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Edited Transcript of PVH earnings conference call or presentation 12-Jun-20 1:00pm GMT

·49 min read

Q1 2020 PVH Corp Earnings Call NEW YORK Jul 6, 2020 (Thomson StreetEvents) -- Edited Transcript of PVH Corp earnings conference call or presentation Friday, June 12, 2020 at 1:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * 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 ================================================================================ Conference Call Participants ================================================================================ * Dana Lauren Telsey Telsey Advisory Group LLC - CEO & Chief Research Officer * Erinn Elisabeth Murphy Piper Sandler & Co., Research Division - MD & Senior Research Analyst * Heather Nicole Balsky BofA Merrill Lynch, Research Division - VP * Jamie Susan Merriman Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst * Jay Daniel Sole UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Softlines & Luxury * Matthew Robert Boss JP Morgan Chase & Co, Research Division - MD and Senior Analyst * Michael Charles Binetti Crédit Suisse AG, Research Division - Research Analyst * Omar Regis Saad Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Softlines, Luxury & Department Stores Team * Robert Scott Drbul Guggenheim Securities, LLC, Research Division - Senior MD ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, and welcome to the PVH First Quarter 2020 Earnings Conference Call. At this time, I would like to turn the conference over to Ms. Dana Perlman to read the safe harbor statement. Please go ahead, ma'am. -------------------------------------------------------------------------------- Dana M. Perlman, PVH Corp. - Senior VP of Business Development & IR and Treasurer [2] -------------------------------------------------------------------------------- Thank you, operator. Good morning, everyone, and welcome to the PVH Corp. First Quarter 2020 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 to be discussed, 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 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 pandemic continues to have a significant impact on the company's business, financial condition, cash flow and results of operations. There is significant uncertainty about the duration and extent of the impact of the pandemic. The dynamic nature of the 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 and projections to be discussed will be on a non-GAAP basis as defined under SEC rules. Reconciliations to GAAP amounts are included in PVH's first quarter 2020 earnings release, which can be found on www.pvh.com and in the company's current report on Form 8-K furnished to the SEC in connection with the release. At this time, I'm pleased to turn the conference over to Mr. Manny Chirico, Chairman and CEO of PVH. -------------------------------------------------------------------------------- Emanuel Chirico, PVH Corp. - Chairman & CEO [3] -------------------------------------------------------------------------------- Good morning, everyone. Joining me on the call is Stefan Larsson, our President; Mike Shaffer, our Chief Operating and Chief Financial Officer; and Dana Perlman, our Treasurer and Senior Vice President of Business Development and Investor Relations. I'd like to take a moment and address all that is going on around us. Most recently, we have seen our country ripped apart by the lethal effects of systemic racism. This has caused too many instances of social injustice in our country. At PVH, we are guided by our purpose, which is to drive fashion forward for good. And one of the best ways we can do this is to fight for racial equality within the walls of our company, throughout our industry and in society at large. We are creating forums to listening and learning. We are also updating our talent, acquisition practices and training development programs to create new opportunities to grow so that we can increase the representation across all levels and support our black associates for success in attaining leadership positions across our company. Furthermore, the coronavirus pandemic has dramatically impacted our business over the past few months, impacting every region of our business. The health and well-being of our associates, consumers, partners and the communities where we operate, remain our top priority. Throughout our almost 140-year history, we have been faced with many challenges. And I'm confident that we will successfully navigate this backdrop as well. We have strong financial discipline; a healthy, strong balance sheet with $1.8 billion of overall liquidity; and a wide range of global growth opportunities driven by Calvin Klein and Tommy Hilfiger. Our brand and our people are our 2 greatest assets, and they were both on full display during the first quarter. Our associates and business leaders truly demonstrated their passion, dedication and agility. And I would like to thank each and every one of them to helping drive our business forward despite the challenges that COVID-19 pandemic presented. From working to first efficiently close stores and then putting plans in place to successfully reopen stores around the world, to those in our warehouses that have kept our businesses moving forward and those working from home, it was truly a feat, and I cannot thank everyone enough for their resilience and commitment. Our iconic Calvin Klein and Tommy Hilfiger brands has continued to experience excellent consumer response over this period, demonstrating strong brand health and loyalty during the crisis. Each brand attracted new consumers visiting our sites for the very first time with good conversion and strong purchasing behavior over this period. Operating a diversified portfolio of brands with strong geographic diversity has always been one of our strong suites. And now more than ever, we have benefited from the diversification of our business. For example, the foresight and expertise we've gained from our Asia teams have been incredibly valuable as we navigated the coronavirus across other regions. This helped us get ahead of key decisions, such as adjusting our marketing campaigns, the ways to engage with consumers and drive our digital business during the temporary store closures as well as had us safely and most effectively reopen our stores once restrictions were lifted. Additionally, we were able to reallocate resources to better support what was opened during this period, focusing on how to rescue our own and operated e-comm sites and also working with our third-party digital partners. These competitive advantages, our people, our brands and our diversified business model is what gives me great confidence in the long-term health of our business. And now moving on to the first quarter financial results. We entered 2020 with strong brand health and increasing momentum across Tommy Hilfiger and Calvin Klein in the majority of regions where we operate. Unfortunately, COVID-19 had a significant impact on our business during the first quarter as our stores and our wholesale partners' stores were closed for over 6 weeks on average during the quarter. This resulted in revenue in our own stores being down 50% to 65% depending on the region, while our wholesale revenues declined about 40% as shipments to our wholesale partners were dramatically reduced across all markets. Our digital businesses, both our own and with our wholesale partners, had outstanding performance and became our #1, most critical channel for business during the quarter. With our European digital businesses being the strongest outperformer of any of our markets. On the operating margin side, our gross margins and SG&A rates were under significant pressure as well. While we tackled every expense line, including marketing and made difficult decisions relating to payroll expense, most of these measures didn't