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Edited Transcript of PVH earnings conference call or presentation 2-Apr-20 1:00pm GMT

Q4 2019 PVH Corp Earnings Call

NEW YORK Jun 2, 2020 (Thomson StreetEvents) -- Edited Transcript of PVH Corp earnings conference call or presentation Thursday, April 2, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dana M. Perlman

PVH Corp. - Senior VP of Business Development & IR and Treasurer

* Emanuel Chirico

PVH Corp. - Chairman & CEO

* Michael A. Shaffer

PVH Corp. - Executive VP and Chief Operating & Financial Officer

* Stefan Larsson

PVH Corp. - President

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Conference Call Participants

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* Erinn Elisabeth Murphy

Piper Sandler & Co., Research Division - MD & Senior Research Analyst

* Irwin Bernard Boruchow

Wells Fargo Securities, LLC, Research Division - MD and Senior Specialty Retail Analyst

* Jay Daniel Sole

UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Softlines & Luxury

* Kimberly Conroy Greenberger

Morgan Stanley, Research Division - MD

* Michael Charles Binetti

Crédit Suisse AG, Research Division - Research Analyst

* Robert Scott Drbul

Guggenheim Securities, LLC, Research Division - Senior MD

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Presentation

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Operator [1]

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Good day, ladies and gentlemen. Welcome to the PVH Fourth Quarter 2019 Earnings Call. Today's call is being recorded. The safe harbor statement will be read today by Dana Perlman.

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Dana M. Perlman, PVH Corp. - Senior VP of Business Development & IR and Treasurer [2]

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Thank you, operator. Good morning, everyone. And welcome to the PVH Corp. Fourth Quarter and Full Year 2019 Earnings Conference Call. This webcast and conference call is being recorded on behalf of PVH and consists of copyrighted material. It may not be recorded, rebroadcast or otherwise transmitted without PVH's written permission. Your participation in the question-and-answer session constitutes your consent to having anything you say appear on any transcript or replay of this call.

The information being made available includes forward-looking statements that reflect PVH's view as of April 1, 2020, of future events and financial performance. These statements are subject to risks and uncertainties indicated in the company's SEC filings and the safe harbor statement included in the press release that is the subject of this call. These risks and uncertainties include PVH's right to change its strategies, objectives, expectations and intentions and its need to use significant cash flow to service its debt obligations.

Significantly, at this time, the COVID-19 outbreak is having 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 virus. The dynamic nature of these circumstances means what is said on this call could change materially at any time. Therefore, the operation of the company's business and its future results of operations could differ materially from historical practices and results or current descriptions, estimates and suggestions.

PVH does not undertake any obligation to update publicly any forward-looking statement, including, without limitation, any estimates or suggestions regarding revenue or earnings. Generally, the financial information provided is on a non-GAAP basis as defined under SEC rules. Reconciliation to GAAP amounts are included in PVH's fourth quarter 2019 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 this release.

At this time, I'm pleased to turn the conference over to Mr. Manny Chirico, Chairman and CEO of PVH.

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Emanuel Chirico, PVH Corp. - Chairman & CEO [3]

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Thank you, and good morning, everyone. Joining me on the call is Stefan Larsson, our President; Mike Shaffer, our Chief Operating Officer and Chief Financial Officer; and Dana Perlman, Treasurer and Senior Vice President of Business Development and Investor Relations.

We're all working from home today. So I want to thank everyone for joining us on our fourth quarter call. I must comment that it is, indeed, strange to be sitting in my living room for this call and not in my conference room, but I suppose that is the new normal. And I hope everyone is safe and healthy this morning.

We were extremely pleased to how we ended the year. We had a strong holiday season with increasing momentum across Tommy Hilfiger and Calvin Klein in the majority of the regions where we operate. We had a significant revenue beat of about $100 million and exceeded our earnings guidance on a non-GAAP basis despite the impact from the coronavirus, which was not contemplated in our initial outlook. If you compare our fiscal year earnings per share results with our guidance of at least $9.45, we had a $0.31 beat out of earning -- out of our business outperformance from Calvin and Tommy and a $0.03 beat from lower interest and taxes. This was offset by a $0.25 hit for the corona inventory reserves that we booked that we recorded at the very end of the fourth quarter, which was not contemplated in our initial guidance.

I believe the magnitude of our business outperformance, especially our sales outperformance, given the backdrop that we were dealing with in the fourth quarter, was truly impressive and speaks to the health of our brands and the momentum in the business that we saw in the fourth quarter. We were pleased to end the year with very clean inventories. Overall, our inventory position was down 7% year-over-year, which also was better than the guidance we talked about.

Before I go into our financial results, I wanted to take a few moments to talk about the coronavirus, which I am sure is top of mind in everyone in the investment community. This is an unprecedented time, and it's a rapidly changing situation. And our hearts go out to all those impacted by the events that are unfolding. Our PVH people are demonstrating their passion and dedication to PVH, with most of our regions working remotely from home to continue to operate our business through this uncertain time. It has been inspiring to see our people rally together, and I truly believe that this demonstrates the power of PVH.

The spread of the coronavirus is unfortunately having a major impact on our business with temporary store closings felt across multiple continents, including store closures across Europe, the Americas and Australia. Our wholesale customers and licensees have been similarly impacted, which, in turn, negatively impacts PVH. Our digital sites and those of our key partners continue to service consumers, and we are seeing significant growth there. Depending on the market, we are seeing anywhere from 20% to over 50% growth on online versus last year, which we are balancing with the health and safety of our workers in the distribution center, making sure goods get to consumers. As a reminder, our digital business in 2019 was up approximately 20% globally and now represents about 12% of our total revenues versus 10% in 2018.

In China, we are seeing some encouraging early signs of recovery. All of our stores have reopened, but stores are operating with shorter hours, and approximately 95% of our franchisee stores are also open. We are seeing some rebound in sales with improvement week over week. And for the month of March, total business was down only about 35%, but digital sales are comping up closer to plus 40%. We know it clearly will take some time to return to normality and hope that our other regions will follow a similar path to normal business once the pandemic has passed.

