PVH Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
March 28, 2023

Key Takeaways

  • 4Q 2022 Results: Underlying revenue grew +9% driven by D2C strength and performance from both Tommy Hilfiger and Calvin Klein, beating top- and bottom-line expectations.
  • 2023 Guidance: PVH projects full-year revenue growth of 3–4% (2–3% cc), operating margin expansion to ~10% and ~11% EPS growth to ~$10.
  • Supply Chain Execution: On-time deliveries improved from 60% to 95%, enabling better availability, cost efficiencies and SKU rationalization to boost productivity.
  • North America Rebound: Domestic consumer comps are mid-single-digit above 2019 and D2C comps are high-single-digit, although wholesale partners remain cautious amid macro uncertainty.
  • Margin Headwinds: Elevated product costs, higher ocean freight and increased promotions pushed inventory up 34% and pressured Q4 gross margin by ~240 bps vs. prior year.
AI Generated. May Contain Errors.
Earnings Conference Call
PVH Q4 2023
00:00 / 00:00

There are 9 speakers on the call.

Operator

Good morning, everyone, and welcome to today's PVH's 4th Quarter and Full Year 2022 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, you will have an opportunity to ask questions during the question and answer session. Please note that this call may be recorded It is now my pleasure to turn today's program over to Cheryl Freeman, Senior Vice President of Investor Relations.

Speaker 1

Thank you, operator. Good morning, everyone, and welcome to the PVH Corp. Leading the call today will be Stefan Larson, Chief Executive Officer and Zach 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.

Speaker 1

Your participation constitutes your consent to having anything you say The information to be discussed includes forward looking statements that reflect PBH's view as of March 28, 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 statements 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 planned cost efficiency action announced in its 2nd quarter earnings release and its 2021 sale of Assata and exit from its heritage brands business to focus on the Calvin Klein and Tommy Hilfiger businesses. Significantly, the COVID-nineteen pandemic, global inflationary pressures and the war in Ukraine continue to have As a result, what is said on this call could change materially at any time. Therefore, the operation of the company's business and its future results which can be found on www.pvh.com and in the company's current report on Form 8 ks furnished to the SEC in connection with the release.

Speaker 1

At this time, I'm pleased to turn the conference over to Stephan Larson.

Speaker 2

Thank you, Cheryl, and good morning, everyone, and thank you for joining our call today. We are pleased to report that we drove strong 4th quarter financial performance, ahead of expectations For both the top and bottom line, led by strength in our direct to consumer businesses, revenue exceeded our expectations on both And constant currency basis, an underlying growth excluding the impact of currency and the Russia Ukraine exit was plus 9% in the 4th quarter, driven by better than expected results for both Tommy Hilfiger and Calvin Klein. We are coming into 2023 with strong momentum and expect to continue to grow our top line, led by outsized D2C growth, while planning to deliver EBIT margin expansion and double digit EPS growth. The growth in 2022 was driven by strong consumer response to our product, marketing and marketplace execution across both brands and across all regions. We showed that we were able to compete to win in what proved to be a much more challenging macro environment than any of us expected going into the year.

Speaker 2

And I would like to highlight some of the proactive choices we made to make that happen. Last April, we shared our long term vision And digitally led growth plan that will over time build Calvin Klein and Tommy Hilfiger into the most desirable lifestyle brands in the world and in parallel making PVH one of the highest performing brand groups in our sector. The clarity of our direction and plan have provided a very strong focus for everyone in the company. We know where we are going. We know how we will get there and we made great progress in the 1st year of execution.

Speaker 2

This stronger execution focus is gaining traction across the company and we will continue into this year. In 2022, both Calvin and Tommy delivered increased strength in product with hero products across key categories and in our consumer engagement with cut through campaigns, collaborations and world class talent partnerships. This strength in product and consumer engagement is a big reason we drove high quality plus 9 percent underlying revenue growth with increased pricing power. For 2022 from a regional perspective, Europe continued to grow from strength in a challenging environment and delivered a very strong plus 10% growth in euros when adjusting for the Russia exit. In Asia, we are setting out to accelerate our growth.

Speaker 2

We were able to drive outstanding performance in the That were not in COVID lockdown, driving plus 11% constant currency growth for the total region And plus 23% constant currency growth outside of China. And in North America, we were able to Start to win more with our domestic consumer, driving plus 9% growth for Tommy and Calvin together in a brand accretive way, recognizing that this is the beginning of a multiyear unlock. From a supply chain perspective, We successfully navigated through the COVID related challenges. Over the year, we increased our on time deliveries from 60% to 95%, which have and will continue to deliver positive impact on both availability and cost. We are creating a strong data driven sourcing approach that will return not only efficiencies and cost opportunities, but also enable us to invest back into great products.

Speaker 2

In addition, we are optimizing our SKU breadth to create higher productivity by cutting the unproductive assortment tail. We also came into the year knowing that The underlying driver of the PVH Plus plan is to become more cost competitive in a way that simplifies how we work, increase our speed and decision making and empowers our team to execute and enables us to drive new growth by making strategic investment in areas such as marketing, supply chain and technology. I'm pleased to share that we made significant progress here during the year. Perhaps the most important improvement we have made this past year was to continue to strengthen our management team with the capabilities needed to translate our PVH plus plan to impact. From my experience, The strength of the leadership team is the single most important factor in successfully translating a value creating plan into action and impact.