get enacted until the end of the quarter. In addition, we recorded about $100 million in reserves for future inventory markdowns and accounts receivable write-offs. Given this operating environment, we have also been addressing our inventory levels to reflect the current demand picture and are work closely with our suppliers in the event of any meaningful shipping disruptions or delays. Additionally, during the quarter, our licensing partners were significantly impacted with business disruptions as well. We will continue to work closely with our licensing partners throughout the year as we are planning for their businesses to experience similar pressure to what we are seeing in our business. With our long-term vision in mind, we took prudent and proactive measures to strengthen our balance sheet, preserve our liquidity and improve our financial strength to come out of the COVID crisis as a stronger company. Overall, we ended the quarter with $1.8 billion of liquidity. Our CFO, Mike Shaffer, will discuss the specific steps we took to strengthen our financial position in his comments. As we navigate through the recovery phase, we will continue to evaluate how we can further strengthen our balance sheet, optimize our businesses and identify efficiencies, which will allow us to operate smarter and ultimately enhance our operating margin profile, which we believe will drive enhanced long-term returns for our stockholders. I believe that these actions in totality will position us to successfully navigate the COVID-19 pandemic and emerge in an overall stronger competitive position. Before I hand things over to Stefan to go through our regions and brands initiatives, I would like to thank Daniel Greider, who served as CEO of Tommy Hilfiger and PVH Europe, for all his contributions to the company over his many years of service. I also want to congratulate Martijn Hagman on his promotion, and I am confident that Martijn will successfully lead Tommy Hilfiger and PVH Europe into the future as we capitalize on significant future growth opportunities for our business. And with that, I'd like to turn it over to Stefan. -------------------------------------------------------------------------------- Stefan Larsson, PVH Corp. - President [4] -------------------------------------------------------------------------------- Thank you, Manny. And when giving you all an update today from our regions and brands, I would like to start with, as Manny mentioned in his introduction, that this has been a very different kind of quarter where all of our brands and regions have been heavily impacted by the COVID crisis with our stores and our wholesale customer stores closed for 6 weeks on average during the quarter. Mike will, later on the call, share more details on how the numbers came out and give you an indication of Q2 trends. What I would like to share with you is how we are successfully navigating our brands and regions through the different phases of this crisis, what our key learnings have been as well as sharing some of the green shoots that we're starting to see when gearing up to drive an accelerated recovery and to win with our brands and consumer post COVID. From a regional perspective, our regions came into this crisis at different times. Asia and China, in particular, came in first and also recovered first. Then Europe was hit, closely followed by North America. Starting with Asia and China, they have provided us with the best learnings for the recovery phase in our other regions. Currently, all of our stores in China are open. Since China started to reopen, we have been strong week-over-week improvements across the board. For example, our reopened stores are now approximately flat to last year and our digital business up triple digits for both Calvin and Tommy. We're experiencing very strong conversion and higher units per transaction in stores and lower overall traffic trends. To drive transactions during the store closures, we offered virtual clienteling and engaged with VIP shoppers through WeChat. We livestreamed our brands to connect with consumers, which led to significant sales growth versus a typical day. Then Europe followed closely after Asia, where we have also seen strong week-over-week improvements. Currently, about 85% of our stores are open and trends are very encouraging. We're planning for the U.K. market to reopen early next week. As we reopen stores, we have experienced strong conversion and favorable full price trends with less promotions than planned. We have faced lower overall traffic trends that have improved more in smaller cities versus big cities as consumers are shopping closer to home. We have applied a data-driven approach to be able to offer targeted promotions to increase sellouts while also keeping margins relatively stable. Overall, we believe that Europe's recovery will be about one calendar quarter behind the trends we're seeing in China. For wholesale, our full order books that were up mid-teens pre-COVID, are now down low to mid-teens for each of our brands as we work with our partners to consolidate product seasons to better match demand and to end the year as clean on inventory as possible. And lastly, North America, stores here were the latest to reopen, and we will be at 85% reopen by next week. We are pleased to see how the consumers are coming back. In our own stores, small doors are performing very well. Our domestic consumers are over indexing, and it will be critical to target that domestic consumer for the remainder of the year as international consumers are traveling much less and we don't expect this trend to materially improve this year. Our wholesale partners saw business improve with the introduction of curbside pickup and ship-from-store. Digital conversion is significantly higher than last year, and we are attracting a lot of new consumers shopping on sites. We believe that the recovery in North America will follow a slightly slower recovery trajectory than Europe, and we expect that promotions will be elevated. Also, similar to Europe, our wholesale partners stopped accepting shipments in March, which has been a headwind to the business. And we have only seen replenishment orders start flowing again. Across regions and brands, when we were hit by the COVID crisis, we had a very strong focus on the short-term navigation through the immediate crisis, the health and well-being of our teams and consumers, cash preservation, expense reduction and inventory decisions to adjust to the current demand situation. We're using multiple approaches to manage our inventories, such as canceling orders, repurposing and reflowing goods, re-platforming fabrics, consolidating future collections and packing away certain core items where we can achieve strong margins in upcoming seasons. In parallel to hunkering down from a cash, cost and inventory perspective, we redirected our focus early on to demand creation to where the consumer was shopping. We have supercharged our e-commerce channels across all brands and regions, both own and operated, and we are collaborating very closely with Tmall, Zalando and Amazon, among others, in ways that moves us to where the consumer is going, both in terms of live events, product launches as well as connecting our inventory from our bricks-and-mortar stores to serve our own e-commerce as well as partner platforms. What is exciting to see is that our consumers have expressed a strong demand for our brands across all digital platforms. A few examples: our own digital businesses had excellent performance during the first quarter. Calvin's digital revenues were up 40% and Tommy's own digital business up over 60% with triple-digit increases in the second quarter to date. Our Calvin North America e-commerce business turned a quarterly profit for the first time in ck.com's history. In Asia, we furthered our partnership with Tmall by featuring a virtual exhibit for our CK One