Before I go into our business review and forward-looking comments, I want to touch on a few topics given the current climate. The health of our balance sheet remains our core strength. We recently drew down about $750 million from our revolver, which gives us over $1.2 billion in cash and available borrowings. We ended the fourth quarter with a gross leverage ratio of 2.2x and a net leverage ratio of 1.9x. Cash preservation is a critical focus of area of us now. We suspended our stock repurchasing program and also suspended our cash dividend beginning in the first quarter of 2020.

Cost-cutting measures have been implemented. We have taken a hard look at expenses and are reducing or canceling discretionary spending and variable expenses in many areas to navigate successfully and take the pressure off the business. This includes our marketing expenditures, although we continue to invest in our digital businesses as this is a critical channel for us to maintain our connection with our consumers and to transact globally with our consumers. As of now, store associates in the U.S., Canada and Europe continue to be paid through this week and next, and we are evaluating aiding any and all payroll opportunities and salary reductions, including looking at what different governments are offering as relief packages in each region.

We took a hard look at capital expenditures and now expect to spend around $190 million in CapEx for 2020, about a 45% reduction from 2019, as we have canceled or delayed capital projects that are not business-critical at this time. On the supply side, our supply chain is one of our key competitive advantages, and we have strong relationships with long-term partners. Therefore, we've been able to reduce our inventory commitments for the fall season, and we are redeploying some inventories, particularly core and core fashion from summer to fall; and consolidating some seasons, particularly holiday and spring, which will give us more time to make better decisions about making inventory commitments.

As we operate in so many countries around the world, we have a task force headed up by Stefan Larsson, our President, reviewing all options, including government relief and support and different inventory programs that we would utilize in each region. We will take advantage of any government support that's available to us as it is appropriate.

Lastly, as a reminder, in January, we announced our transaction to sell our Speedo business to Pentland, which is expected to close in April or this coming month for our business. And we will take advantage of that support of about $170 million that will come in as cash sometime in April.

Before I go into our financial review, I just want to take a moment and reiterate my confidence in PVH and the strengths that we have that will enable us to navigate this crisis. Our brands are iconic with incredibly strong brand health across the board. We have great consumer brand loyalty, and we are taking this opportunity to deepen our connection with the consumers even further as we leverage our always-on digital approach. The diversification of our business is a true advantage, both from a regional and a brand point of view. And we have significant category and regional opportunities to further extend our brands after the pandemic subsides. While the near term is uncertain, I do believe that PVH will emerge from this even stronger given the strength of our brand, our people and our strong competitive balance sheet.

Moving on to the business. We are pleased with the fourth quarter results, especially in light of the challenging and volatile global backdrop. Our revenues rose 6% on a constant currency basis, which significantly exceeded our previous guidance and exceeded it by about $100 million. I think that clearly demonstrates the momentum that we saw in the business, particularly in the December holiday season and in the January period, right before the coronavirus hit.

Outperformance was principally driven by our international businesses, which represented about $75 million of the $100 million beat. Europe, in particular, was strong, but also China.

In North America, we saw an outperformance against our plans of about $25 million in sales, and that was driven principally by our retail businesses, which comped significantly ahead of our initial plans. Our brand health in the region -- all regions is very strong for both Tommy Hilfiger and Calvin Klein, and we feel we significantly outperformed our competition in the fourth quarter. Tommy continued to see an excellent response to its lifestyle offerings, which enabled us to continue to get -- gain share from regional and global competitors. Calvin Klein in Europe continued to see great trajectory of growth, and we remain confident in the long-term path to $2 billion in revenues, which were just about double our business from today, as we expanded both category offerings and capitalized on the consumer appetite for the brand.

If we look to the current state of the business in Europe, obviously, the region today is quite challenged due to the coronavirus epidemic. Our stores remain temporarily closed as per government regulations and so are those of certain of our key wholesale partners. Before the COVID-19 outbreak, our strong order books were for both brands, plus 12% for spring; and for fall, were plus 12% for Tommy and over 20% increase for Calvin Klein. However, in light of the crisis, there will be some pressure from our partners, and we need to support them through this period and allow for some level of cancellations in order to move goods through and in order to get inventories back in line. We will continue to manage this situation in order to position our both Calvin Klein and Tommy Hilfiger for long-term growth in Europe.

Moving to North America. We had a great holiday season relative to our plans. Our wholesale business has performed quite well for both Tommy and Calvin, particularly on digital channels where we continue to grow our penetration. We remain a key account for our wholesale partners. Our brands are traffic drivers.

In our North America retail business in North America, Calvin Klein posted an 800 basis point acceleration in comp stores relative to the third quarter, which we were very pleased with. Comps overall for the quarter came in at plus 4%. However, we saw traffic in sales under pressure during the fourth quarter due to lower visits from international tourists, especially as we got closer to the Lunar New Year period in January. This had a particular impact on our Tommy Hilfiger retail business, which has about 40% of its sales coming from tourists and led us to take deeper discounts and markdowns.

Currently, in North America, there are clearly store closures for both our own stores and those of our wholesale partners. These temporary closures are pressuring our business, and we expect that we will have to deal with some pressure from order cancellations as we move forward. We're working with all of our retail partners to manage that and to manage the inventory flow.

Finally, for our results in Asia. I'd like to highlight that China showed a significant improvement in the fourth quarter relative to third quarter trends, with Tommy Hilfiger's fourth quarter comps up double digits and Calvin Klein fourth quarter comps flat. But in January, we saw significant increases, particularly in China. Obviously, this trend reversed with the coronavirus outbreak where we saw a significant drop in business in the fourth week of January and then moving to February.