Speaker 2

I'm proud to share that we made significant progress in this critical area. Zach Kuglin joined as our CFO David Saadman as our Chief Supply Chain Officer and Sarah Bland as our Chief Strategy Officer. All three bring highly relevant experience and we are already seeing the positive impact from their leadership. And then as of this month, Eva Serrano joined as Calvin Klein Global President, having spent 20 years as one of the Key leaders behind the growth of Sara and Inditex. And Donald Koehler joined as Calvin Klein, America's President, Having spent a big part of his career on the team that turned around Burberry, both from global roles and as Head of North America for them.

Speaker 2

With these appointments complementing our strong existing leadership team, we have the capabilities, experiences and the competitive mindset needed to deliver on our long term PVH plus growth commitments. Finally, I spend a big part of my time in 2022 traveling to experience our markets and stores from the consumer's perspective, And I continue to be impressed by our people and teams around the world. I want to thank all of our for their hard work during 2022 and give a special recognition to our store managers. Their incredible work ethic, Expertise and their passion to every day go out there and win with the consumer is an inspiration to all of us. Now turning to our regional performance and how we are connecting our brands and executing the PVH plus plan across each region.

Speaker 2

Starting with Europe. Our Europe team continued to drive very strong performance, Reflecting the power our brands have with consumers in the region, despite macro headwinds, we really leaned into the business and finished The year is strong. We delivered double digit year over year growth for the 4th quarter and had another record quarter Exceeding EUR1 1,000,000,000 in revenue. For the year, Europe also delivered double digit underlying revenue growth, adjusted for FX and our Russia exit, including growth in every quarter of 2022. Growth in the 4th quarter was led by our retail stores, which generated very strong performance during the holiday selling period.

Speaker 2

We also saw strong early wholesale shipments So, spring 2023 collections, which have been very well received by our partners. Growth was enabled by better product availability, Increased operational efficiencies and faster product deliveries. Our Tommy product strategy continues to be driven by product elevation, Winning assortments and product stories true to the Tommy DNA, all with a focus on reaching the aspirational consumer. This was supported by our hero product strategy, which was a strong enabler of growth in 2022. And in 2023, we are further increasing our category offense and with that amplifying our iconic products.

Speaker 2

For Calvin, we continue to leverage our proven playbook from Tommy to further build out Calvin as a lifestyle brand across product categories. We see strong growth momentum in footwear, accessories, Nexstar established Calvin Klein underwear and jeans businesses. We have seen favorable demand from consumers for our spring collection with unplanned early sell through at wholesale. Looking ahead, adjusting for Russia and improved delivery performance compared to last year's supply chain disruptions, Our shipped order book for fall is expected to be up low single digits. While our wholesale partners are taking a conservative approach Given the potential for macroeconomic volatility, we are well positioned to capitalize should stronger demand continue through our best in class operating model and strong Never Out of Stock program.

Speaker 2

Moving on to Asia Pacific. Our Asia team continued to deliver solid growth in constant currency in the Q4 outside of Greater China. In Greater China, we generated stronger than expected 11.11 performance, which was offset by the widespread COVID impact. For the year, the region generated strong double digit constant currency growth and both Kevin and Tommy continued to increase their brand awareness. Our focus on key growth categories and hero products And ongoing efforts to refine the product assortment through regionally relevant products with SKU rationalization are driving results.

Speaker 2

In the Q4, our hero products outperformed with higher AURs and lower discounts. We continue to lean in and win key consumer moments such as Lunar New Year by driving engagement and performance above plan, fueled by successful product capsule launches and consumer activations. Both brands continue to move up The rankings on Tmall, underscoring the strength of our brands and product in the market and how well they're resonating with consumers. For the holiday, we launched the Tommy Miffy capsule collection, which featured the iconic cartoon character Miffy. The omni channel campaign and capsule launch was brought to life across retail, social media, influencer collaborations and e commerce partnerships, fueling strong brand heat.

Speaker 2

Calvin also launched the dedicated capsule and consumers As we look toward 2023, we are working to further expand the region's digital capabilities Such as Douyin live streaming and collaborations with the Tmall Innovation Center, which leverages big data and consumer insights to offer customized styles. We're also laying the foundation for new and enhanced capabilities in our supply chain through Asia for Asia sourcing as well as improving our demand planning to focus increasingly on core replenishment and a read and react model to enable shorter lead times with higher in season buying. Looking ahead, our brands have a clear premium brand and product positioning with opportunity to grow further in all markets. We Lastly, shifting gears to our business in North America. Step by step, We are getting early traction in growing the business in a brand accretive way, underpinned by a clear category and product focus to deliver sustainable profitable growth with an increased focus on the domestic consumer.

Speaker 2

Our Tommy and Calvin businesses delivered mid single digit growth in the 4th quarter, led by our D2C stores. We delivered strong performance despite a very promotional holiday period given elevated inventory levels across the market. For the year, our Tommy and Calvin businesses increased high single digits. Our D2C stores Delivered high single digit positive comps in the 4th quarter, driven by improved product assortments and in stock levels. Most importantly, we continue to drive improved domestic consumer comps.

