PVH Corp.

Good day, everyone, and welcome to the PVH Second Quarter 2021 Earnings Call. Today's call is being recorded. At this time, I would like to turn the conference over to Dana Pearlman. Please go ahead, ma'am.

Thank you, operator. Good morning, everyone, and welcome to the PVH Corp Second Quarter 2021 Earnings Conference Call. This webcast and conference call is being recorded on behalf of PVH and consists of copyrighted materials. It may not be recorded, rebroadcast, or otherwise transmitted without PVH's written permission. Your participation in the question and answer session constitutes your consent to having anything you say appear in any transcript or replay of this call. The information to be discussed includes forward-looking statements that reflect PVH's view as of August 31, 2021, of future events and financial performance. These statements are subject to risks and uncertainties indicated in the company's SEC filings, and the safe harbor statement included in the press release that is the subject of this call. These risks and uncertainties include PBH's right to change its strategies, objectives, expectations, and intentions, and its need to use significant cash flow to service its debt obligations. Significantly, at this time, the COVID-19 pandemic continues to have a significant impact on the company's business, financial condition, cash flow, and results of operations. There is significant uncertainty about the duration and extent of the impact of the pandemic. The dynamic nature of these circumstances means what is said on this call could change materially at any time. Therefore, the operation of the company's business and its future results of operations could differ materially from historical practices and results or current descriptions, estimates, and suggestions. PBH does not undertake any obligation to update publicly any forward-looking statement, including without limitation any estimates or suggestions regarding revenue or earnings. Generally, the financial information and projections to be discussed will be on a non-GAAP basis, as defined under SEC rules. Reconciliations to GAAP amounts are included in PBH's second quarter 2021 earnings release, which can be found on www.pbh.com and in the company's current report on Form 8K furnished to the SEC in connection with the release. At this time, I'm pleased to turn the conference over to Mr. Stephan Larson, CEO of PBH.

Good morning and thank you for joining. With me on the call today are Mike Schaefer, COO and CFO, Dana Perlman, EVP, Chief Strategy Officer and Treasurer, and Jim Holmes, our Corporate Controller, who we announced will be Interim CFO effective September 10th. Let me start by sharing that we delivered a very strong second quarter performance. and significantly outperformed our plans from a revenue, EBIT margin, and EPS perspective, all despite the ongoing challenges from COVID. We're also taking up our guidance for the year. I would like to thank our associates around the world for their hard work and critical contributions to the great second quarter and very strong first half of the year. Our results in the quarter included strong double-digit revenue growth against last year, which was relatively in line with pre-pandemic levels. And this was led by our international business, specifically Europe. Our performance was underpinned by meaningful gross margin expansion and operating expense efficiencies, which drove significant EBIT margin expansion of several hundred basis points compared to 2019. For several quarters now, we have shown great progress in driving an accelerated recovery through the disciplined execution against our strategic priorities. These include increasing our focus on our two iconic global power brands, Calvin Klein and Tommy Hilfiger, building on the strength in international, delivering on product strength, pricing power and gross margin expansion, while winning in the marketplace through supercharged e-commerce growth and at the same time driving operating efficiencies. Looking ahead, our strong performance in the quarter combined with the strength of the underlying growth drivers in our business has led us to increase our top and bottom line full year guidance. Our EBIT margin guidance now assumes a return to a margin similar to our 2019 levels. We are confident in our ability to continue to drive an accelerated recovery, while also prudently planning our business for the remainder of the year, as we navigate pandemic-related uncertainties, including market and supply chain disruptions. I will now share some of the key proof points on how we are executing our accelerated recovery priorities. Mike will then share more of the financial details. We have continued to supercharge e-commerce with digital revenue growing approximately 35% in the quarter. A strong result, particularly when compared to our outside growth last year when stores were closed or under restrictions, which are now open. Importantly, our digital penetration remained consistent at 25%, which is double pre-pandemic levels. We continue to ramp up investment in digital, while at the same time, growth in our brick and mortar retail stores is accelerating, demonstrating our increasing strength in connecting with the consumer across channels. Next, we are driving product strength across our brands and regions. The trends we saw last quarter have continued, with consumers excited to come out of COVID restrictions, and adopting a hybrid