PVH Corp (PVH) 2020 Q3 法說會逐字稿

Good day, everyone, and welcome to the PVH Third Quarter 2020 Earnings Call. Today's call is being recorded.

And at this time, I would like to turn the call over to Dana Perlman. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to the PVH Corp. Third 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 December 2, 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 pandemic continues to have a significant impact on the company's business, financial condition, cash flow and results of operations. There is significant uncertainty about the duration and extent of the impact of the pandemic. The dynamic nature of these circumstances means what is said on this call could change materially at any time. Therefore, the operation of the company's business and its future results of operations could differ materially from historical practices and results or current descriptions, estimates and suggestions. 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 third 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.

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

First of all, I'd like to thank you all for joining us for the third quarter call. It's hard to believe that this is the third earnings call since the pandemic started, and our associates in certain parts of the world have been working remotely for over 9 months now. I would truly like to thank all our associates for their hard work and flexibility, in particular, our dedicated retail store and distribution center associates who manage to keep running our business as usual despite the backdrop, which is far from normal. Our third quarter results were very strong, and we significantly outperformed our top and bottom line expectations across all markets and channels despite the challenging environment.

I'm also very pleased to note that our fourth quarter is off to a very strong start as we are outperforming our plans for our global holiday kickoff events, including Singles' Day in Asia; and Black Friday, which is now being observed in many markets outside the U.S. And we feel great about the momentum behind our brands. There is clearly an unprecedented amount of change happening in the apparel industry, which the pandemic has only accelerated. To navigate this backdrop, our teams have been evolving our business model to compete in the new world of retail and, in particular, capture the younger consumer generation while continuing to serve our core consumer.

We also addressed near-term challenges, which are -- with a long-term approach to drive sustainable, profitable growth, including some difficult business decisions as we recognize the need to adapt quickly to the realities that COVID-19 is presenting to us with. In this context, we have been accelerating our digital agenda and reallocating additional resources to drive growth in this highly important channel. We are seeing strong revenue growth and are pleased that our EBIT margins for our own digital business are in line with those of our overall business, which, as we continue to scale the business, should continue to improve. We also continue to evolve our business towards the comfort and casual categories that are working with the consumer today, especially the younger generations.

And lastly, we continue to pivot towards our international businesses where we continue to see a very significant revenue opportunity for both our Calvin Klein and Tommy Hilfiger businesses while also contributing a higher overall operating margin. We believe that our focus on these aspects of the business will drive long-term revenue and margin growth for our stockholders driven by gross margin expansion and SG&A leverage. Stefan and Mike will get into the specifics of the third quarter as well as the current fourth quarter sales and margin trends, which are all very positive.

I'm also extremely pleased with the tremendous liquidity that we have in place in order to expand any potential disruption from the pandemic. We are cautiously optimistic about this year's unique holiday season. Clearly, the shift to digital is the narrative for this holiday season. And we have positioned our business to succeed in this context with strong digital events planned, inventory, investments to fuel the demand in the channel and adjustments to the in-store experience to adapt to the capacity constraints in stores. We believe that we are positioned to capture market share for holiday while also selling through any carryover inventories. We'll continue to monitor how the virus ebbs and flows as well as its impact on our business.

Before I pass things over to Stefan, I'd like to just acknowledge what a privilege it has been to lead PVH as CEO for the last 15 years. I truly want to thank the PVH Board and all our amazing associates worldwide for all their contributions and, most importantly, their partnership and support. I'm quite amazed at how PVH has grown and transformed during my 15-year career at PVH. We've evolved from over -- from a North America-based dress shirt business with sales of $1.5 billion to a portfolio of global iconic brands with about 70% of our EBIT coming from outside the U.S., over 40,000 associates employed worldwide and close to $10 billion in revenues last year. We've also developed one of the industry's leading corporate responsibility platforms. And our vision to drive fashion forward for good motivates and guides the way we operate our business every day.