Speaker 2

Our assortment and product improvements continue to yield Results. For Tommy, our global bestseller initiative, which focuses on combining global winning design, scaled quickly to 70% of our D2C business. This initiative is generating higher AURs, Stronger sell throughs and higher gross margins compared to the balance of the assortment. One great example that we shared with you last quarter pertain to our Expanding Polo Business. Building on the prior quarter success in this key category, in the Q4, our 3 biggest Polo product We also saw significant progress With on time deliveries in the region, with over 90% of our spring season on time, compared to a year ago where we were just 32% on time at the start of the year.

Speaker 2

This improvement is a direct result of our improved supply chain leadership. Looking ahead to 2023, we are focused on applying our learnings from 2022 and further scale our growth initiatives in North America. We are doubling down on the performance drivers in our D2C stores Through rigorous assortment billing and editing, even better match to demand with a focus on in stock improvements in key categories. For Tommy, we're expanding the Tommy global bestseller initiative to the wholesale channel. And for Calvin, we're building market share in CK Underwear by improving replenishment execution and in stock levels across all channels, coupled with our impactful marketing execution.

Speaker 2

At the same time, we're making investments in store upgrades to ensure our stores deliver an elevated consumer experience. Next, I'll share a few global brand highlights and how we are bringing both brands to life for the consumer, beginning with Calvin Klein. Jonathan Bottomley, our Global Calvin Klein CMO and our Calvin marketing team have done a fantastic job and going back to the iconic DNA of Calvin Klein and made it highly relevant to today. During the past Few months, we have been able to see this work come to life under the campaign umbrella of Calvin's or Nothing. In January, the campaign launched with global tennis star Carlos Alcaraz in our signature cotton underwear styles wearing our classic straight jeans and it drove strong results.

Speaker 2

More recently, the spring chapter of the campaign was launched globally, starring ambassadors and friends of the brand, including Michael B. Jordan, Jenny Kim, Kendall Jenner, FKA Twigs and Aaron Taylor Johnson. Dressed in the latest underwear and jeans, the full cast The campaign launched with Michael B. Jordan timed to the release of his highly anticipated film Creed III. The campaign images quickly went viral across Social media and generated very high engagement.

Speaker 2

The collab post to date with a total reach of $8,000,000 on own social. We saw incredibly strong organic broadcast and digital coverage across entertainment, pop culture and fashion outlets, including on Jimmy Kimmel Live For a total reach of $1,300,000,000 in the 24 hours after launch. And the campaign pickup didn't stop there. The brand's collab post with Kendall Jenner is now the highest reaching post of the year with $13,400,000 in reach. Again, a testament to the power of the right imagery and the right talent to cut through.

Speaker 2

Also launching this week, Jungkook, a member of the extremely popular South Korean boy band BTS, We've joined the brand as global ambassador for Calvin Klein Jeans and Calvin Klein Underwear. Moving on to Tommy Hilfiger. Tommy, with his unique classic American cool DNA, continue to drive strong brand visibility and relevance among our target consumers. The brand generated Approximately 4,000,000,000 impressions from November to January. Tapping into a moment of strong consumer relevance, The brand's Miffy collaboration, which I just spoke to, although developed for the Lunar New Year celebrations, Was leveraged globally and it was one of our strongest performing capsules.

Speaker 2

Looking ahead, our Tommy Spring campaign, Classics With Shawn Mendes, recently launched globally. And as part of that, Tommy and Shawn just hosted a tour of immersive events In London, Berlin, Milan and Mexico City, selected flagship stores held in store activations. Sustainability stands at the heart of this collaboration with the collection incorporating a broad range of recycled and other sustainable materials. The Tommy Jeans label is also fostering new consumer connections through the upcoming Tommy Aris collaboration, which features a bold and creative play on all things Tommy Jeans. The collection is inspired by archival Tommy pieces and will in the coming days be available for early access online in our own stores and in key 3 to 8 retailers globally.

Speaker 2

For both brands, we are looking forward to an exciting 2023. It will be a year to take another big step forward in delivering on our PVH plus commitments towards our long term vision of building Tommy and Calvin into the most desirable lifestyle brands in the world, all while becoming one of the highest performing brand groups in our sector. I recognize the macroeconomic environment will likely continue to be tough. So we will be relentless in Executing our 5 PVH plus growth drivers across both brands and all regions. In winning with products, we will advance our category offense and create the best hero products in the market.

Speaker 2

In winning with consumer engagement, we will deliver seasonal cut through campaigns charged by an increasingly strong network of aspirational talent. You will also see us improve the aspirational presence of all consumer touch points, ranging from social media, e commerce We're also investing more into marketing as a share of sales to make sure we continue to cut through with our initiatives. In winning in the digital marketplace, we will continue to drive D2C offense across both e commerce and stores With improved productivity, all while we strengthened our partnership and business with our key wholesale partners and increasing our full price penetration. We are continuing to drive e commerce strength both owned and operated and with key partners. We are only in the beginning of developing our demand driven supply chain.