lifestyle towards an increasing mix of wearing locations. This is still very much grounded in a casual lifestyle that fits both Calvin and Tommy really well. In the quarter, we saw continued strength in key essential product categories like underwear, T-shirts, polos, hoodies, active, sneakers, and a rising demand for denim and categories like dresses. We continue to lean into the strength of our key essentials and hero products, which represent the must-have product silhouettes in key product categories. Through this work, we saw an improvement in AURs during the quarter, including double-digit increases in some of our biggest investments. We also continue to cut more unproductive SKUs, including a 20% cut on average for fall 2021. Through this work, and by taking a more data and demand-driven approach, we are driving revenue growth with AUR increases and gross margin expansion. Overall, our inventory levels across the board are in very good shape, down 13% versus last year. And as we further improve the way we plan and buy our inventory, we will be able to read and react more quickly to demand. In addition, we continue to invest in our key strategic focus areas. And at the same time, we continue to drive efficiencies across our business as part of our work to operate with more speed, more agility to better follow the consumer in this dynamic environment. Lastly, we successfully sold our heritage brands as planned. This has already enabled an increased focus on Calvin and Tommy. which are higher return businesses with global growth potential. So turning to our regional update, while each of our regions is in varying stages of recovery, we drove performance significantly above plan for both revenue and profitability. Let me start with Europe this time. Our European team delivered another quarter of exceptional performance through very strong execution of our accelerated recovery priorities. Both Tommy and Calvin performed significantly above plan, including double-digit growth versus pre-pandemic levels. The strength in our Europe business is a very good example of the kind of performance we're able to drive when we execute really well. And it offers a proof point and a blueprint for what's possible in our other regions as well. Across both brands, we are winning with the consumer, driving brand relevance through leaning into the strength of our hero products, and we continue to supercharge our digital and our omni-channel capabilities. Building on our success in the first quarter, as lockdowns were lifted, we saw great demand for our products. both in our own channels as well as in wholesale. We deliver strong revenue trends supported by significant margin expansion, which included gross margins above 2019 levels driven by pricing power, lower promotions and higher retail productivity. We also continued to drive operating expense efficiency. We generated strong digital sales growth of 45%, even against a backdrop of stores reopening. Driven by our expanded business with digital pure players, Europe represents our highest e-commerce penetration, well above the company's overall rate of 25%. In our D2C channel, we continue to accelerate our omni-channel capabilities by investing in connected retail technologies. Paired with the e-commerce performance, we generated very strong retail store sales, with traffic levels sequentially improving versus 2019 as stores reopened. Highlighting the strength of our product in the marketplace, we drove higher conversion, stronger full-price filters, and higher AURs. In addition, the strong consumer demand drove significant core replenishment. And as spring and summer products sold through much faster than expected, we transitioned earlier to pre-fall collections. Demand in our future order books across both brands continue to be very strong, with spring 2022 planned up double digits, following double-digit growth for fall holiday 2021. Moving on to Asia, our Asia team continues to execute really well. Although COVID resurgences across the region in markets such as Japan, Korea, and most recently Australia are making it difficult to see the real underlying strength on how we are improving our execution in the markets. Overall, revenues were relatively in line with pre-pandemic levels and our plans led by China. Despite the current COVID-related challenges, what excites me the most is the strength we are seeing against our strategic focus areas as we continue to drive increased product strength, pricing power, inventory efficiencies from better inventory management, and higher gross margins, all driven by the same hero product focus. China remains a significant growth opportunity for both Tommy and Calvin. As we continue to invest in the market, we are driving brand heat and relevance through our integrated marketing and capsules around key shopping moments, including 6.18 this quarter, and most recently, Chinese Valentine's Day. We are creating unique content and activations to win with the consumer in these key moments. We have also leaned into our most successful hero products, which are delivering strong KPIs, including higher conversion, higher sell-throughs, and higher AURs, and continue to drive comparable store sales increases in retail stores. And as with supercharged e-commerce, we are leveraging data analytics and utilizing new tools and channels to drive performance. We are focused on developing new creative ways to engage with consumers. including expanding our work