In my new role as Chairman, I look forward to seeing PVH continue to drive this vision forward and deliver the company's next chapter of growth and profit recovery. I have great confidence in Stefan as he assumes the role of CEO in February. His global experience, consumer focus and high-performance track record, especially in this unprecedented time of disruption, are tremendous assets for PVH. As Stefan continues to partner with our incredible team of senior leaders, many that have been here for over a decade, I believe that their expertise and collective knowledge of our industry and consumer base will help maximize the growth potential for PVH.

Overall, I'm very optimistic about future opportunities ahead for PVH. We have unique, competitive advantages: our incredible people, our iconic global brands and our strong financial and operating fundamentals, which I believe will position us to continue to deliver sustainable long-term growth for all of our stakeholders.

With that, I turn it over to Stefan for comments about the quarter and the fourth quarter as well.

Thank you, Manny, and good morning, everyone.

First, let me start by saying that I'm deeply honored and humbled by the opportunity to succeed Manny in the CEO role for this great company. And I would like to thank Manny and the Board for their confidence and trust in me as well as for a very strong partnership. Manny is one of the few iconic leaders of our industry. And having had the opportunity to work side by side with him over the last 1.5 years has given me unique insights into how he and our team over the last 15 years have built PVH into one of the largest apparel groups in the world. My focus will be to build on the core strengths that brought us here and connecting them closer to where the consumer is going than any time before, which will form the foundation to successfully deliver our next chapter of growth. And coming in as the CEO, I will continue to build up on the people-first values Manny has instilled in PVH.

With the critical start of the holiday season now underway, our teams have been doing a great job in pivoting to optimizing our consumer offering to this very different kind of environment where supercharging digital and our omnichannel capabilities and leaning into our casual essential products led to our strongest-ever digital holiday sales results and an above-plan performance for the initial holiday period overall. Our strong execution, including our events for Amazon Prime Day, Singles' Day and Black Friday in Asia, Europe and North America reflects the hard work and flexibility of our talented teams around the world. And I would like to thank everyone for their critical contributions.

I will now share some key insights on how we drove performance in the third quarter and fourth quarter to date. And as Manny mentioned, Mike will then share more financial details and current trends.

The focus for our brands and regions has remained to successfully navigate through the pandemic, capture market share in the holiday period and selling through seasonal inventory to enter spring 2021 with a clean inventory position. In parallel to the focus on driving the business here and now, we continue to lean in to drive an accelerated recovery to win with the consumer coming out of COVID.

I'd like to start by sharing some proof points, demonstrating our progress against 3 value-creating areas that we outlined last quarter. First, we continue to supercharge the e-commerce channel through our owned and operated as well as third-party digital partners. As a result, for the quarter, we grew total digital sales by 36%, including 70% growth on our owned sites. We are seeing strong new user growth, particularly with the younger consumers, as we expanded our casual assortments and offered digital innovations, such as live streams and targeted activations with the pure players. Improved in-stock levels and enhancement to our owned sites are also resonating well, including ship-from-store and additional payment options, which are all important to attract and convert the younger consumers.

Next, we continued to increase our focus on driving product relevance, which led to stronger-than-expected demand and margin in our key casual categories. Within these categories -- key categories, we increased our focus on the essential products that have the highest demand and, at the same time, we rationalized unproductive SKUs, resulting in higher AURs in many of our most important products.

Lastly, we are realizing the savings from our recent workforce reductions in North America, and we continue to evaluate further measures to drive cost efficiencies across the company. While our regions are all in various stages of their recovery, these focus areas continue to guide our teams with clear objectives to operate against, to drive an accelerated recovery.

As I provide a regional update, you will see that the third quarter operating environment had stores open for the majority of the quarter. However, in late October, the virus resurgence intensified, resulting in temporary store closures in Europe and further weakening of our store traffic in North America.

Let me start with Asia, specifically with China. Overall, China remains the furthest ahead in terms of the recovery with sales up 6% in the quarter -- in the third quarter and total digital sales up 63% as well as improving traffic in our brick-and-mortar stores.