As I mentioned earlier, the majority of our stores in Asia are now open, and we have seen a resurgence in business, which I will go into in more detail. Let me begin with talking about Tommy Hilfiger first. Tommy Hilfiger continued to experience momentum during the fourth quarter. Brand health remains strong as we continue to deliver differential product assortments and engaging consumer experiences. We had exciting partnerships, including our sponsorship of the 2020 Hahnenkamm ski races in Australia where Tommy Hilfiger did a full brand takeover. This was in addition to our new capsule collections, including a joint captain (sic) [capsule] collection with Lewis Hamilton and Grammy award-winning singer and songwriter H.E.R.

From a business position, Tommy increased its revenue an impressive 12% in the quarter and 13% on a constant currency basis, which significantly exceeded our revenue guidance by about $75 million. However, earnings declined 13% during the quarter, while earnings on Tommy Hilfiger business were up year-over-year during the quarter. This was offset by several factors, most notably the continued gross margin pressure in North America retail business to clear goods as well as the negative impact of additional inventory reserves that were unexpected at the time that we gave items in anticipation of lower sales caused by the coronavirus.

By segment, our international business continued to show strength with revenues up 22% on a constant currency basis, and overall comp stores up 10% with comp store increases particularly in Europe and China, which exceeded our guidance. Tommy's European business continued to outperform as it experienced double-digit revenue growth with strength across all channels of distribution in all markets and product categories. We believe that our market-leading position is driven by our excellent product, our compelling price-value proposition and strong brand power, which is allowing us to take share from regional and global competitors.

Our Asia business posted revenue growth during the fourth quarter. China was very strong for us with comps up double digit. We also experienced strong momentum in our Japan business and had the benefit of the addition of revenues from the acquisitions of our Australia and Central and Southern European Tommy businesses.

In North America, revenues declined only 2%, and margins were down -- but margins were down sharply. We continued to see very favorable trends at wholesale as our brand outperformed competition throughout holiday. However, results for our business -- our retail business, which were planned, were extremely challenged as we continue to take heavy markdowns to end the year clean with inventory.

Our global licensing business continued to be very favorable for us, particularly with G-III on our women's business, that continues to be an excellent partner for us and continue to exceed all of our sales plans for the Tommy Hilfiger women's business.

Despite the current pandemic, we continue to having incredible confidence in the long-term opportunities for the Tommy Hilfiger brand from category and regional expansion opportunities and the ability to optimize our distribution network globally.

Let me move to Calvin Klein now. We continue to expand -- experience brand heat during the fourth quarter. We deepened our connections with consumers by delivering compelling product, engaging brand experiences, and we're providing a platform for self-expression for our consumers. Importantly, we made significant progress to reposition and refocus the brand with an enhanced product focus. We recently launched CK Everyone, a clean fragrance; alongside the new CK One underwear and jeans collection, marking our first-ever cross-category marketing launch that spans both fragrance and fashion. This was a global launch for us for the brand.

We also debuted the spring Calvin Klein jeans and Calvin Klein underwear campaign, featuring new spring offerings and starring Justin Bieber, Lay Zhang, among other key talent people.

Moving to the business. Overall revenues decreased 2% or 1% on a constant currency basis. If you remove the jeans business, which was transferred to our G-III partner, business was up overall 1%, which beat our guidance by approximately $25 million. The only softness in business that we saw was in Asia in Hong Kong during the fourth quarter driven by the protest that continued, which had a major impact on that market's position -- sales position overall. By region, Calvin Klein international revenues increased 8% on a constant currency business (sic) [basis] with comp stores increasing overall by 1%. And if you remove the Hong Kong business from that comp store number, comp stores increased ex Hong Kong by 5%.

We continue to see excellent momentum in our European and our China business. Consumers responded well to our offerings for holiday, and performance was broad-based across our channels, markets and product categories. In Asia, we were pleased to see a notable acceleration in China during the quarter. Our trends were quite favorable before the coronavirus escalated.

Bearing that, we've made progress relating to our products and consumer engagement. And I think you can see that in the momentum we saw in sales, particularly in December and January, as we started to deliver new spring product. Our digital businesses continued to see excellent growth as the consumer is increasingly shopping online, and we added more online activation to drive overall engagement. Overall, we were very pleased with Asia's performance outside of Hong Kong, which continued to be impacted by the protest in the fourth quarter.

In North America, revenues declined 11%, largely driven by our decision to license the jeans business to G-III. Wholesale was a positive story for us, particularly our performance in the digital channels. Our retail business posted a sequential acceleration with comps up 4% in the fourth quarter. We were quite pleased with these results, which were achieved in conjunction with an improvement in far fewer and less promotional lockdowns than last year.

As we look past the current global backdrop, we continue to see strong long-term growth opportunities for the Calvin Klein brand, most notably our expansion in Europe, which we believe is at least $1 billion sales opportunity for us, driving both our -- driven both through all channels of distribution as we move forward. We continue to leverage our growth in the digital opportunities and leveraging our growth opportunities across Asia.

Finally, moving to our Heritage business. We continue to feel pressure due to the challenging North America retail environment in our Heritage Brands that really impact moderate price points such as our Heritage businesses. Revenues for the business declined 1% with flat comps in our own retail stores. Operating margins remained under pressure as planned as gross margin expansion in the business was offset by expense deleverage on the expense side. We will continue to look for additional ways to optimize and streamline the Heritage business in the future to generate enhanced returns. And we remain on track, as I mentioned before, with the sale of our Speedo business, which should occur in April.

Before I pass things over to Mike, I want to highlight that PVH's 140-year history is marked by a strong resiliency. We have overcome countless challenges, including the Great Depression, 2 world wars and the Great Recession in 2008. As we move forward, we have tremendous opportunities across PVH's business model to capture long-term sustainable profit growth from driving meaningful engagements with our consumers to continuous improvement in product at Calvin Klein to capturing the global distribution opportunities for both Calvin Klein and Tommy Hilfiger. And we continue to look for ways to optimize our business model whether through the supply chain or through efficiencies across the business.

