laying these foundational blocks to start activating the flywheel, further enhanced by building a data-driven supply chain that aligns inventory with demand, optimizing our assortment planning, purchasing, and allocation. We are investing in these areas while continuously improving efficiencies. It all starts and ends with the consumer flywheel, leveraging the existing love for our brands and driving relevance in all our efforts.

Thanks a lot, guys.

Thank you very much. Could you please elaborate a bit on inventory? I understand you brought some items in early and invested in your most essential products. Can you discuss how this has affected the fourth quarter and clarify what you mean by essential products? Also, being in stock 95% of the time, how does that benefit the business, and what prompted you to make those changes? Thank you.

Thank you, Jay. Inventory is crucial for us. As we start the holiday season, we are on track and have improved our inventory composition compared to last year. This means we have a greater proportion of new inventory and less of the old. We are continuously adjusting our inventory levels to optimize profitable sell-through. While we have more inventory than last year, it's less in absolute terms and relatively lower in relation to sales. As Zac mentioned, we are experiencing a double-digit decrease in inventory relating to sales this year compared to last year. Regarding our key products, like the Oxford shirt from Tommy, the Polo shirt, and our iconic Calvin Klein underwear, our goal is to maintain at least a 95% in-stock rate. During the year, we recognized the importance of keeping our iconic items at that level. Moving forward, as we continue to leverage data and a demand-driven supply chain, we will keep adjusting and optimizing. Overall, we have a better inventory composition and levels, positioning us well as we finish the holiday season and prepare for spring.

Got it. Thank you so much.

Thanks, Jay.

Hi, good morning. Just two questions. The first one is progress in North America. Can you just give us an update sort of where you are on that trajectory and how you see things materializing? And then just following the inventory question, can you just talk more about what the promotional activity in North America and just how you think inventories are at retail? Thanks.

Thank you, Bob. Let's begin with our performance in North America, where we have made significant improvements and strengthened the execution of Calvin and Tommy over the past two years. This quarter, we maintained good performance despite a challenging macroeconomic environment and consumer backdrop. This marks our fifth consecutive quarter of double-digit EBIT growth, and we are executing very well across both brands. You can see this in our direct-to-consumer channels with more full-price sales and reduced clearance. Even with traffic challenges, we have seen increased conversion rates and robust e-commerce growth. For the year, wholesale is up in the low single digits. Looking ahead to 2025, we anticipate continuing our strong execution. Consumer research indicates that our brands resonate well with North American consumers, so we are focused on enhancing our PVH+ strategy as we enter 2025. Regarding promotional pressure, the main change we observed during the holiday season is that it began earlier this year due to various calendar shifts. This led the entire industry to start promotions sooner, increasing promotional pressure. In relation to inventory and promotions, we are managing to have less inventory in relation to sales and are maintaining more fresh inventory, which gives us confidence.

Thank you.

Hey, good morning, everyone. A couple of questions from me, mainly on the licensing impact for next year. Just at a high level, maybe, Stefan, to start, just how has that transition been working? Has the foundation been fully laid out to begin? Taking those categories in, is there any more cost? Just kind of curious there at a high level. And then maybe this is for Zac. Two follow-ups. Can you give context for how much revenue from that business should hit next year and then what is left over to hit the P&L in '26? And I'm sorry, the last question is, when you mentioned modest growth for next year in constant currency, I'm just curious, is that organically and with licenses or is that really just a function of the licenses benefiting? Thank you.

Thank you, Ike. I want to explain our decision to bring our women's product back in-house in North America. This move is crucial for reinforcing our long-term strength and competitiveness in the market for both of our brands. As a reminder, we already manage women's products in all other global regions. Improving product execution, sourcing, distribution, and pricing is essential for succeeding with our consumers and partners to generate sustainable sales growth. This is our strategic reasoning behind the decision. Regarding our progress, we are on track with our preparations and are at the early stages of this multi-year process. Such a significant transition is always complex, which is why we planned it over several years, gradually reclaiming our North American women's business while collaborating with our partners to foster long-term sustainable growth. Also, our strong position in men's products for both Calvin and Tommy presents a significant opportunity in the women's segment, which we are actively pursuing for its long-term value.

Yes. Regarding your second question, we've indicated that around 20% of the women's wholesale licensing portfolio will return in 2025 as part of the first wave. We haven't disclosed specific financial figures yet, but we expect to have more information to share next quarter when we'll actually be selling in and have made more tangible progress. We intend to discuss that positively. For 2025, we are entirely focused on returning to organic growth. We recognize that the licensing transition will affect the profit and loss statement, and we will ensure to clarify that for everyone. As we look ahead to next year, our main goal is indeed to achieve a return to organic growth.

Thanks, guys.

All right. So thank you very much for being with us going through our Q3 performance. As we always end these calls is that we are on a multi-year journey to tap into the full potential of our incredible brands and we look forward to continuing the conversation in the new year. Wishing everybody a great holiday and speak soon.