Our teams in Asia has been doing a great job planning and executing the back half of this year. They have supercharged e-commerce, leaned into our big casual categories, the most relevant casual and athleisure products and based on our selling trends, cut many unproductive styles, all leading to improved sell-throughs and markdown rates. They have also been effective with their brand marketing and consumer engagement.

During the third quarter, we experienced very strong performance in China during Golden Week. And we were also pleased with the start of the fourth quarter, including Singles' Day sales, which now spans several weeks, where we grew over 50% on Tmall and drove positive comp store sales in our brick-and-mortar stores at the same time, all with increased pricing power. Our strong execution, including live streaming activations with top Chinese live streamer, Viya, resulted in market share gains against the competition with Tommy's ranking in Tmall flagship store rising 14 places.

And lastly, our marketing activations resonated very well with the consumer, including Calvin's virtual event with Ambassador Lay Zhang, which we livestreamed from our Shanghai Daning store, resulting in plus-48% growth that day on Tmall and 2.6 million views on Weibo.

Overall, while there has been some infection resurgence in Japan and parts of Southeast Asia, we continue to make good progress towards a continued strong recovery in the region as a whole driven largely by China and digital strength.

Moving on to Europe. Our business across both brands outperformed despite the tough backdrop with revenues declining only 4% versus last year in local currency. Just like in Asia, our management team in Europe has been very effective in taking sustainable, profitable market share in a very difficult environment. We drove a very strong recovery for the majority of the quarter, including in our brick-and-mortar stores. However, since late October, we have been negatively affected by the resurgence of the virus with an increasing number of lockdowns imposed towards the end of the quarter.

Overall, strong brand product and channel execution drove higher consumer and retailer demand for our Tommy Hilfiger and Calvin Klein products to the point where we were chasing goods in select categories to fuel the consumer demand while also achieving strong margins. Our well-developed, scalable digital distribution network continues to be a real competitive advantage. We grew total digital sales by 33% as we continue to post outside growth through our owned and operated sites as well as through our partnerships with Zalando, ASOS and ABOUT YOU.

With approximately 40% of our stores temporarily closed in Europe during November, we quickly pivoted our operations to best leverage our digital distribution network. And we're also able to leverage our connected store inventory to meet the stronger-than-expected inventory demand online. In recent weeks, the lockdowns have started to ease, and we expect all doors to be open within the next 10 days, assuming no further government restrictions.

We feel very good about our future order book where spring and summer order books actualized up high single digits versus last year and the first indication for pre-fall 2021 are very positive. All these factors make us have great confidence in our ability to continue to gain market share in Europe.

Lastly, our North American business continued to feel the most pressure relative to our other regions driven by a combination of the lack of international tourism, increasing resurgence of the virus across the region and bigger dependency on brick-and-mortar than our other regions. Our teams in North America are working very hard in navigating through the COVID-related challenges.

While our overall sales in North America declined 38%, digital remained a true highlight with our owned sites growing over 100% enabled by our site enhancements, inventory investments and logistical improvements to fuel demand. We had another strong quarter with Amazon, including Calvin and Tommy posting their highest Prime Day sales ever achieved with a significant increase in new consumers.

At the same time, tourism is currently down 95% and not expected to return in a while, presenting a significant challenge for our brick-and-mortar business. Losing the tourist business, that's usually 35%, 40% of our total retail business in North America, has put pressure on clearing through inventory, which, in combination with an unusually early start of the holiday season, led us to be more proactive with driving early promotions, moving some of them from Q4 to Q3. Our main focus remains to enter spring clean from an inventory perspective.

Moving on to our fourth quarter outlook. We have so far performed better than expected over Black Friday week and Cyber Monday across all channels in North America. While we still have significant amount of business ahead of us for holiday, we're expecting the current business trend to continue through the final holiday stretch.

So looking ahead for North America. Having navigated through the most challenging parts of the pandemic while the lack of tourism by far is the biggest challenge we are facing, it's clear that we have our own work to do coming out of the pandemic. We will increase our focus on our domestic consumer. We will continue to take on the significant opportunities to further expand our e-commerce business, both our owned and operated and third party. And we will also improve how we plan and buy inventory to demand.