product drop and our CK One Tmall Club Day saw a strong consumer demand and sell-throughs. In Europe, we accelerated the rollout of connected e-commerce with Zalando and About You, and our ship-from-store penetration reached double digits for Zalando in April and May. North America, our Amazon business benefited from significant growth in Prime memberships. And this month, we will participate in their summer sales at Soft Lines as they move their Prime Day to October. In the product assortment across brands and regions, we have seen the consumers in an accelerated way going towards cash on essential products. There is a big increase in demand for our essential categories like underwear, loungewear, t-shirts, hoodies, athleisure, activewear as well as jeans. All these categories are core strengths of both brands. We have redirected big product introduction and product collaborations to e-commerce and done some of them purely digital. Our CK One launch had an Instagram reach of 57 million people. We also launched our Tommy Jeans Looney Tunes capsule in a livestream partnership with Tmall, achieving over 45 million impressions. Lastly, this crisis has made it clear that our product lead times have come down across the board to better match inventory to the current demand trends. Our marketing has also been redirected towards social and digital to reflect the time we are living in. For Calvin, we hosted monthly live stream session from WeChat using local talents in the campaigns. Calvin recently launched its Pride 2020 campaign, #proudinmycalvins, across social, digital and e-commerce in over 20 markets. Initial sell-through is strong and the campaign and collection had a plus 89% increase in average comments per post. At Tommy, we livestreamed our spring collections with the ability for consumers to purchase directly from the event for wear now product. Tommy also hosted 4 celebrity livestreams on short video platform, GoWin, which secured 1.5 million views and helped us convert both new and existing consumers to purchase. All our brands have refocused on engaging with the consumer in a more interactive way than any time before. I would also like to take a step back and give some global brand highlights, starting with Calvin. Calvin Klein began first quarter with strong brand health, including very strong global awareness. The Calvin Klein lifestyle is truly resonating with consumers during this time, particularly our underwear, loungewear, activewear and wear now offerings. We adapted our marketing message to reflect this through our #athomeinmycalvins campaign. Our efforts were successful as we saw significant growth in new consumer shopping our sites, and we continue to focus on new consumer acquisition as well as retention and conversion. For example, our CK One launch, which is our replay of the iconic genderless collection from the 1990s cater to the younger consumer and now represents 10% of our CK underwear sales in Asia. Before COVID crisis hit, we had already started the work with setting the forward-looking brand direction for Calvin Klein. And I'm pleased to share that the team has completed this work, and we are looking forward to take you through it in detail at a later time. So now I would just like to share that the evolved brand direction is built around going back to the iconic DNA of the brand and reconnecting it to the consumer and culture of today. It's focused on serving clients unique strengths as one of few authentic global lifestyle brands and will be a very strong foundation to drive consumer engagement and profitable growth for the years to come. The response from our own teams and external collaborators has been very strong. Moving on to Tommy Hilfiger. Tommy entered 2020 with a strong underlying momentum. I would like to start with welcoming Martijn as our COO for Tom Hilfiger Global and PVH Europe. Martijn has been the co-pilot behind the Tommy Hilfiger brand and business success over the last few years. He is a very strong leader and value creator. Tommy Hilfiger was recognized in the top 20 on Vogue's business index for the top 50 luxury brands, which ranks brands across consumer sentiment, digital presence, omnichannel performance, sustainability reporting and financial performance. We also had exceptional sell-through of collaboration launches throughout the quarter, including Tommy Jeans Looney Tunes capsule, which shows that our differentiation is a true advantage, especially in a market like China. Moving on to Heritage. We are pleased to close on our sale of the Speedo business to Pentland in April for approximately $170 million. And we will look for additional opportunities to streamline and/or exit businesses that are non-core to us. Our Heritage Brands business was under significant pressure, although the online businesses from our wholesale partners was a partial offset. The cash realization trend that's being accelerated by COVID, that's working for us in both Calvin and Tommy, is working against us in the more formal wear to work product categories in Heritage. We are addressing these challenges by managing inventory levels more prudently, lowering our cost base, evaluating our store portfolio and reviewing additional ways to optimize and streamline the business. Finally, as Manny mentioned, navigating through this crisis has made us even more aware of the many unique strength we have to build on coming out of COVID. We have 2 of the most iconic brands in the market globally, in Tommy Hilfiger and Calvin Klein, both with very strong global awareness as well as big, strong consumer bases around the world. We also have a very strong multichannel presence in North America, Europe and Asia, and we are increasingly matching our reach towards where the consumer is voting to shop. And the crisis has made us move faster and get even closer to the customer. And what we have realized navigating through the immediate crisis is that many of the key learnings from doing the crisis work are very tightly connected to what it will take to win post COVID. Overall, we see that the COVID effects in our business reflects big accelerations of existing underlying consumer market trends and increased focus on e-commerce, product relevance and consumer engagement will be core priorities as we are driving towards an accelerated recovery. And with that, I would like to turn it over to Mike. -------------------------------------------------------------------------------- Michael A. Shaffer, PVH Corp. - Executive VP and Chief Operating & Financial Officer [5] -------------------------------------------------------------------------------- Thanks, Stefan. I want to briefly touch on the first quarter 2020 results, then move on to the current state of the business. As expected, our business was significantly impacted by the COVID-19 pandemic as the majority of our stores and our wholesale partner stores were closed for 6 weeks on average during the quarter. As a result of the widespread store closures, revenues from our retail stores were down approximately 50% to 65% depending on the region. Shipments to our wholesale customers sharply reduced as well, resulting in an overall decline of 41% in our global wholesale revenues. Our directly operated digital e-commerce businesses were fully operational during the quarter, and we experienced strong revenue growth in all regions, up 40% versus the prior year with double-digit to triple-digit revenue increases during the period while our stores were closed. This growth in e-commerce partially offset declines in our brick-and-mortar and wholesale revenues. Overall, our reported revenue was down 43%. Tommy Hilfiger revenues were down 39% with international down 32% and North America down 51%. Calvin Klein revenue was down 46%, with international down 40% and North America down 54%. Heritage revenues were down 47%. In addition to the revenue decline, our results were under