Speaker 2

And this year, we will make progress in cost of goods, Delivery accuracy and leveraging our scale across both brands, all while we take big steps to become cost competitive, Going after efficiencies while investing behind our growth drivers. I look forward to building on the strong Momentum we started in 2022 to win in 2023 beyond. We are starting to get real traction around the vision, The plan, the execution and most importantly, the team and the mindset needed to get it done. Over time, there is enormous power in the compounded effect on being consistent in direction and value creating focus through the PVH Plus plan. I'll now turn the call over to Sak to discuss the financials in more detail.

Speaker 3

Thanks, Stefan, and good morning. My comments are based on non GAAP results and are reconciled in our press release. As Stephane discussed, we are extremely pleased with our results for the Q4 and the full year, which significantly exceeded both our top and bottom line guidance, driven by strength in our European business and continued cost discipline globally. 2022 was a year of unprecedented macroeconomic volatility In this tough environment, we fought hard to win by focusing on what is within our control. Our ability to drive underlying revenue growth of 9% for 2022 And earnings per share of $8.97 in line with our initial expectations at the start of the year of approximately $9 per share is a testament to our disciplined execution of our strategic priorities and the power of our 2 global brands Calvin Klein and Tommy Hilfiger.

Speaker 3

We are encouraged by the positive momentum we drove in the 4th quarter and are confident that we can deliver solid top line growth in 2023 while driving increasingly improved profitability. I will now discuss our 2022 results in more detail and then we'll move on to our outlook for 2023. Our strong 4th quarter results delivered underlying revenue growth of 9% versus last year, Exceeding our top line guidance by 4% on a constant currency basis and we delivered earnings per share of $2.38 Significantly exceeding our earnings guidance by $0.73 Our underlying revenue growth was driven by both our Tommy Hilfiger and Calvin Klein brands. We delivered strong revenue growth in Europe and continued growth in North America driven by the direct to consumer business. We continue to experience negative impacts in China from the COVID pandemic, but the rest of Asia Pacific continue to drive growth in constant currency.

Speaker 3

On a reported basis, 4th quarter revenue was up 2%, which reflected a 6% negative impact from exchange and a 1% negative impact from the war in Ukraine. We continue to focus on driving performance in our direct to consumer business where we have the closest connection to our consumer and DTC was up double digits on an underlying basis, driven by strong High single digit growth in North America and mid teens growth in Europe in euros. On a reported basis, DTC revenue was up 4% compared to last year, which reflected a 6% negative impact from exchange and a 1% negative impact from the war in Ukraine. From a regional perspective, 4th quarter revenue for our international business was up 11% versus last year on a constant currency basis, continuing to significantly exceed 2019 pre pandemic levels. Within our international business, our European business had another record quarter following the first €1,000,000,000 quarter in the company's history in the 3rd quarter.

Speaker 3

Our Asia Pacific business was down 8% on a reported basis including a 9 Negative impact of exchange. 4th quarter results in Asia Pacific were severely impacted as COVID cases in China rose following restrictions there, but saw improvement at the end of the quarter and into the Q1 of 2023. In North America, revenue in the 4th quarter was up 5% overall for Tommy Hilfiger and Calvin Klein with our retail store business High single digits versus last year as we drove sequential improvement versus the Q3 in sales to domestic consumers. Our domestic comp sales are now up mid single digits compared to 2019 levels. Our global brands also continued strong underlying growth Balance across both brands, Lutami Hofiger revenues up 10% on a constant currency basis and Calvin Klein revenues up 8% On a constant currency basis, reported revenues were up 3% for both Tommy Hilfiger and Calvin Klein.

Speaker 3

In the Q4, we delivered gross margin of 55.9 percent, up approximately 190 basis points compared to pre pandemic levels, but down approximately 2.40 basis points compared to last year. Gross margin reflected favorable region and channel mix compared to last year as well as planned price increases. Those benefits were more than offset by higher product costs, elevated ocean freight rates and increased promotional selling compared to last year as inventory levels are elevated across the industry. Later, I will discuss how some of these headwinds transition into Tailwinds for 2023. SG and A expense as a percentage of revenue for the Q4 was 47.2%, down nearly 400 basis points from last year and better across all dimensions of the business.

Speaker 3

We continue to take a disciplined approach to managing expenses, driving cost efficiencies while making targeted investments in strategic areas to fuel growth in line with the 5th growth driver of the In total, EBIT for the quarter was $215,000,000 exceeding our expectations due to strong revenue performance and lower expenses. Operating margin was 8.6% as reported and 9% excluding the negative impact of approximately 40 basis points due to exchange. Earnings per share was $2.38 compared to $2.84 in last year's Q4 and exceeded our guidance by $0.73 almost entirely driven by the improvement in EBIT. Earnings per share for the quarter also included a $0.23 negative impact compared to the prior year related to exchange and a $0.13 negative impact due to the war in Ukraine. Excluding these two external Earnings per share was almost flat to prior year.

Speaker 3

Our tax rate was approximately 22%. As a reminder, In last year's Q4, we benefited from non cash tax rate relief tied to our purchase of the Calvin Klein brand back in 2003. This benefit ran out in 2021. As a result, our tax rate in the Q4 of last year was a benefit of approximately 33%. Inventory was up 34% at the end of the quarter compared to the prior year period due to a combination of factors.