As our performance across regions demonstrates, we have taken a very deliberate approach for each brand to get even closer to the consumer as we continue to enhance our brand relevance and positioning. I'd like to share a few brief global highlights from the quarter, beginning with Calvin.

We are seeing Calvin Klein continue to register strong 86% global brand awareness with increasing consumer consideration to purchase across all regions. Our increased focus on creating product consumers' desire was captured through Calvin Klein's underwear collaboration with Kith, featuring Gigi Hadid, which sold out 75% of the collection in just 4 days, highlighting incredible results with younger consumers, both from an engagement and sales perspective, which we will continue to build upon as we head into 2021.

Lastly, I'm excited to say that we strengthened Calvin's global brand leadership team during the quarter, announcing our new key hires across design, merchandising and marketing, which will enable the execution in product and marketing of Calvin's evolved brand vision.

Moving on to Tommy. I'm excited to welcome Avery Baker back to Tommy in a newly established role of President and Chief Brand Officer with global responsibility for the brand's products, marketing and experiences. Avery was the driving force behind many of the brand's transformational programs, including TOMMYNOW, and has experience and real strength in connecting the Tommy DNA to culture and what the consumer desires today.

Tommy also celebrated its 35 anniversary as an iconic brand with global editorial coverage and a brand activation on Tmall. And we continue to see improving global awareness, including in key growth markets like China. The brand also continued to further its sustainability agenda, launching Tommy jeans recycled denim line for fall 2020.

Finally, to our Heritage business. Our Heritage Brands business continued to be under pressure during the third quarter as the mid-tier department stores experienced traffic challenges and dress furnishings categories remains under pressure. We are continuing to actively address the business challenges by managing inventory levels aggressively, lowering our cost base and reviewing additional ways to optimize and streamline the business.

Before I hand it over to Mike, I would like to reiterate that the actions we are taking now to successfully navigate the pandemic and drive an accelerated recovery are also positioning us to win with the consumer coming into a new normal post-COVID. The proof points that I just shared with you from our strong digital growth to our increasing brand engagement and enhanced product strategies to our strong performance internationally demonstrate the global brand power behind Calvin Klein and Tommy Hilfiger and the strong relationships that we are building with our consumers, particularly the next generation. As we leverage the power of PVH, focusing in on our core strengths and connecting them to where the consumer is going, I'm confident that we will drive brand relevance, cost efficiencies and deliver long-term sustainable growth while driving fashion forward for good. Looking ahead, we are working on our long-term plan for PVH next chapter of growth and we look forward to sharing more details with you at an Investor Day we are planning for mid-2021.

And by that, I would like to hand it over to Mike.

Thanks, Stefan.

The comments I'm about to make are based on non-GAAP results and are reconciled in our press release. I'm going to discuss our third quarter 2020 results and move on to the current state of the business and our fourth quarter expectations.

While our business continued to be negatively impacted compared to last year by COVID-19 pandemic, our overall results were an improvement compared to the second quarter and exceeded our expectations driven by strong outperformance in Europe and China.

Overall, our revenue was down 18% as reported and 21% on a constant currency basis from last year. Tommy Hilfiger revenues were down 12% as reported and 16% on a constant currency basis with international flat as reported and down 6% on a constant currency basis and North America down 37%. Calvin Klein revenue was down 18% as reported and 21% on a constant currency basis with international flat as reported and down 4% on a constant currency basis and North America down 39%. China continued to show positive year-over-year results in both Tommy Hilfiger and Calvin Klein. Our Heritage revenues were down 36%.

Our third quarter reflected a 22% decline in revenue through our wholesale distribution channel and an 11% decline in revenue from our total direct-to-consumer businesses, including a 70% increase in sales through our digital commerce business driven by strong growth across all brands and regions. The lack of international tourist traffic coming to the U.S. continues to challenge our North America brick-and-mortar retail business.

While we continue to be negatively impacted by the pandemic, our earnings exceeded our expectations and our earnings per share was $1.32 on a non-GAAP basis for the third quarter. Our gross margin reflected heavy promotional selling in the U.S. as we advanced markdowns from the fourth quarter into the third quarter in order to maximize the earlier holiday selling season.