I believe that our core strengths, our talented people, our iconic brands and our strong financial fundamentals and our balance sheet -- our conservative balance sheet will continue to serve as key competitive advantages for us as we -- and will allow us to come out of this crisis stronger than we came in.

And with that, I'd like to turn it over to Mike to talk about the financial results in more detail. Mike?

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Michael A. Shaffer, PVH Corp. - Executive VP and Chief Operating & Financial Officer [4]

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Thanks, Manny. The comments I'm about to make are based on non-GAAP results and are reconciled in our press release. I'm going to briefly touch on the fourth quarter of 2019 and then move on to 2020.

Our reported revenues were up 5% and up 6% on a constant currency basis, and revenues were much stronger than our previous guidance. Tommy Hilfiger revenues were very strong, up 12% as reported and 13% on a constant currency basis. And ForEx exceeded our previous guidance. Tommy Hilfiger International revenues increased 20% as reported and were up 22% on a constant currency basis. The Tommy Hilfiger International revenue increase was driven by continued outperformance in Europe and the revenue from our Australia and Tommy Hilfiger Central and Southeast Asia acquisitions. International comp store sales were up 10%.

Tommy Hilfiger North America revenues declined 2%. Growth in the wholesale business was offset by North America comp sales down 6%, primarily due to the lower traffic and spending in our stores in international tourist locations.

Our Calvin Klein revenues were down 2% as reported and decreased 1% on a constant currency basis and were better than our previous guidance. Calvin Klein International revenues increased 6% as reported and were up 8% on a constant currency basis driven by continued growth in Europe and the revenue from our Australia acquisition, partially offset by softness in Asia due to the Hong Kong protests.

Our international comp store sales were up 1%. Calvin Klein North America revenues decreased 11%. Our wholesale business revenues were negatively impacted compared to the prior year by the licensing of our women's jeans business to G-III. North America comp sales were up 4%. Heritage revenues were down 1% to the prior year and below our previous guidance. Our Heritage retail business comp store sales were relatively flat to the prior year.

Our non-GAAP earnings per share was $1.88, which was $0.09 better than our previous guidance. The EPS beat versus previous guidance was driven by outperformance in our Tommy Hilfiger and Calvin Klein businesses for approximately $0.31 and favorable interest and taxes of $0.03. These beats were partially offset by additional inventory reserves we needed to approximately $0.25 because the onset of the virus occurred in Asia at the end of our fourth quarter.

For the full year 2019, we ended the year with record revenue of $9.9 billion, an increase of 3% versus the prior year, and non-GAAP earnings per share of $9.54.

Moving on to 2020. Our first quarter and full year 2020 results will be significantly negatively impacted by the COVID-19 pandemic. The duration and extent of the pandemic is highly uncertain, and our results could be impacted in ways we are not able to predict today. As a result, we are not in a position to issue guidance for the quarter of fiscal year 2020. We're monitoring the situation closely with regard to our associates, customers, business partners and supply chain. We feel we are well positioned to manage through these uncertain times. We ended 2019 with cash of $503 million and with inventory levels down 7% compared to the prior year.

We're taking a number of steps to preserve liquidity and financial flexibility. We feel very comfortable with our liquidity position as we've drawn down from our revolving credit facility, in addition to suspending share repurchases under our stock repurchase program. Our mandatory long-term debt repayments in 2020 are only $14 million. This is in addition to suspending our cash dividend beginning with the second quarter of 2020. Our previously announced dividend was paid on March 31 and was not impacted by the suspension. We're reviewing every opportunity to eliminate discretionary spending. We are cutting capital expenditures to approximately $190 million from $345 million in the prior year, with capital expenditures only for minimum requirements in our retail stores and for projects currently in progress related to systems and warehouses.

We are also reducing operating expenses, including reviewing payroll opportunities and reducing all nonpayroll expenses, including creative marketing and travel. We're also tightly managing working capital. We are adjusting inventory levels by canceling and delaying orders. We're extending payment terms to both merchandise and nonmerchandise vendor invoices or suspending the payment of rent temporarily and delaying or canceling planned new store openings.

Also, as a reminder, our sale of Speedo North America business to Pentland Group PLC, the parent company of Speedo brand, is expected to close in the first quarter of 2020 for $170 million cash, subject to a working capital adjustment.

We will give guidance for future quarters and the year once there is more clarity on the impact and duration of the COVID-19 pandemic. As we work through 2020, our financial discipline will help us take advantage of the opportunities available to us to withstand the current pressures on our business and emerge from the crisis well positioned to capture long-term sustainable profitable growth.

And with that, operator, we'll open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will take our first question today from Bob Drbul of Guggenheim Securities.

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Robert Scott Drbul, Guggenheim Securities, LLC, Research Division - Senior MD [2]

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I do have a couple of questions. I think the first question that I was hoping you guys could expand upon is generally, when you look at the channel globally, and you did talk about the need for some markdowns and cancellations, can you just talk through exactly where you see the biggest concerns on your inventories in the channel and what's coming over from Asia and your sourcing? And then the second question, I don't know, it's probably for Mike. Mike, can you just talk a little bit about the biggest buckets of expense opportunity as you think about where you could pull the levers, whether it is payroll, whether it is rent, even on the marketing side, just sort of how you're really approaching it? If you could expand upon those 2 questions, that would be great.

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Emanuel Chirico, PVH Corp. - Chairman & CEO [3]

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Bobby, thanks for the question. Everybody just get it out of the way. I feel fine. You saw me on TV yesterday. I'm one of the fortunate ones. Whatever symptoms, they have been unbelievably mild. And I've been able to continue to work and operate and focus on the business.

From a -- look, spring/summer inventory is the biggest issue that everybody is dealing with, first. Goods are coming in. Goods have been ordered. Prior to the pandemic and the crisis, as we ended the year with -- our inventory is down 7%. I could tell you, we were going in, in the channel, department stores across the board in North America, Asia and Europe. In our own stores, we were going into the year very clean and feeling really good with tremendous amount of momentum. I got to tell you, we were really feeling great in January before this all hit us and felt we were going to be starting the first quarter with a tremendous amount of momentum and the ability to continue to grow margins and add to our top line growth.