Speaker 3

As we've discussed, inventory levels were abnormally low in 2021 due to supply chain and logistics disruptions, which intensified in the second half of twenty twenty one. We have seen steady progress over the course of 2022 towards pre pandemic production capacity and significantly improved delivery times. And in the Q4 this year, we experienced much earlier receipts of inventory but also contributed to the higher ending inventory levels. Absent the elevation due to timing of receipts, we have normalized back to inventory levels that support our planned growth. We also felt the full impact this quarter of higher product costs compared to last year.

Speaker 3

Looking into 2023, we expect cost to improve as we move through the year, particularly in the second half. We ended the full year 2022 with revenue of $9,000,000,000 and underlying revenue growth of high single digits aligned to our long term financial algorithm and driven by growth in all regions and in both our Tommy Hilfiger and Calvin Klein brands. Our full year reported revenue was down 1% versus prior year and reflected a negative impact of 7% from exchange and 3% from the exit of Heritage Brands and the war in Ukraine. Operating margin was 9.5% And our tax rate for the year was 23.3%. Overall, we delivered earnings per share of $8.97 delivering our initial start of year guidance of approximately $9 per share.

Speaker 3

Additionally, we delivered on our commitment under the PVH Plus plan to return excess cash to shareholders, returning over $400,000,000 to shareholders during the year through the repurchase of 6,200,000 PVH shares and our dividend, including approximately $73,000,000 for the repurchase of 1,100,000 shares in the 4th quarter. Moving on to our outlook. In 2023, we expect to continue to execute our strategic priorities to unlock the full potential of our 2 global brands, Tommy Hilfiger and Calvin Klein, and as a result, drive strong financial performance across all regions. We ended 2022 strongly and are entering 2023 with momentum behind the PVH plus plan. With that said, We acknowledge that macroeconomic uncertainties still exist with consumer sentiment tempered by inflationary concerns, particularly in North America and to a lesser extent Europe and retailers planning cautiously due to elevated inventory levels industry wide.

Speaker 3

As such, we've approached our plans for 2023 with a healthy balance of optimism and prudence. We are projecting revenue growth in all regions with operating margin expanding to approximately 10% and earnings growing 11% to approximately For the full year, our overall revenue is projected to grow approximately 3% to 4% as reported and approximately 2% to 3% on a Europe and North America are planned to grow low single digits with strong growth in our direct to consumer channel tempered by wholesale as retailers remain cautious on buys. And Asia Pacific plan to grow by low double digits as China has eased COVID restrictions. We 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, which we have previously discussed. The improvement in our gross margin is supported by a favorable shift in channel and regional mix compared to 2022 As we accelerate growth in our higher margin DTC business in line with our PVH plus strategies and our DTC and international Businesses make up a larger portion of total revenue.

Speaker 3

Additionally, we are seeing ocean freight rates coming down rapidly. We are using significantly less airfreight and abnormally high raw material costs will ease as we move through 2023, particularly in the second half of the year. SG and A expense as a percentage of revenue for the full year is expected to increase approximately 70 basis points compared to 2022. We continue to drive cost efficiencies across the business while targeting our investment focus on key areas that drive growth, especially marketing. We expect to generate increasing savings as we move through the year related to our plan to reduce people cost in our global offices by 10% by the end of 2023, but these benefits are more than offset by the impact of regional and channel mix, which are the favorable to our gross margin carry higher expenses.

Speaker 3

We expect our full year operating margin will increase to approximately 10% reflecting high single digit EBIT growth. Interest expense is projected to be approximately $100,000,000 and our tax rate for the year is estimated at approximately 24%. For the full year 2023, we are projecting earnings per share to be approximately dollars up 11% versus 2022. Looking at the balance sheet, we expect to build cash With a significant increase in cash from operations, reflecting an improvement in working capital due to lower inventories compared to 2022 as receipt flow normalizes. We are projecting capital spending of $350,000,000 which is approximately 4% of sales As we invest in our stores, supply chain and technology and in line with our PVH plus plan priorities.

Speaker 3

We are also currently planning at least $200,000,000 of share repurchases and we'll continue to review opportunities capital deployment as we move through 2023. To 0 in on the Q1 specifically, we to continue to be challenged by residual inflationary pressures and lingering macroeconomic uncertainties. Our overall revenue is projected to be relatively flat as and to increase by approximately 3% on a constant currency basis compared to the prior year. 1st quarter earnings per share are projected to be approximately 1 Our ability to win in a tough environment as evidenced by our performance in 2022. And while we expect the macro environment will continue to be volatile in We are continuing to focus on executing our strategies to drive top line growth, improve profitability and Strong double digit EPS growth in 2023.

Speaker 3

And with that operator, we would like to open it up to questions.

Operator

Our first question will come from Bob Drbul with Guggenheim. Your line is open.

Speaker 4

Hi, good morning. Couple of questions that I have actually. On the first one, can you just talk about what surprised you the most in the 4th quarter? And I mean the results were just well ahead what we expected. And then the second piece of it is, when you think about the PVH Plus Glenn, what elements do you think you got the most traction on that give you the confidence that you portrayed for FY 2023?

Speaker 4

Thanks.

Speaker 2

Well, thank you and good morning, Bob. Let me so first of all, from the surprises in Q4, I would say what It's the lack of surprises because we set out the PVH Plus plan almost a year ago. And we started leaning into our iconic brands and said those are absolutely unique. Perhaps there are A handful of those brands globally, and we have 2 of them, Carbon and Tommy. And the PVH plus plan is about Leaning into each of these iconic brands' main product categories, and we were able Get traction on that.