Inventories ended the quarter down 16% from last year. As of the end of fiscal 2020, we are now projecting to carry approximately $100 million of basic inventory into spring '21, which is a reduction compared to our prior projection of about $125 million.

Earnings in the third quarter benefited from cost savings resulting from the North America workforce reduction announced in July 2020 and COVID-related government payroll subsidy programs in international jurisdictions as well as reductions in all discretionary spending categories. Partially offsetting these savings were increased ongoing expenses associated with health and safety measures to protect our associates, customers and business partners. These safety measures are expected to continue.

We ended the quarter with $2.7 billion of liquidity, consisting of approximately $1.5 billion of cash on hand and over $1.2 billion of available borrowings under our revolving credit facilities.

Moving on to the current state of business and our expectations for the fourth quarter. Overall, for the fourth quarter to date is running down approximately 20% versus last year. And we currently expect that revenue for the full fourth quarter will be down approximately 20% versus last year as well.

We continue to see strong growth in our owned and operated digital commerce business and experienced a strong positive consumer response to Singles' Day promotions and the holiday season kickoff events globally. Additionally, we see continued overall positive trends in Asia, particularly in China.

However, our retail stores in Europe and North America continue to face significant pressure as a result of resurgence of COVID-19 cases. Approximately 40% of stores in Europe were closed for the majority of November. As a result, our fourth quarter to date direct-to-consumer business has declined compared to the third quarter, running down approximately 25% overall compared to last year.

When we look at the total direct-to-consumer business by region, we are running up low single digits for total Asia, down high 20s for North America and running down low 30s in Europe, including the impact of the closed stores I mentioned. As of today, only about 10% of our stores in Europe are still closed. And within the next 10 days, all of our stores are planned to reopen. We expect the trend in Europe to improve considerably as a result. Also, through November, all of our regions are running ahead of our current plans.

We expect that our fourth quarter gross margin percentage will be relatively flat compared to last year and our expenses as a percent of revenue will be in the mid-50s. Overall, for the second half, our gross margin percentage is in line with our previous expectation. And our expenses as a percentage of revenue have improved by approximately 250 basis points. We're not in a position to issue a detailed guidance due to the uncertainty related to the duration and severity of the pandemic.

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

(Operator Instructions) We'll take our first question from Erinn Murphy with Piper Sandler.

Manny, it really is an end of an era. So wishing you all the best in whatever the next chapter holds for you. I guess my question...

Thank you, Erinn.

You're welcome. I guess my question, first, is just on your own digital margins. Manny, you spoke to in your prepared remarks that it's now in line with overall margins. Can you just speak to some of the changes that you've made to see that materialize? And then where should digital margins go over time?

Yes. Erinn, it's Mike. I'll take it. I am -- look, I think one of the benefits we've seen this year has been the scaling of the business. So in each region, we've seen increasing gains on the top line and we've gotten significant benefit to leverage in the expenses. We have done deep dives. We've reviewed expenses in every region. We looked at how we ship, how we manage, what we do for shipping. And our teams are getting a cadence and rhythm around the business, which they didn't have before. So it's all those things put together. It's truly detailed work, it's truly getting the benefit of that scaling of the business.

As we look forward, the business in terms of digital is -- overall, across our regions, is now approaching the profitability level of our brick-and-mortar business. So we're really happy with the way that business is evolving. And where we felt pressure in North America, we're now seeing significant improvement there on the bottom line. And just a reminder that Europe and Asia are -- and have been profitable businesses for us and continue to just be very profitable for us.

Got it. Okay. And then I guess my second question is really just on your comments, I guess maybe more for Stefan or Manny to tag team. You talk about supercharging e-commerce, and that was definitely a thread throughout the comments this morning. There's also been a lack of tourism here domestically. So I'm curious how you're thinking about reevaluating your store fleet, particularly in the domestic market. But if you had any comments on Europe as well, that would be most helpful.