Obviously, that all changed within a couple of week period of time. The biggest challenge we're facing is that we've lost -- we have to assume that stores are going to be closed at a minimum through April here in North America and Europe, our 2 biggest markets. And we've lost at least 6 and -- to 8 weeks of spring selling and spring selling in the heart of the season. So I mean, you have to think of it that way. When you think about Easter, when you think about March, April, that's the heart of the season. As you're going into it, that's your biggest areas of doing full-price selling as you go in. So that losing that's -- that anywhere from 6 to 8 to 10 weeks of sales is really where the pressure point is going to be. And what we're looking at and stepping is really taken on is with the regions. And our brands across the board is what we're really looking at that inventory, making some judgments about what we should promote and liquidate through our own stores or through some partner accounts to really go after it.

The other piece that we're really looking hard at there is what should we repurpose and utilize to sell into the season and to sell through the season as we go forward. And we're looking at the ability to potentially pack and hold some really good merchandise that's in the warehouse that we'll use and maybe have to carry for a few months to bring it out as we go forward. So we're looking at all of those from a channel point of view as we think about inventory.

When we think about inventory for fall, we've done a lot of things for ourselves. Stefan has worked with the teams with Daniel Grieder in Europe, with Tom Chu in Asia and Cheryl and Ken Duane here in the United States, to really look at the inventory pipeline and with our logistics teams to really look at how that pipeline would be worked, try to push out with our partners to push inventory commitments out at least an additional 4 to 5 weeks, so we'll have some more visibility. We have been able to have deep conversations with our retail partners about what makes sense to cancel and what really is necessary as we go forward. So we're trying to balance that as we look at it.

I think it's -- the risk/reward today is to have less inventory and chase later, if we need more goods. The best story, if we're sitting here in the third quarter of this year and I'm sitting with you telling we're low on inventory and we're chasing fall, that would be a real excellent problem to have as we go forward.

Mike, are you going to take the second part of the question?

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Michael A. Shaffer, PVH Corp. - Executive VP and Chief Operating & Financial Officer [4]

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Sure. Hey, Bob, as it relates to expenses, Bob, the big buckets, we're very focused on virtually any discretionary expense. So when you think about what that means for us, it's basically -- we're taking a hard look at payrolls. We're taking a hard look at salary reductions. We're taking a hard look at marketing, any expense that is actually discretionary. Obviously, travel is down to 0 now, and we're going to clamp down in travel moving forward. And it will just be a matter of doing the right things in the short term to be in a position that when things do get better and we do open, we have the base ready to move, ready to staff up and ready to reopen with the appropriate tools at their availability. So we're making every discretionary cut we can at this point. Really, it's anything discretionary.

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Operator [5]

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We now move to Erinn Murphy of Piper Jaffray (sic) [Piper Sandler].

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Erinn Elisabeth Murphy, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [6]

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I guess my first question is on digital. It sounds like it's relatively outperformed, particularly as you've shuttered the stores across the globe. Can you just talk a little bit more about what you're seeing there? And maybe using China as kind of a launch point, just given we've seen a bit more recovery there. And then within that $190 million CapEx budget for the year, what are the biggest buckets there? And how is digital and data investment kind of prioritized within the CapEx budget this year?

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Emanuel Chirico, PVH Corp. - Chairman & CEO [7]

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Sure. Mike, I'm going to answer the first part. You'll take the CapEx. So just give me a moment to just respond. Look, the digital transaction has been the bright spot throughout this. It's -- even before the coronavirus, we were seeing 20% growth in our digital business. And our penetration for 2019, we've always talked about 10%, has grown to 12% overall digital penetration to PVH. I think this -- the pandemic is only accelerated that, not only in the short time frame, but I think it's also impacted the way consumers are going to shop going forward.

I think -- I was on Mad Money last night being interviewed, and I talked about it is -- I always had a general belief, and I think I've spoken on a number of calls and conferences about that over the next 5 to 6 years, we're going to continue to see consolidation in the retail industry. And we're going to see -- and wholesale apparel industry. And I thought that would be a 5-, 6-year path. I think this pandemic accelerates that. It accelerates the consumers' comfort level with buying apparel online. I think it accelerates the potential store closures and the C and D and E stores closing as we go forward. And we'll get to a healthier store base. We've always talked about that, especially in the U.S., there is too many stores. Our sales per -- sales per square foot per capita are by far the highest in the world. And it would be healthy to see that happen. But obviously, it's also going to be painful as we go through that process.

I think that what we're seeing in digital and the kind of growth market by market, we're seeing -- you see anywhere from 20% to 60% growth, depending on the channel. In China, our penetration continues to grow. We were somewhere in the neighborhood of about a 15% penetration in China. And I think that this year, it wouldn't surprise us if that moved to 20% as we're seeing outsized growth in our digital channel. We're growing digitally between 35% and 40% on digital sales. And that's a very high margin. So we're not out there promoting. We're out there connecting with our consumers, but we're not doing from a price point basis. We're doing it at a very positive level. So I think that's a bright spot, and I think it will continue to be a bright spot.

And on the cap side, that one -- capital expense side, that's one area where we haven't backed off, continue to make investments to support that business.

Mike, do you want to talk about the CapEx?

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Michael A. Shaffer, PVH Corp. - Executive VP and Chief Operating & Financial Officer [8]

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Yes. Look, I think you said it. It's -- we took our CapEx down from $390 million to $190 million. And basically, we've cut out discretionary. So what we've seen is we've taken out renovations. We've taken anything that doesn't have to happen.