Speaker 2

There are lead times. So we set out to do that a year ago. And what you can see in the Q4 was that we were starting to get traction. So starting to get early traction on the product category focus, starting to get traction in Q4 on Developing some of the best hero products in the market, the most important products in the consumer's wardrobe. And then we were able to Really deliver cut through campaigns with world class talent.

Speaker 2

So we were able to tap into the iconic strength of the brand. We were able to increase Product strength and then bring that to market and compete to win in, as Zach mentioned, a much tougher macro with A cut through campaign in Calvin and a cut through campaign in Tommy, that's look at it as a Crane umbrella that will continue to go because it's really combining the category, the hero products, the world class talent, And that's what we can see in Q4, consumer facing. Then on the underlying business engine side, we were able to drive Better much better supply chain execution. So we were 60% on time delivery last year, heavily affected By the COVID disruptions, today we're at 95%, close to 100% on time. And then we were able to drive cost efficiencies While investing more in growth.

Speaker 2

So you will hear Sak take you through how we invest more in marketing. And then The final part is the leadership team and getting the capabilities on the leadership team we needed to execute this. So this is some of the highlights of what I see drove 4th quarter And also how it will continue that this is just the beginning, and that drives the confidence for the outlook this year.

Speaker 4

Thank you.

Operator

Thank you. Our next question will come from Michael Binetti with Credit Suisse. Your line is open.

Speaker 5

Hey guys, thanks for taking our questions. Let me add Congrats on a great quarter here. I guess I have 2 on the finance side, Zach. Can you give a little more color on sizing the buckets you listed to The 200 basis points of underlying gross margin expansion, it would help us to get a little bit of an idea of the magnitude of the different buckets there And then you mentioned North America direct to consumer sales to domestic consumers are now, I think you said mid single digits above 2019. I know you talked previously about almost 30% of sales in those doors are from tourists before COVID.

Speaker 5

Can you offer any specific quantitative examples of where North America DC Stores are in terms of total productivity levels and profitability levels compared to pre COVID and what you think is the right pace investors can think about to recapture some of that opportunity?

Speaker 2

Well, thank you, Michael. It's Stefan. So let me just start from the business side in terms of the gross margin Strengthening in the outlook because I'm encouraged by a lot of what I see on the gross margin side. 1st, Cost of goods are coming down. Freight is coming down.

Speaker 2

And also The supply chain strengthening so that we are getting better at leveraging our scale with vendors. So that's all favorable versus Last year. And then on the gross margin side, we also have a shift in the business, a regional and channel mix shift. So international grows faster, D2C grows faster. So that's on the highest level from a business Zack, if you don't mind going through more in detail.

Speaker 2

Yes.

Speaker 3

Let me put in some numbers around that for you, Michael. I think that, first of all, as we've said, gross margin, we expect to grow by Over 100 basis points this year versus last year and keeping in mind that includes approximately 100 basis points transactional exchange headwind that we've talked about previously. So to your question on the 200 basis points of underlying improvement, As Stephane mentioned, first, we are planning for a significant increase in DTC penetration aligned to the PBH Plus plan, And that drives almost 100 basis points of gross margin improvement. And then second, we expect that Several of the macro headwinds that we experienced were increasingly transitioned to tailwinds, but as we work through 2023. Included in that are significant reductions in ocean freight rates and a decrease in utilization of air freight as the supply chains have normalized.

Speaker 3

Those two changes alone are worth approximately 100 basis points of gross margin improvement. So I think those are the 2 main drivers that we expect to see moving in our favor. And again, starting with both the exchange more of a first half story and then Increasingly, these other measures taking a more powerful impact in the second half of the year. And then you talked you asked a little bit, I think, about In terms of the international stores, at this point in time, our outlook does not count on A return to 2019 levels of international Tortoise, we're still assuming a significant Decrease versus 2019. We are seeing the beginnings of some of that start to come back this year.

Speaker 3

And as they're coming back in, they're buying strongly. But I think We've learned over the last couple of years to not count on that. The focus will remain on the on really satisfying the domestic consumer and that will be the area from there. And if international tourists come in, That'll be a source of growth later in the year that's not currently planned for.

Speaker 5

Thank you.

Speaker 2

Michael, one part that was exciting in Q4 was to see the domestic consumer. The focus we have had over the last year on Winning more with the domestic consumer in North America to really see that we started to get traction there, and that's something that we will continue to lean into.

Speaker 5

Yes. We haven't heard many other North America outlets improving, so it was nice to hear. Thanks for the color, Stefan.

Speaker 2

Thank you, Mike.

Operator

Thank you. Our next question will come from Jay Sole with UBS. Your line is open.

Speaker 3

Great. Thank you so much. I think you mentioned for the full year guidance you expect revenue growth in all regions. Maybe just elaborate a little bit and maybe give us an idea of how you're thinking about growth in North America versus Europe versus Asia? Thank you.