significant pressure in the quarter due to a $97 million increase in accounts receivable write-offs and inventory reserves and a significant deleveraging of expenses. We continue to pay certain retail associates for all and most of the time our stores were closed and the measures we are taking to reduce expenses didn't take effect until the end of the quarter. The unprecedented revenue and earnings decline as a result of the pandemic resulted in a loss per share on a non-GAAP basis of $3.03 for the first quarter. On a GAAP basis, due to the pandemic and reduction in our market cap, we took noncash goodwill and intangible asset charges of $933 million. Also, we took noncash impairment charges totaling $16 million related to store assets and $12 million related to an equity method investment. Moving on to the current state. Our second quarter and full year 2020 results will continue to be significantly negatively impacted by the COVID-19 pandemic, and we expect that our revenue decline in the second quarter will be more pronounced than the first quarter. The duration and extent of the pandemic remains highly uncertain. Our results could be impacted in ways we are still not able to predict today and as a result, we are not in a position to issue more detailed guidance for the second quarter or for the fiscal year. We are continuing with our Phase 3 opening of our stores in the U.S. and around the world. By mid-June, over 85% of our stores will be reopened globally. Although most of the stores are operating with reduced hours and occupancy levels, while sales remained down across all regions on a year-over-year basis, traffic and sales trends are improving each week. Second quarter-to-date we're seeing same-store sales for our brick-and-mortar stores that have reopened, running about down 25% from North America, down 20% for Europe and down 25% for total Asia, with China flat, and China was the first country to close and the first country to reopen with the pandemic. All in second quarter-to-date for our total direct-to-consumer business, including stores that were closed for a portion of all of the second quarter-to-date and our directly operated digital commerce sites, we are running about down 65% for North America, down 25% for Europe and down 11% for total Asia, but China is up 25%. Additionally, most of our wholesale customers have now reopened in the majority of their locations across all regions. However, due to the significant levels of inventory that remain in stores, the majority of our North American and European brick-and-mortar wholesale partners stopped accepting shipments beginning in March, which has not materially improved into the second quarter. In response to the pandemic, we are taking every proportion to reduce our expenses and working capital. These actions started in mid-April and are continuing into the second quarter and the rest of the year. We are reducing payroll costs, including salary and incentive comp, furloughs, decreased working hours and hiring freezes as well as taking advantage of applicable government relief programs. We are eliminating or reducing other discretionary and variable expenses, including marketing, travel, consulting, and creative and design costs. We are also tightly managing inventories, including reducing and canceling inventory commitments, redeploying basic inventory items to subsequent seasons and consolidating future seasonal collections as well as negotiating extended payment terms with our suppliers. I want to emphasize that our priority has been on cash flow and liquidity. We ended the quarter with $1.8 billion of liquidity, including cash of approximately $800 million and $1 billion of available borrowings under our revolving credit facilities. As previously announced, we moved quickly to reinforce liquidity in response to the pandemic. We suspended share repurchases under our stock repurchase program in March, following approximately $110 million repurchases we completed in the first quarter, and we suspended our cash dividend beginning with the second quarter. We entered into a new $275 million 364-day revolving credit facility and issued an additional EUR 175 million, of 3.625% senior notes due 2024. Importantly, we obtained a waiver of the leverage and interest coverage covenants under our senior credit facilities through and including the first quarter of 2021. We are cutting capital expenditures to approximately $190 million in 2020 from $345 million in 2019, with capital expenditures only from minimum requirements in our retail stores and for projects currently in progress related to our systems and warehouses. Additionally, we closed on the sale of our Speedo North America business to Pentland Group PLC, the parent company of the Speedo brand, in April for proceeds of about $170 million. We will give guidance for future quarters in the year once there is more clarity on the impact and duration of the COVID-19 pandemic. And with that, operator, we will open it up for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) We'll now take our first question in the queue. This comes from Erinn Murphy from Piper Sandler. -------------------------------------------------------------------------------- Erinn Elisabeth Murphy, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [2] -------------------------------------------------------------------------------- I guess my first question is on the virtual composition on the other side COVID-19. You referenced in the script kind of good trends in that leisure/comfort, curious how durable you see that? How is Denim performing, particularly with your expectations? And then on the Heritage business, does it still make strategic sense in a post-COVID world? -------------------------------------------------------------------------------- Michael A. Shaffer, PVH Corp. - Executive VP and Chief Operating & Financial Officer [3] -------------------------------------------------------------------------------- Yes. So Erinn, when it comes to the cash utilization trend in product, it's a trend that we saw pre-COVID and we see the COVID effect accelerating that. And everything we see in the data and how the consumer is shopping is saying that, that trend will continue. And it's core to -- what excites us there is that the big casual product categories like underwear, t-shirts, hoodies, including veteran suits, those are all core to our 2 big brands. -------------------------------------------------------------------------------- Emanuel Chirico, PVH Corp. - Chairman & CEO [4] -------------------------------------------------------------------------------- I guess on the Heritage side, Erinn, I would say is we're taking a hard look. You could see that in the decision to sell the Speedo business, which was a good business, but just didn't fit strategically when we were moving the company. And I think we'll take a hard look at continuing to prune the Heritage business back and look for streamlining opportunities in the future. We are not seeing the return on our investment and return on invested capital. So I think we will continue to be aggressive in that area. -------------------------------------------------------------------------------- Erinn Elisabeth Murphy, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [5] -------------------------------------------------------------------------------- Okay. That's helpful. And then, I guess, my second question is just around -- with the strength of digital, have your views around the retail footprint or your own retail, have those evolved? And do you expect to be kind of a net closer or a net opener of stores over the next few years? And then just any comment on tourist stores because I know there's a bit heavier hit? Where do you see that role going forward? -------------------------------------------------------------------------------- Emanuel Chirico, PVH Corp. - Chairman & CEO [6] -------------------------------------------------------------------------------- I think when we look at the store portfolio, I think we're taking a hard look at how that needs to develop. And I think those stores that were 6 months ago, 4 months ago cash flow positive, marginally profitable, I think those stores with the pressure that's been put on from the pandemic and the shift to digital is really pointing to the need to reevaluate those stores and look to streamline the portfolio. And I think that will continue, though, particularly here in the United States, and I think to some degree, in Europe as we look at that portfolio. In Asia, where we are underdeveloped from a retail point of view, China, it's just about every market in Asia, we've got a good brand positioning. Well, there seems to be brick-and-mortar opportunity there. So I think there will be a net opener. And I think in the more mature markets, we'll probably be a net closer over time. The second question, as you could imagine, we're seeing tremendous results, positive results in our permanent population stores, smaller cities, cities that really are driven by -- stores that are really driven by the consumer in that geographic market, both here in Europe, Asia and in North America. And we are being dramatically hurt by tourist location stores. And we just think about the biggest Orlando, Las Vegas, Guam in Asia, Hong Kong, that market that drives off of it in Europe, Paris, Milan, London, those stores which are big profit producers, without that international tourism, those stores are down significantly more than the overall averages and our permanent population stores across the board are much positive to flat to ultimately down slightly. -------------------------------------------------------------------------------- Operator [7] -------------------------------------------------------------------------------- We'll now take our next question from Bob Drbul from Guggenheim. -------------------------------------------------------------------------------- Robert Scott Drbul, Guggenheim Securities, LLC, Research Division - Senior MD [8] -------------------------------------------------------------------------------- Just from the perspective of inventories, I was wondering if you could give us your view on the progression towards supply demand getting back in balance, both within your business, but also within many of your customers, just in terms of like a time line or how you really see it playing out? And then the second question is just can you talk a little bit about distribution around door closures and wholesale door closures and how you're approaching that sort of as you think through the rest of this year and into next year? -------------------------------------------------------------------------------- Emanuel Chirico, PVH Corp. - Chairman & CEO [9] -------------------------------------------------------------------------------- Yes, I'm going to make Mike speak to the inventory question, and I'll come back on distribution. -------------------------------------------------------------------------------- Michael A. Shaffer, PVH Corp. - Executive VP and Chief Operating & Financial Officer [10] -------------------------------------------------------------------------------- So you know Bob, in each region, we have this period of closure. Good when the pipeline goods were flowing, and you see that in our inventories. Our inventories are not reflective of the second quarter demand and there our balances are reflective of goods that we will be liquidating throughout the year. Our expectation is that we will get cleaner each quarter as we move through the year, but we will carry some goods over. Basic core spring product, white T-shirts, underwear that don't change from -- that will not have a significant change, and we believe can sell next year, we will carry, pack and hold and put into our spring assortments for next year. So -- and that number is going to be, let's call it, around $250 million. So in effect, I don't think you will see the inventories truly reflect demand for some time in the first half of next year. -------------------------------------------------------------------------------- Emanuel Chirico, PVH Corp. - Chairman & CEO [11] -------------------------------------------------------------------------------- I think, Bob, when you think about distribution, we're clearly watching it closely. Distribution, meaning that we know the wholesale channel, the department store channel that we sell into worldwide, Europe and North America, specifically, we saw the tremendous pressure. And I think inevitably, we're going to see store closures and contraction in business. We've already seen bankruptcies, and we'll be repurchasing real estate and consolidation. And I think it's clear to us that this is not an environment where you want to get too far from an inventory point of view and a demand point of view for fall. We're being very cautious how we're buying for fall. Based on what we're seeing in our order books, we are not planning on excess replenishment within season. As Mike said, we got plenty of core to support the most profitable sides of our business that underway our basic business, our basic sportswear business. Those businesses, plenty of inventory to support that and meet the demand. But when it comes to fashion sportswear and things like that, we're really buying very, very tightly. And that's going to continue as we watch both the coronavirus impact, but also just the inevitable acceleration of the virus is causing to close it then. So we'll see how that all plays out. -------------------------------------------------------------------------------- Operator [12] -------------------------------------------------------------------------------- We'll now take our next question from Michael Binetti from Crédit Suisse. -------------------------------------------------------------------------------- Michael Charles Binetti, Crédit Suisse AG, Research Division - Research Analyst [13] -------------------------------------------------------------------------------- I think Manny said, related to your comment that calvin.com just turned profitable. As we look at your overall digital business, I know you've been ramping up your digital shops in recent years than the past. I think you really relied on your wholesale partners to capture the digital consumer for you and all the spending that it takes to drive traffic to the sites and the digital CapEx that goes with it. Can you talk a little bit about how quick you think you are today if your output of this whole period and the consumer engaging directly with the brands online after this? How does your digital business overall influence your gross margins, SG&A and operating margins? -------------------------------------------------------------------------------- Emanuel Chirico, PVH Corp. - Chairman & CEO [14] -------------------------------------------------------------------------------- I think impacting the first quarter profitability, the digital business, both our own sites and our pure-play digital players with our partners like Tmall, Amazon, Zalando, those wholesale partners, pure-play, those are some of our most profitable businesses. And what we -- some of the efficiencies that we've built into our own e-comm business and scale, which has really turned those businesses much more profitable for us. So really the e-comm business had no negative impact at all on our profitability in the first quarter. That profitability impact was really driven by the reduced sales volume, the expense initiatives that really began late in the fourth quarter as the stores closed, and we continue to pay people for a month before we started to furlough and take other initiatives hoping that this would be quicker. So I think you'll see those start to become more in line as we get to the second half of the