Thank you, Erinn. It's Stefan. As you mentioned correctly, we have been very successful in pivoting towards e-commerce. And then parallel to that, we're working on rightsizing the brick-and-mortar fleet to match where the consumer is going. It's an extreme case now given that we are in the middle of the pandemic. So we are tracking where we are going right now and optimizing what we can here and now. And then we are following where the consumer is going coming out of the new normal. But it's going to be an important work for us to make sure that we rightsize the brick-and-mortar portfolio, North America, Asia, Europe.

What we do see, though, in this quarter, which is very exciting in both Asia and Europe, is when we execute really well, cross-channel, the consumer shops cross-channel. So during the Tmall activation where we drove a 50% comp, we were also, at the same time, able to drive sales in the stores. And the same in Europe that when we see pivoting -- an extreme pivoting to 40% of the stores closed, we are able to connect to use our connected inventory. So we see a future where the consumer continue to shift more and more into digital but very much an omnichannel consumer.

And Erinn, it's Mike. I would just add, in North America, just a reminder, our leases tend to be relatively short and average 3 years with lesser-performing stores being less than that. So we do have some significant flexibility.

We'll take our next question from Bob Drbul with Guggenheim.

Manny, I have to say, look, it's been a real honor and pleasure. I think you talked about a 15-year career just as CEO. But you go back to your CFO days and how far it's come and where we've been together, and we're going to miss you. Congratulations. You've been an amazing leader over the last 20-plus years. Stefan, you've got some big shoes to fill. I wish you luck.

Thank you, Bob. I agree with you.

So Manny, the first question that I do have is for you. In your agreement as Chairman, have you arranged like an exclusivity with Jim Cramer and Mad Money to be the guest for PVH on going on the quarter?

No. No. But I think -- maybe I'll be a guest to talk about retail in general, but not PVH specifically. I'll leave that to Stefan, Dana, Mike and the team. But thanks for the kind words, Bob, that's very nice of you.

Okay. And I guess the second question then is, can you guys talk about -- I think you talked about the improvement in the European order book. I'm just wondering if you can elaborate a little bit with the business trends to date. With the store closures, how much the store closures have impacted the fourth quarter, how it should shift when they reopen. And then just real curious on the order book over the next few quarters. I think spring definitely firmed up from the last time you talked about it, some comments on summer and fall. If you could just talk to how the retailers are planning and/or envisioning the coming quarters as things hopefully come back to some sort of normalization.

Yes. Bob, it's Stefan. I'll start and then hand it over to Mike. So we experienced very strong performance, strong market share gains in Q3 until the temporary store closures hit. So Mike can give you more of the details of those trends.

But then when we look at the order books, what's exciting to us is that they are very strong and they kept strong throughout the resurgence. And it keeps coming back to our team is very, very good at executing in terms of brand relevance, product strength, working, driving their owned and operated e-commerce, their own stores and also strong partnerships with third players and other wholesale partners.

So very strong trends and then disrupted by 40% of the stores being closed and then very strong indications on the order books. But Mike, I'll leave it for you to provide some additional detail.

Yes. Sure. So I guess, Bob, just some color around the -- again, the third quarter, these stores were all plus. We were running up 7% for all of Europe. Even with 40% of the stores closed, we were down 30%. So what we actually have seen is the stores that were remaining open were actually running plus comps and the stores that are opening are opening strong. I actually think there's pent-up demand, and we may get some of the business back from the closures. So that would be the hope.

Our next question comes from Michael Binetti with Crédit Suisse.

Let me -- Manny, let me, first of all, thank you so much for the dialogue all these years also. It's been a pleasure and obviously, wish you the best in the next chapter. And Stefan, cannot wait to pick it up with you here as you start the next adventure in your career. This will be very fun, very excited to work with you.

I just want to ask you quickly on the -- I don't know, Manny or Stefan, who wants to jump on this. But with the revenues down today and 20% and the D2C down 25%, but 40% of the stores in Europe closed and now reopening. Is there a piece of the business that you expect to slow from here that hold you at negative 20% revenues in the fourth quarter, if Europe stores are going to be opening and the contribution should be improving? I'm just curious what you're thinking about or if it's just conservatism. And I had a follow-up.