Speaker 2

Yes, absolutely. Thank you, Jay. So in Europe, Let me just take it a step back to Q4 that we were able to drive a very strong holiday performance in a very tough macro in Europe, And we see the momentum continue. And we see D2C to Zach's point as he mentioned, we see D2C Being the main driver, we see that being true for both Europe and North America and Asia. When we look at North America, it's continuing to build strength with that domestic consumer in a brand accretive way.

Speaker 2

And then when it highlights on Asia is the comeback of China and the Chinese consumer. And we are very encouraged by What we are seeing early days there coming out of COVID.

Speaker 3

Yes. And I think just to put some numbers behind that, we've talked about sort of that Mid single digit range of growth for the overall business and that's comprised of low single digit expectations in both North America and Europe And then low double digits in Asia. I think both in North America and Europe, we wanted to make sure with the uncertain consumer backdrop that we're planning prudently for the year. I think we see some of that in terms of the work we have with our accounts a bit more of a cautious approach. And I think considering the volatility we're experiencing, we think that that is A prudent way to plan for the year, focus on those things in our control.

Speaker 3

And then depending on how the year evolves, if there's stronger consumer Demand of that, we're ready to address that both in the U. S. And Europe as that comes. Okay, great. Thank you so much.

Speaker 3

Thanks, Jay.

Operator

Thank you. Our next question will come from Dana Telsey with TEG Advisors. Your line is open.

Speaker 6

Good morning, everyone, and congratulations on the nice progress. As you think about Europe and the order book going forward What you're seeing in wholesale globally? What trends are you seeing? How are you seeing order books moving forward and The full expression of your new collection being distributed, balancing that, Stephane, with certainly DTC, how you're thinking about growth both for e commerce and your own stores as we move through 2023? Thank you.

Speaker 2

Well, thank you, Dana. So when we Look out for 2023 in Europe, we see strong consumer demand. So if we look at Q1, We see strong consumer demand continuing from Q4 last year. So start of the year, strong consumer demand in both D2C channels And in wholesale sell throughs. So consumers' response to our spring product is strong.

Speaker 2

For the back half Of the year, our wholesale partners are taking a more cautious approach, and it comes back to The volatile macro. What really makes us have a uniquely strong position in this situation is that In Europe, in particular, we have a very, very strong ability to react into and fulfill in season demand, both in D2C and in wholesale. So continuing to see the consumer strength that we see now For the rest of the year, we will be able to react and fulfill into that beyond the preplanned order books.

Speaker 3

Yes. And I think just to sort of talk a bit more, just put some numbers around that Dana, around the European order books. Just a reminder for spring 2023, We had order books in at high single digits. And we're happy to say that that is actualized Fully as product supply chains normalize and products started showing up earlier than expected. Now keeping in mind that's about in line with where pre pandemic was, But earlier than us or the accounts we're planning, the accounts have been very eager to take that product.

Speaker 3

So we're able to ship And partially in Q4 and the rest early here in the Q1. And we're seeing from those floor sets as they're setting a Strong consumer response. I think we feel great about the spring order book. As Stephane mentioned, the fall order books have come in and the numbers are low single digits from a growth perspective, Which is not aligned with what we're seeing from consumer response today. So we believe they're taking a cautious outlook.

Speaker 3

I mean, we're aligning our overall expectations for the year to that. But I do think it's important to highlight what Stephane had mentioned that we saw Specifically through the COVID period and all that volatility, our European operating model the team has built that never had a stock fulfillment model, Best in class, we're able to chase quickly into demand that showed itself then. And I think as consumer trends stay where they are, we believe we'll be well positioned to do that As well heading into the year.

Speaker 6

Got it. And then just lastly, just on marketing. How do you see marketing progress through the year? And what percentage of sales do you see marketing becoming? Thank you.

Speaker 2

Yes. Thanks, Dana. So on the marketing side, As I mentioned in my prepared remarks, Calvin Jonathan and the Calvin team has done a fantastic job, to start with Calvin. In Calvin's store, nothing is the campaign umbrella. So it's very much connecting back to the iconic Beloved DNA and making it Super relevant for today, whether it's Michael B.

Speaker 2

Jordan, Kendall Jenner and most recently, Jungkook from BTS, The BTS star, who is now becoming a Calvin Global Ambassador. And it was remarkable yesterday, we teased it on Instagram. Sak and I were following the reaction hour by hour. In a few hours, we got 1,500,000 likes. We got 157,000 comments like from our customers, our consumers saying things like our dream has come true.

Speaker 2

I'm dying. My life is complete. I'm ready to die. I'm crying right now. So it's that You can only do that if you have an iconic beloved brand Like Calvin and Tommy and then connect that with incredible products and incredible talent.

Speaker 2

And then something I saw late last night, a team member sent Through Tommy and Shawn Mendes are doing the classics reborn campaign, also Focusing on the DNA, the classic American cool, the style icons and making them relevant for today and fantastic response to that. And what I received last It was a video clip from 1 of the it's called the Arts, 1 of the premier shopping centers in Mexico City. Sean Mendez were there and did an immersive appearance and thousands of people Screaming, going wild. So it's this fantastic balance between the iconic timeless DNA of the brand and then making it current. So these campaign umbrellas, we just continue.

Speaker 2

And it's for us, It's about systematically repeatedly executing better and better and better. So that's from a marketing And then we then as I mentioned, we are investing more in marketing. So Zach, will you be able to share more of the details of what That means in numbers.