year, the expense ratios. And our margins were impacted by the reserves we took in total $100 million. A big portion of that towards margins for future markdowns that we're anticipating in the second and third quarter. So I think that would have much more impact on our profitability margins and the loss that was generated. And then finally, I would just say is, as this demand curve on e-commerce continues, we are seeing our profitability significantly improved in that channel of distribution both from a direct-to-consumer where we are doing everything and selling directly and particularly where we're working with our third-party players that by far is our most profitable business. -------------------------------------------------------------------------------- Michael Charles Binetti, Crédit Suisse AG, Research Division - Research Analyst [15] -------------------------------------------------------------------------------- I guess just as a follow-up to that. At scale, is that business going to be your own digital business? At scale, is that going to be a positive to your long-term margins? I know at a certain point, it's going to be a very highly variable cost structure. I guess -- and I do want to ask one follow-up. I'm curious about the -- we've heard a number of wholesalers packing away inventory, you said about $250 million, what's the response from the factories while they're seeing you and your peers packing away inventory, which inevitably means they're going to have capacity issues over the next year? Do you need to support them in any way to make sure the capacity is there when you need it? And do they need to start taking physical assets out of your system for the new normal? How should we think about that? -------------------------------------------------------------------------------- Emanuel Chirico, PVH Corp. - Chairman & CEO [16] -------------------------------------------------------------------------------- Okay. So you want to take the second point, Mike? On the suppliers and how we're trying to support them and... -------------------------------------------------------------------------------- Michael A. Shaffer, PVH Corp. - Executive VP and Chief Operating & Financial Officer [17] -------------------------------------------------------------------------------- Yes. Look, we are working with our suppliers in every way, shape and form to keep them healthy, to keep them on track. Our supply base, in general, consist of bigger players rather than smaller players. So there is some stability in that mix. We do have a financing program that allows us some flexibility with our vendors as well. So it is -- there is pressure in the whole supply base as people have been canceling orders and doing the pack and hold. So the only offset to that has been that many of the factories were closed and demand was down. We now see our factories back to pretty much a normal level of -- they're open, but still dealing with social distancing and some of the issues around the pandemic less efficiency. And they just continue to make adjustments to try to work in the new world, and we're doing everything we can to help. -------------------------------------------------------------------------------- Emanuel Chirico, PVH Corp. - Chairman & CEO [18] -------------------------------------------------------------------------------- And communication is key, which we're communicating responsibly so we can adjust, modify, do whatever they can, trying to work together. But I don't believe it's going to require any significant material support above and beyond what would be in a normal course. -------------------------------------------------------------------------------- Stefan Larsson, PVH Corp. - President [19] -------------------------------------------------------------------------------- And Michael, coming back to your question on e-commerce, the redistribution choices we will make going forward will follow where the consumer is going. And we see big opportunities, both for own and operated e-commerce. And as Manny mentioned, the third-party e-commerce and the connections between the 2. Scale will continue to improve our profitability in those channels as well as our continuous improvements in execution in -- and that's something that I mentioned in my notes that we are very pleased to see how our teams across the world are leaning into e-commerce, and as you know, it's about continuous improvements on multiple parts. And we see both the demand being there and us increasingly profitable tapping into that demand. -------------------------------------------------------------------------------- Operator [20] -------------------------------------------------------------------------------- We'll now take our next question from Jay Sole from UBS. -------------------------------------------------------------------------------- Jay Daniel Sole, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Softlines & Luxury [21] -------------------------------------------------------------------------------- Just a follow-up on the comments about gross margin and the sort of $97 million on inventory, accounts receivable that was taken, the charge that was taken this quarter and also the fact that on SG&A, some of the actions that you took came at the end of first quarter, so we didn't see a whole lot of those impact in Q1. Can you just give us a little bit more directional color on how you see gross margin in 2Q playing out? And how you see SG&A dollars trending in Q2 relative to where they went in Q1? -------------------------------------------------------------------------------- Emanuel Chirico, PVH Corp. - Chairman & CEO [22] -------------------------------------------------------------------------------- On the gross margin front, I think we're going to see a leveling off year-over-year. You should see it. And based on the response that we're seeing -- the favorable response that we're seeing as we open our stores and not needing to be as maybe as promotional as we anticipated, we're encouraged by that, and we think that there's a positive impact that we'll see overall compared to first quarter in -- from a margin perspective. And then in addition, if you think about our business from a gross margin point of view, the mix of business in the second quarter, in particular, that will shift more so to a retail model given the fact that wholesale in the second quarter would be under more pressure. That will also have a positive impact on margins overall, offset by the world and the promotional nature, just in general, what should be out there as everybody is clearing spring/summer inventory through the second quarter instead of early third quarter. -------------------------------------------------------------------------------- Michael A. Shaffer, PVH Corp. - Executive VP and Chief Operating & Financial Officer [23] -------------------------------------------------------------------------------- And on the expenses, it was -- the spread between the prior year and this year, as you said, is only -- we didn't have a full quarter of savings in Q1. In Q2, you will see that spread get wide. We'll see additional savings as we get the full quarter of the benefit rather than on a partial quarter. -------------------------------------------------------------------------------- Operator [24] -------------------------------------------------------------------------------- We'll now take our next question from Dana Telsey from Telsey Advisory Group. -------------------------------------------------------------------------------- Dana Lauren Telsey, Telsey Advisory Group LLC - CEO & Chief Research Officer [25] -------------------------------------------------------------------------------- Regarding the topic of product lead times that Stefan mentioned, how do you frame that in terms of the target? And what it means for margin and inventory levels going