The one place we've left dollars in is to stabilize, expand and grow our digital business. That includes e-commerce. It also includes our consumer data efforts. It also includes not just our owned and operated e-commerce but gateways, pathways and support to work with some of the bigger players in the pure-play area. So that's still in our plans, and we hope to execute that -- on that this year.

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Emanuel Chirico, PVH Corp. - Chairman & CEO [9]

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I'm trying to direct this call. And the person, besides our China manage -- country management team and the person was probably closer to this and has really been working directly with Tmall, in particular, is Stefan. Stefan, maybe you could just make a few comments about the relationship and some of the things that are happening and we plan to see happen in that channel.

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Stefan Larsson, PVH Corp. - President [10]

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Yes. Thank you, Manny. And Erinn, when it comes to managing through the crisis with the regions, and in particular with Europe and China where we have -- also in North America, so when it comes to e-commerce, overall, as Manny said, we see strong comps across the board. And what we are doing is that we are working in Europe closely with Zalando. We're working with Amazon in North America. And we are working very closely with Tmall in China. And some of the product launches that we have planned coming in before knowing about this crisis, we redirected even more focused digitally, and it's worked really well. One example is the CK One product launch that Manny mentioned. And through this crisis, we partnered up with Tmall and had a very successful activation, very good reception from our consumers.

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Emanuel Chirico, PVH Corp. - Chairman & CEO [11]

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And Erinn, the only other thing I would add in North America on a digital point of view is with our key accounts, particularly Macy's, the Macy's.com business continues to be strong for us. And we continue to have strong consumer connections there and seeing really strong growth as they've tried to redirect.

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Operator [12]

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Our next question is from Jay Sole of UBS.

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Jay Daniel Sole, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Softlines & Luxury [13]

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My question is on promotions because 1 feature of the situation is it's not just 1 company that has an inventory challenge to deal with. It's every company. It seems like a global issue. How much do you -- how promotional do you think it's going to get out there? And what kind of impact might it have on gross margin, generally speaking?

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Emanuel Chirico, PVH Corp. - Chairman & CEO [14]

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Listen, I think that's the big question. And I think -- look, objectively speaking, this is not an industry that has had across the board great inventory control metrics in place. That said, I think as we came out of holiday going into the first quarter, there was a tremendous cleanup that went on in the fourth quarter across the board to get inventories back in line. So at the end of January, what we saw was -- as a bright spot was inventories that were really under control throughout the channel, department stores, North America and Europe. And then even competitively, everyone took advantage of the good selling that was going on overall. And everyone saw some level of margin pressure when they reported earnings. But I think a big piece of that margin pressure was the objective to make sure inventories were clean as we went into 2020.

I think inventory was bought with more discipline because you heard us all complaining on our third quarter calls about open-to-buy dollars being so tight, and the retailers are trying to get turned under control. So that's all true. But I also think that there's going to be a significant amount of inventory. The loss of, let's say, 8 weeks of selling in spring will make the environment promotional, and we've planned for that in our cash flow. We've planned for that in our projections. And I think it's going to be a reality for a period of time.

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Jay Daniel Sole, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Softlines & Luxury [15]

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Got it. And then maybe just one more, if I could add on to that. As far as like the seasonal goods, and you talked about some of the core and core basic items that you can shift to, how much flexibility is there with those core items to maybe leave them in a distribution center until a year from now to the next season? And maybe did they have a longer shelf life than people realize in this environment, how much can you sort of just assume that there's not a lot of sales happening, you can just hold on to that inventory for maybe a longer period of time, and so in the future without have to take maybe super big markdowns on those items?

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Emanuel Chirico, PVH Corp. - Chairman & CEO [16]

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Yes. Look, I'll give a quick answer, and then I'll just ask Stefan to really comment on that inventory management. But I think pack and hold, which we have historically not been big believers in, we try to turn the inventory into cash. If there's -- the old story is in apparel. If you're having a sales problem, this is not like wine that gets better with age. Your inventory gets worse. This is a completely different situation, and we have to have a completely different mindset. And I think a lot will depend on what the off-price promotional market looks like about how aggressive we would have to be in order to clear goods. And if it's too aggressive, I think we'll do exactly what you said, and we will pack and hold core that will -- that doesn't have a big seasonality to it. And then core plus that has a level of seasonality to it, I could see us packing it up for a period of time because there's -- the goods haven't hit the floor. The goods are in scale. I don't believe the goods would be out of cycle or -- from that point of view. So we will take a hard look at that and balance that with our cash flow and balance sheet requirements. But given the strength of our balance sheet, I think it's something that we will have as a tool that a lot of our competitors that are not nearly as well capitalized as we are, are not going to have the benefit of carrying goods for 6 or 9 months to get to spring next year and have quality goods to sell.

So that model has been used extensively by the off-price channel, the T.J.s and the losses. And I think we're going to have to take a lesson out of that and maybe have to park some inventory for a period of time. Interest rates are very low, and we'll take advantage of that as we go forward.

Stefan, I hope I left you something to comment on.

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Stefan Larsson, PVH Corp. - President [17]

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Yes. Thank you, Manny. And Jay, yes, when it comes to the inventory and receipt part of navigating through the crisis, we are starting with -- the most important first step is that as soon as we saw this coming playing out, we froze everything that hasn't been cut. So we bought ourselves time to take the right actions.

And then if we look at the inventory that is more towards core, it's a strength that we have. Both in Calvin and Tommy, we have a strong core, a lot of essential products that are less seasonally dependent. And we also have a replenishment system there that gives us much better opportunity to react.

When it comes to the more seasonal part of the assortment, it's the time we're taking while we have this freeze is to plan through what we're going to redirect, how we adjust flow timing, as Manny talked through, how we adjust volumes. So we have significant opportunities to, in this very difficult situation, try to optimize inventory and receive as much as possible and then with the biggest strength being our core.

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Operator [18]

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Our next question is from Michael Binetti of Crédit Suisse.