Speaker 3

Yes. We're making a commitment this year to increase marketing spend both in dollars and I think importantly as well in percentage of revenue. So the percentage of revenue will increase 30 to 40 basis points this year to almost 6%. And that's just the first step on the journey. The key investments, priority for us as we work on delivering the PVH plus plan.

Speaker 3

So a big step forward to almost 6% this year.

Speaker 6

Thank you.

Speaker 3

Thanks, Dana.

Operator

Thank you. Our next Question will come from Chris Nardone with Bank of America. Your line is open.

Speaker 7

Hey, guys. Good morning. Can Can you discuss the underlying assumptions around your North America wholesale business? It would be very helpful if you could discuss how sellout Trends are faring for both brands given your healthier inventory position. And then whether you think you're in a position to chase if retailers begin to turn more positive as we move through the year?

Speaker 7

Thanks.

Speaker 2

Yes. Thanks, Chris. So in North America, as we mentioned, the outperformance in North America was driven by, 1st of all, our D2C business. But there is an underlying driver of improvement in North America that I really want to mention, which is And it connects to wholesale, which is how we strengthen our performance in the full price wholesale channel with Macy's. So we are seeing improved sell through trends for both Calvin and Tommy.

Speaker 2

And we see tremendous potential here In working with Macy's and expressing our full price Presence in North America stronger for both Kevin and Tommy. We are seeing so much potential there. And the exciting part in Q4 and start of this year is that we're seeing it translate to high growth and improved seltzers. With that said, there is a cautious outlook in North America as well from all our wholesale partners coming back to The macroeconomic volatility. Yes.

Speaker 3

I think we expect, as we had said, DTC to be our big focus in North America. And then closely behind that, as Stephane mentioned, sort of our full price execution with our key partners like Macy's. Beyond that, we do expect the broader wholesale environment to remain sort of, I would say, the accounts are cautious. And with our focus increasingly on those global best sellers and that core set of products, I think When we see the improved sell out, we're able to work closely with those partners and they're eager to follow back in with inventory as we're building something closer towards I've never had a stock model with them as we go through. So I think we're optimistic that should those trends continue, we've seen early in the year that we'll be able to continue to fulfill that demand Regardless of where the consumer demand goes.

Speaker 7

Okay, great. And then just on and if I could squeeze one more in. Just on China, can you just talk about how that reopening is going? And then what level of recovery are you assuming in the back half to get to The total sales guide?

Speaker 2

Yes, absolutely. So China, as I mentioned before as well, China as a market It's a very important growth market for us. And seeing the reopening and seeing the consumers come back, It's been really strong positive trends. So that's why we are planning Asia for 2023 as the highest growth So what we see is very encouraging. We have time for one more question.

Operator

Thank you. Our last question will come from Ike Boruchow with Wells Fargo. Your line is open.

Speaker 8

Hey, everyone. Let me add my congrats. Maybe just looking at the next couple of years, Zach, it's only it's been about a year since The Analyst Day and the PVH Plus plan, targets were given, your 15% margin goal for 25% was laid out. You're looking for 10% this year. How are you feeling a year later, in your progress towards that 15% and then I guess to that point, Beyond 25%, when these licensing dynamics start to play in, I assume that's dilutive to the margin.

Speaker 8

Is there some way we should think about margins Past 25% as the business model changes a bit more from owned away from license? Thanks.

Speaker 2

Thanks, Ike. It's Stefan here. So if I start from just an overall business perspective and value creating Perspective, 1st year in now into the PVH plus plan, there is significant growth opportunities, Both from a revenue and a margin expansion perspective in each of through each of these five growth drivers: the product, The increased marketing, consumer engagement, the marketplace execution, the demand driven supply chain that we are moving towards, The cost efficiencies and then investing behind these growth drivers. So 1 year in, when I look at this, I see that we are just in the beginning of unlocking this value, and it's independently of macro because there's so much And what excites me the most is to see how we as a team have come together during this year And really locked into the direction we set out and now it's just about consistently delivery improvements. Sak?

Speaker 2

No. We built our PBH Plus the financial model with flexibility. Over any multiyear period, it was safe to assume that

Speaker 3

we'd experience the range of macroeconomic cycles and we've seen that. So obviously we're going to drive growth when those opportunities are there just like we saw in 2022 with high Pricing power to drive gross margin improvement in all elements of cost, product cost, supply chain cost, we've talked about that already today, In all elements of SG and A that we knew and we talked about we had efficiencies to work our way through. So we knew the journey would not be linear and obviously it hasn't been in that 1st year. But as Stephane said, we're just as committed to delivering the targets as we laid out a year ago.

Speaker 2

And the more just to build on what Zack you're saying, the more we lean in as The team on these five growth drivers, we also see the specific opportunities and then we unlock them step by step.

Speaker 8

Great. Congrats.

Speaker 2

Thank you very much.

Speaker 3

Thank you very much. Appreciate it, Ike.

Speaker 2

So with that, We're ending our call and looking forward to reconnecting next quarter. Thank you.

Operator

Thank you, ladies and gentlemen. This does conclude today's PVH's 4th quarter and full year 2022 earnings conference call. We appreciate your participation and you may disconnect at any time.

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