forward? -------------------------------------------------------------------------------- Emanuel Chirico, PVH Corp. - Chairman & CEO [26] -------------------------------------------------------------------------------- Stefan, do you want to talk to that? -------------------------------------------------------------------------------- Stefan Larsson, PVH Corp. - President [27] -------------------------------------------------------------------------------- Dana, thank you for the question. It's an important one and one that's being very clear coming out of the crisis work that we will continuously help to improve the lead times. And as you know, there are multiple components on lead times. There is lead times connected to core replenishment that can get us down to 1 to 2 months replenishment. And then there is read and react capabilities to seeing when demand trends take off to then react to those versus being bought up front. So we are working, then there are the overall product development lead times that have to come down and will come down. And both in Calvin and Tommy and the Heritage division, we're working with digitalizing the supply chain and the sourcing and product development. So that will cut lead time. So we'll come back later on with specific targets, but it's very clear that it's a combination of those 3 activities. -------------------------------------------------------------------------------- Emanuel Chirico, PVH Corp. - Chairman & CEO [28] -------------------------------------------------------------------------------- And Dana, I'm just going to add that this is an area that Stefan has been working with our product teams, our sourcing teams and our logistics teams. And I think pre-pandemic, we were very optimistic about being able to demonstrate some of those benefits going into second half of 2020. Unfortunately, those benefits that will be there, I think, is going to get masked from a financial perspective this year because of all the noise around the pandemic because of the issues and the need to carry excess inventory. And so it was not to stuff the channels with excess goods. But I think as we get into 2021, we really could start to see some of the benefits that Stefan has brought to the company, working with our teams very closely to really get those benefits on lead times that should enhance margin and hopefully, over time, reduce our inventory carrying. -------------------------------------------------------------------------------- Operator [29] -------------------------------------------------------------------------------- We'll now take our next question from Heather Balsky from Bank of America. -------------------------------------------------------------------------------- Heather Nicole Balsky, BofA Merrill Lynch, Research Division - VP [30] -------------------------------------------------------------------------------- There are a lot of questions with regard to the reshaping of your distribution footprint given the COVID crisis with wholesale closures being accelerated and the shift to online accelerated. Can you help us understand the bigger picture about what this all means from a growth algorithm perspective where wholesale is a pretty high EBIT margin channel, but e-commerce sounds like it's strengthening, and just how you're thinking about it? -------------------------------------------------------------------------------- Emanuel Chirico, PVH Corp. - Chairman & CEO [31] -------------------------------------------------------------------------------- Well, Heather, I think Stefan said really well is we need to move where the consumer is moving. We need to go where the consumer is shopping. Trying in the midst of this crisis to try and give you and our investor group specific guidance about sales growth and what will be shrinking, what will be growing, what -- if we could do it, we'd be giving guidance right now. It's just a -- it's coming at us very fast. We're reacting to it very fast. We're using common inventories in wholesale, retail and the digital channel. We're not like we had been in the past that we can use inventories across channels. And I think that's allowing us the flexibility to react. And it's also built in a level of conservatism, at least, for the next 6 to 9 months that we just can't be chasing goods or growth the way we might have in a different time frame on a different economic situation. So I'd love to give you more color. I'd like to have more color exactly what's going to happen. But I think in some ways, this is going to be how agile every -- we can be, our competitors are going to be in order to react what's going to be coming at us from the wholesale department store channel, what's going to be coming out in the brick-and-mortar retail channel and having the system capability and logistics capability to take advantage of the growth on digital, which, this year, will grow from 2019, which we thought we had a good year. We grew about 12% of our business. This is going to be a significant growth for us, driven by the demand and also driven by the pressures that we're seeing in retail channel. -------------------------------------------------------------------------------- Stefan Larsson, PVH Corp. - President [32] -------------------------------------------------------------------------------- Yes. Just to build on what Manny just said as well, it's the consumer -- we have to start with the consumer and the consumer shops across all channels increasingly. So there is an e-commerce piece and there is a brick-and-mortar piece, and there will continue to be a bricks-and-mortar piece. We see when we open up our stores again that the consumer is coming back slightly ahead of our internal forecast. And so for us, it's going to be about the omnichannel across to say in a shopping region, how is the consumer shopping across digital and physical channels and to Manny's points, we're going to match where the consumer demand is. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- We'll now take our next question from Jamie Merriman from Bernstein. -------------------------------------------------------------------------------- Jamie Susan Merriman, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [34] -------------------------------------------------------------------------------- Stefan and Manny, you both talked about being where the consumer is. And it sounds like in the quarter as you emphasize those omnichannel capabilities, you speed up some capabilities like ship-from-store and curbside pickup relatively quickly. I'm just wondering, are there systems investments that still need to be made to support those omnichannel activities over the longer term? And how should we think about those? -------------------------------------------------------------------------------- Stefan Larsson, PVH Corp. - President [35] -------------------------------------------------------------------------------- Just to start answering your questions, we -- you're right. This quarter, the crisis drove us to move faster on connecting digital with physical stores. And we were pleasantly surprised on how fast we can move on that. And one big aspect was to connect the inventory in physical stores to serve our digital channels. So when it comes to investments, again, we -- anybody in this -- everybody in this industry has to continuously invest into those capabilities. When it came to the-ship-from-store capability, it was a lower investment and faster impact than what we have expected. But over time, we will have to continue to invest in those capabilities coming back again to where the customers go. -------------------------------------------------------------------------------- Michael A. Shaffer, PVH Corp. - Executive VP and Chief Operating & Financial Officer [36] -------------------------------------------------------------------------------- Yes. Look, I would just add, we had -- we gave our