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Michael Charles Binetti, Crédit Suisse AG, Research Division - Research Analyst [19]

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I'll start with saying nice job over the holidays. Manny, you mentioned last night, I see that you think that this could cause some consolidation in the industry. Does that mean the retailers? Or do you see the brands starting to merge? And you said you think this could accelerate some of the structural pressures the industry has faced over in last few years. And the last time you said that from memory was a couple of years ago, and it proved quite fresh, and we saw inventories in the channel step change down a lot lower and saw hundreds of closures across the department stores. You have said that. What are you seeing today that drove those comments as you thoughts have been very helpful in the past?

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Emanuel Chirico, PVH Corp. - Chairman & CEO [20]

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So look, we're not -- what we're -- there's a personal opinion, but I think it's -- and I think it's shared by many, is the retail industry, the department store and specialty store apparel area, fundamentally, there's too many stores. And I think that you start with that as a premise. Also, the consumer getting more and more comfortable shopping online. I think the winners are going to be those retailers that invested in their online capabilities. I believe in the omnichannel approach. Brick-and-mortar is not going away, but it needs to be coupled and needs to be aligned with your digital strategy. And it needs to be an experience that the consumer has that has no disruption in it. It needs to be clean, and it needs to be able to flow directly to them. And it needs to be experienced that doesn't have a lot of problems in it.

And I think a number of our players in North America, Macy's has made major investments there. And Nordstrom and a couple of other key players, including Kohl's, has really started to move in that direction. And I think you're going to see more of that. You're seeing retailers doing curbside pickup, and I think that's only going to continue. I think -- so those kinds of things, I think, are going to accelerate that thought process.

The other thing is there's a reality to this situation. And I think balance sheets are going to be stretched. Valuations are dramatically down from where they were just 2, 3 months ago when we opened the year. And given that, I think there is the opportunity -- there will be the opportunity to potentially do acquisitions and bring players together. And the old story that 1 plus 1 equals 4, where you can -- where particularly in a retail situation, there's tremendous leverage that you get from your fixed costs and your back office, being able to spread the investments over a larger base that you need to make in your digital investments, all of those things taking into play -- prior to the pandemic, I felt that we were going to see consolidation in the industry. I think the pandemic has done nothing but accelerate that. It's -- no matter what happens here, balance sheets will be weakened from where they were prior to this. Valuations are going to be lower. And I think -- given all that dynamic, I think there will be opportunity for consolidation. And I think you'll probably see an acceleration of store closings.

That's my theory. And I think it's a good way for us to think about how we have to plan the business and how we have to think about it strategically.

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Michael Charles Binetti, Crédit Suisse AG, Research Division - Research Analyst [21]

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Right. If I could follow that -- I would generally agree with that. Obviously, the retailers didn't come into this period with a model for an extended period of 0 revenues across their businesses. So we've done some work looking at the retail side, and just based on a few reasonable scenarios, it looks like there -- until we get better visibility on how long these stores are going to be closed in the U.S. and Europe, there could be some liquidity concerns on the retailer side. So I'm just -- I'm curious, what are you -- how are you thinking about your business? And what are you going to have to do to help the retailers manage inventory as they think about solvency and liquidity here in the near term in ways they haven't had in several years?

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Emanuel Chirico, PVH Corp. - Chairman & CEO [22]

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Look, that's -- yes, that's a major issue in our thinking as we go forward. It's a major consideration as we plan our inventory buys. We look at the North America landscape, and these are -- we look at our customer base, which has historically been a very financially successful group of companies that are -- that in normal times are well capitalized and positioned that we really don't give much thought to credit being a major issue for these players. We've had to deal with some levels with some weaker players like Sears and whatever that went on years ago. But as we look at our major customers, it hasn't been.

We have to take that all into consideration as we plan and move forward. I think they have plenty of levers to pull, including their real estate has potentially cash-generating assets that help -- may help them get through this as they move forward. And like you said, a lot is going to depend. If the stores open up in May, I think it's -- everybody -- it's back to getting into business. But if it's 3 months after that, I think then there's going to be a real liquidity crisis as we go forward, and there's going to be winners and losers and potential financial hardship that comes with that. And we're going to have -- we're trying to plan accordingly.

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Operator [23]

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We move to Ike Boruchow of Wells Fargo.

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Irwin Bernard Boruchow, Wells Fargo Securities, LLC, Research Division - MD and Senior Specialty Retail Analyst [24]

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I guess maybe to add on to Mike's question. When you think about not necessarily your retail business and retail volume and what happens in stores reopen, but specifically on the U.S. wholesale side, when you piece that business together and you think about a recovery into '21, how do you think about that component of the business? Do you think about it as the light switch goes on, and all of a sudden, volumes go back to 2019 levels? Is there a portion of that business that maybe does that but another portion that maybe takes a year to 3, 4, 5 years to get volume back? I'm just trying to understand how you think that your -- some of your partners in the U.S. will begin reorder activity and begin to take volumes in inventory up again.

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Emanuel Chirico, PVH Corp. - Chairman & CEO [25]

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Okay. I think there's 2 questions in here. I think there's, what do I think -- how do we -- what do I think and how are we planning the business when stores open. We're going to use the China model because I think it's the best model we have. It's also the one that makes the most sense to us. So just to put that into perspective and what that means for us. In China, we came into December, January comping up 5%, business very strong. The last week of January through February when the stores closed and there was all the disruption in China and those -- we saw the business go down to minus 85%, 90%. Basically, everything was being done digitally.

Beginning end of February, business opened. And for the month of March, overall, our business in China is back to about 65%. In the last week, it's probably close to being back to 70% of the business. Digital continues to be very strong. What we're seeing is in the major cities like Beijing and Hong Kong -- Beijing and Shanghai, we're seeing in those cities that are driven by, in some respect, international tourism. And we have the controls and store hours where the controls are tighter on movement and where the tourism has been a big impact on that business in those key cities. There is no tourism going on. Those 2 cities are feeling it much more than the rest of China at large. So it just gives you a sense of where we are.