with WeChat. Lastly, inventory levels continue to be very lean as we continue to focus on buying closer to demand. Overall, while we're still navigating COVID challenges like others in the region, we remain confident about the long-term strength and growth opportunities for both of our core brands. Turning to North America, The region is still under the most pressure, with the lack of tourism remaining our biggest challenge. Tourism continues to trend down significantly versus 2019 levels, which in the normal year made up 30 to 40% of our total business in the region. Our North American teams are leaning into what's within our control, focusing on the domestic consumer, supercharging e-commerce, and driving product strength with AUR and margin improvements. And I'm pleased that we saw a number of green shoes during the quarter. Importantly, we drove sequential improvements in top and bottom line performance across brands and channels. Some of the proof points of our progress this past quarter include, we drove double digit growth in our digital business, led by a combination of continuously improving our own and operated e-commerce sites, and strong partnerships with our key wholesale partners, including Pure Players. In stores, with the domestic consumer, we saw improved traffic with higher AURs. We're also better optimizing inventory across our channels and improving our ability to react to demand changes. For example, in Canada, where the country's reopening has been slower than other markets, we proactively redirected inventory to the U.S. Overall, in North America, we have a lot of work still to do, and we are focused on building the business for long-term growth. This work is focused on the same key value drivers that enable our international businesses to perform so strongly, to continuously drive brand relevance through product strength, pricing power, and winning across channels digitally-led. Next, I'll share a few brief global brand highlights, beginning with Calvin Klein. Global brand health remains very strong, with consistent high levels of global awareness. Our Pride campaign this year was successful in further building brand awareness. The campaign celebrated defining moments, connecting to global LGBTQIA plus communities with a diverse international cast. It resulted in global reach that was up over 30% on last year. It drove a 300% increase in traffic to our site and delivered strong product sell-through and driven by hero underwear products with limited edition pride colorways. In the spring, we launched the brand's first designer collaboration with Huron Preston, which has been very well received by the consumer. This quarter, we will release a second chapter of this collaboration across denim, underwear, and other wardrobe essentials. Looking ahead, we will continue to build out our collaboration strategy. connecting the iconic strength of Calvin Klein with creators and brands from around the world to express their unique perspective of the brand. This includes the second installment of our underwear collaboration with Premium Retailer Kit, which taps into the power of Calvin with a Gen Z audience. Moving on to Tommy Hilfiger. Global brand health KPIs for Tommy also remain very strong. The expansion of our purpose-oriented product offer continues to resonate with consumers, with more than 50% of the global summer pre-fall collection being sustainable. As we focus on Tommy Jean's growth potential with younger consumers, we continue to drive brand heat through successful capsules. From our Blast from the Past capsule inspired by pop culture cartoon icons to our Pastels capsule, which drove very strong engagement and sell-throughs. The brand also launched collaborations that amplified our efforts to increase opportunities and visibility for underrepresented communities within the fashion and apparel industries. In July, we launched the first collaboration with a non-gendered capsule featuring India Moore. The brand also launched a capsule with emerging Brooklyn designer Romeo Hunt, following his mentorship with Mr. Hilfiger. The capsule reimagines iconic Tommy pieces with a focus on outerwear and is available on tommy.com as well as through an exclusive partnership with Selfridges. These collaborations have increased traffic to our sites in the US and Europe with more than 40% driven by new consumers and with significantly higher average retail prices. In closing, I feel very good about how we came together and drove yet another strong quarter of accelerated recovery. Our increased focus on winning with the consumer through our two global power brands, Calvin Klein and Tommy Hilfiger, is driving results. We're still early days in building our next growth chapter, and I continue to be very optimistic for the future as we lean further into our accelerated recovery priorities. leveraging our core strength and continuously following the consumer to position PVH for sustainable long-term profitable growth. And before I hand it over to Mike, since this is Mike's last earnings call, I would like to thank him again for his contributions of nearly 30 years to PVH. We are grateful for his guidance and leadership over the years. I'm also pleased to introduce Jim Holmes, as our interim CFO. Jim has been with PVH for over 20 years and has played a critical role on our finance team, working very closely with Mike to build our strong financial foundation. So with that, I would like to hand it over to Mike.