guidance on CapEx is $190 million. In there, all the investments on the capital side that we're making on e-commerce, omnichannel should come to all those pieces. And those were really redeployed. We basically have moved investments that we would have made in other business into that sector. -------------------------------------------------------------------------------- Emanuel Chirico, PVH Corp. - Chairman & CEO [37] -------------------------------------------------------------------------------- And I think that the deployment will continue into future periods that, again, the $195 million is significantly lower than our historical cap spend. But I think if you're thinking about our cap spend, it will be in line with what our historical leverage has been in dollars and as a percentage of sales. -------------------------------------------------------------------------------- Operator [38] -------------------------------------------------------------------------------- Our next question comes from Matthew Boss from JPMorgan. -------------------------------------------------------------------------------- Matthew Robert Boss, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [39] -------------------------------------------------------------------------------- Manny, maybe any material difference in demand recovery from here that you're planning for as we think about Europe versus the U.S. based on what you've seen so far on the openings? And with that, what's the level of promotional activity that you're seeing necessary to drive demand in Europe versus the U.S. today? -------------------------------------------------------------------------------- Emanuel Chirico, PVH Corp. - Chairman & CEO [40] -------------------------------------------------------------------------------- Okay. Let's talk about the promotional level. As always, the promotional level is lower in Europe than in the United States. And I think that this hasn't changed that. We're seeing in Europe, very strong full-price selling across the board and -- in our full-price stores and in our other channels, we've really targeted our promotions very efficiently. In the U.S., when initially opened, we came out of the box very strong from a promotion point of view. We were anticipating even higher promotions than what actually is happening in the stores today. We have since backed off of that initial promotional cadence. And since we're doing on a POS basis, that gives us the flexibility. As we saw demand exceed our expectations, we have pulled back on the promotional cadence overall. I would compare the promotional cadence in the U.S. to be slightly more than it was this time last year, but not nearly as promotional as we is going to be going forward. So I hope that gives you some color. Okay. And I think with this we're going to take our last question, as right now, it's just about -- it's after 10 and we're going to try to get back to business. So last question, operator? -------------------------------------------------------------------------------- Operator [41] -------------------------------------------------------------------------------- We'll take our last question from Omar Saad from Evercore. -------------------------------------------------------------------------------- Omar Regis Saad, Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Softlines, Luxury & Department Stores Team [42] -------------------------------------------------------------------------------- Two quick questions. Number one is a bit of a technical question. So I think about the stores that were open in the first quarter versus second quarter, are stores and kind of the percentage versus the total overall possible store hours, if you will, is that percentage going to go up or down in 2Q? My assumption is stores are less open in 2Q overall versus 1Q, but I want to kind of get confirmation from that. And then second question, Stefan, I was really curious here you talked about Calvin Klein, the work you guys have done there on the brand. You're hinting at the DNA, hearkening back to the kind of iconic DNA, maybe a little bit more information insight around that? Are we talking about Brooke Shields? Are we talking about Marky Mark? I would appreciate your color there. -------------------------------------------------------------------------------- Emanuel Chirico, PVH Corp. - Chairman & CEO [43] -------------------------------------------------------------------------------- I'll give Stefan a chance to put the marketing campaign together, but all kidding aside, thanks for the question, Omar. On -- clearly, as we go through the second quarter with the stores, if you take the month of February out of the equation, we're going to be significantly more open in the second quarter than we were in the first quarter as we move forward. Right now, I think, as we say in all our disclosure, we're about 85% open mid-June. So by the end of this weekend, about 85% of our stores will be opened. Store hours are less. I think that store hours on average are probably down 15% to 20%, robust number to give you a sense that it's cut. It's also store capacity is down. So we can only let so many people in at a time. And in some locations, we have lines outside the store. All of those things are impacting us, where our store traffic is down significantly more than our sales traffic, and I think that's driven by a couple of things. Consumers -- customers that are out and shopping are out and shopping with a purpose. They need something they're out there. They're shopping. They're not just browsing. They're shopping. And secondly, I think we're being very effective on how we are converting customers. We're offering strong value in our product, which we really saw in February and coming out of the fourth quarter, we saw tremendous momentum in our spring product globally at Calvin and Tommy Hilfiger. And that momentum as the customers come in and they're voting, they're really hitting that target. I think Stefan is not going to give, as you know, in the Calvin organization. We don't announce marketing campaigns way ahead of time until they're ready to be announced. But I think he'll give you just a flavor of what we're trying to. -------------------------------------------------------------------------------- Stefan Larsson, PVH Corp. - President [44] -------------------------------------------------------------------------------- Just coming back to what I shared earlier, it's what the team has done really well is to go back and decode the Calvin DNA covering some of those talents that you mentioned. But what they do from there is to make sure that they understand what made the brand iconic and resonate and become a $10-billion brand. And then they connect those components, those DNA components to the consumer and culture today. You will see it gradually coming out. You will see it in social media. You will see it in collaborations. You will see it in an increased folk of modern essential. So if you think about it, Calvin's brand philosophy -- Calvin was 20 years ahead when he focused on the essential products. One thing Calvin kept back -- kept coming back to what's the meaning of each product, what's the intent behind each product, and it's never been more relevant today. So you will see, as Manny mentioned, you will see it over time. -------------------------------------------------------------------------------- Emanuel Chirico, PVH Corp. - Chairman & CEO [45] -------------------------------------------------------------------------------- Thank you, everyone. We really appreciate it. Thank you taking the time on this call. We look forward to speaking to you in August with our second quarter results. Everyone, please stay safe and healthy. Have a great day. -------------------------------------------------------------------------------- Operator [46] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.