We're expecting that as we get into the month of April, that minus 30% will move to minus 20%. And then we get into May, minus 20% will move to minus 15% or 10%. And we are assuming when we get into the second half of the year, we will start to -- assuming that the pandemic goes the way we hope it does, that business will start to get back to a more normal level as we get into the second half of the year. That's how we're planning it.

I think that's a prudent way for us to plan the way North America will come back as well. I don't think when stores open that the first thing consumers are going to do are going to run out to buy apparel and accessories and get online and go into stores immediately. I think it's going to be a ramp-up as that happens, as people get more and more comfortable with the situation. And I think that's how we're planning it. I hope that was helping.

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Irwin Bernard Boruchow, Wells Fargo Securities, LLC, Research Division - MD and Senior Specialty Retail Analyst [26]

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Yes. And Manny, it would be helpful if you could think about the whole -- I'm also concerned about the wholesale business and the reorder...

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Emanuel Chirico, PVH Corp. - Chairman & CEO [27]

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I think the wholesale -- what you're saying is, what do I think department store sales trends will be? I think they'll be exactly what I just said. I don't know what -- I think the Macy's did. I think a retailer that's got big urban stores that have a big tourist component associated with that, I think those will ramp up slower. And I think the middle of America, I think not -- the nonmall-based retailers that are in strip centers or whatever, I think that the likelihood is, I think, those will come back stronger. So I think that's the picture that we are looking at and as we're planning inventories that we're thinking about. I guess that, that is anybody's guess.

And I think we're going to -- this will be our last question. It's already 5 after 10, and we're going to try to get back to running the business from our living rooms.

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Operator [28]

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We will take our final question from Kimberly Greenberger of Morgan Stanley.

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Kimberly Conroy Greenberger, Morgan Stanley, Research Division - MD [29]

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Manny, you mentioned that in aggregate, I think your March sales declined to 35%. I assume this is a global number. And I -- I'm imagining...

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Emanuel Chirico, PVH Corp. - Chairman & CEO [30]

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No, no, Kimberly, just a minute. Kimberly, 35%, we were talking about Asia. We were talking about China. 30 -- The United States is closed. So what's the question?

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Kimberly Conroy Greenberger, Morgan Stanley, Research Division - MD [31]

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Okay. So that's a good clarification. So I thought in your prepared remarks when you mentioned March sales were down 35%, I thought you were referring to your global number or to North America, not China.

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Emanuel Chirico, PVH Corp. - Chairman & CEO [32]

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I was specifically speaking about China and trying to give you a sense of when the stores reopen what do we see.

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Kimberly Conroy Greenberger, Morgan Stanley, Research Division - MD [33]

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Okay. Got it. And then a comment -- I'm sorry?

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Emanuel Chirico, PVH Corp. - Chairman & CEO [34]

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Nothing. Go ahead, Kimberly.

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Kimberly Conroy Greenberger, Morgan Stanley, Research Division - MD [35]

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Any way for us to think about March or February and March total company global revenue? Basically, where are you quarter-to-date on a global basis? And I think the path that you laid out for China is extremely instructive, and we can certainly roll that through geography by geography based on the virus spread. But if -- can you care to shed any light on where you guys are quarter-to-date? That would be very helpful. And then your leverage calculation that you shared with us, are you factoring in store operating leases into that leverage? Or what are the specific metrics that are going into your leverage calculation?

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Emanuel Chirico, PVH Corp. - Chairman & CEO [36]

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Okay. I'm going to -- Dana will take the question after I answer the first one. Dana will take the question on the leverage. And this way, I don't screw it up. Kimberly, we're not going to give up -- we're not giving guidance, so we're not going to give you an update on sales right now. But let's put it into perspective. The stores shut down in the middle of March. There is no sales going on brick-and-mortar in Europe, in North America, in Australia, in Brazil, on major markets. The only thing that's opened up, and I gave you the exact sales trends, what's going on in Asia, is Asia that's opened up. In Asia, our big markets, China, I talked about in detail, our career has bounced back the strongest for us. There, our March business is only down about 20%, and the last week was only down about 10%. And Japan seems to be following pretty closely to what's going on in China. Those are our 3 big markets in Asia, and that's what gives us a level of confidence about how we're thinking about planning the business once it's open.

It's very difficult to have any sense of what the sales are going to be because I have no crystal ball that's going to tell me when stores are going to be opened. I could tell you, pre-coronavirus, sales trends comps were very strong throughout. And then as the coronavirus started to impact us in February with tourism or whatever, we started to see our comps get impacted to a degree, but then -- and then stores close. But overall, we were still pretty happy with the kind of sales we were doing. And up until the very last week when stores around us were closing and people were starting paddling, our business was off probably around 50% overall, which we felt was really good given what was going on, on a store basis. But that was the kind of trends we were seeing right before the stores closed for that week or a 10-day period. Prior to that, business had been very strong for us. So I hope that helps. But trying to do modeling or whatever is really very difficult now.

Dana, you want to talk about the leverage?

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Dana M. Perlman, PVH Corp. - Senior VP of Business Development & IR and Treasurer [37]

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Yes. Thanks, Manny. And Kimberly, just on our -- the leverage that we quote is gross leverage. It does not include leases. So gross leverage, 2.2x total debt to EBITDA; net leverage, 1.9x net debt to EBITDA.

Thank you. Manny, I'll hand it back to you.

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Emanuel Chirico, PVH Corp. - Chairman & CEO [38]

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Okay. Everyone, I thank you for the time today. I appreciate everybody joining us. Everybody, please stay healthy, stay safe. You're all in my thoughts and my prayers, and take care of your families. Thank you for joining us. Hopefully, we'll be speaking to you on our second quarter call, and we'll do -- we'll be doing it in more normal state back in our offices. Take care.

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Operator [39]

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Thank you. Ladies and gentlemen, that will conclude today's conference call. Thank you for your participation, you may now disconnect.