I'll start and then let Stefan chip in. I guess from my perspective, it's just an incredibly uncertain time. So we had stores that were closed. We've obviously seen most of those stores open and hope balance -- and are planning the balance open over the next 10 days. We've seen resurgence in the U.S., pretty much no closures or very, very few. So it's just uncertainty in the business. While we are outperforming our plans to date, we were just prudent in how we project it.

I agree with Mike. It's -- looking at Europe as an example, we were on fire. And then within a few weeks, 40% of the stores were closed down. And now within a few weeks later, we are fully open again. So the underlying trends are very strong in both Europe and Asia.

That seems pretty easy to navigate, Stefan. I don't know what the uncertainty is. I'm just kidding. Can you help me -- can you help us understand a few of the pieces of the puts and takes on the gross margin in the third quarter? Any numbers you could give us to understand the 260 basis points of pressure in the quarter? I am most curious about how the pull-forward of markdowns as you saw the incremental store closures coming and you said you moved some markdowns in the third quarter. Any number you could help on that would be helpful. I think that's the most important thing to understand. And then any of the other relative buckets, if you just mind rank ordering them for us as far as what the pressures were.

Yes. So look, I think it's -- it really was driven by North America. We have work to do here, and we were promotional on the business. So we got -- we advanced markdowns. We were -- saw this holiday season being earlier. It clearly paid off. We were able to deliver an increase to the year in terms of profit. We remain consistent in our gross margin plan, as we reported from last quarter to this quarter.

So I think we're feeling good about the business. We're feeling good about the decision we made, and we think we got rewarded for doing it. So that was really what the change was.

Our next question comes from Dana Telsey with TAG Advisors.

Manny, congratulations on a wonderful career and have a wonderful next chapter and hopefully, we can all still stay connected.

Stefan, as you think about the business and, as Erinn mentioned, supercharging e-commerce, with each of the brands of Tommy and Calvin and your motto of that sustainable repeatable process, how do you see that for each of those brands and continuing to capture the younger consumer on a fashion-forward basis?

And then, Mike, just on the inventory levels, how are you thinking about them ending the fourth quarter going into '21?

Yes. Thank you, Dana. And it's an important question. And this year, coming back to -- it's a pandemic year. So -- but what's exciting is that our pivot to e-commerce following the consumer has really worked. So in 1 year, we have grown penetration from roughly 10% to over 20%. So can the growth rate continues this way? Probably not when the stores -- but it's the long-term growth potential coming back to systematic, repeatable value creation in e-commerce. Is it beyond 20% in penetration? Absolutely. And I have the benefit of spending a year next to Manny and really learning in depth and looking at our core strength. And I see very big opportunities over the long term to continue to grow in e-commerce.

Right. And Dana, on inventories, I -- we called it out in the release. The third quarter, we were down 16%. And that includes the $100 million of carryover product that we've now chosen to pull into next year, basic product, no liability.

As we look at the fourth quarter, the year-end, I think what we'll see is inventory reduction, call it, mid-single digits. And then that carryover inventory is worth about 6% or 7%. So something in the low teens in terms of a reduction, excluding that $100 million of carryover.

Our inventories are very clean. Obviously, with the beat we had on the top line in the third quarter and the way the business is trending ahead of our plans, we're in very good inventory shape at the moment.

Our next question comes from Jay Sole with UBS.

So my question is about what percent of the business do you think has been impacted by COVID in terms of the category? So if you think about fragrance or women's dresses or bottoms or some of the things that maybe consumers are shifting away from just in the stay-at-home environment, can you give us an idea of what's been impacted and sort of with an eye towards next year and those businesses probably coming back as things get back to normal?

Before I hand it over to Mike, who might have more facts or details behind it, I mean the biggest change is the formal wear to casual. The COVID and having everybody work from home around the whole world is a big move to casualization. That's the biggest trend change we see.

Yes. And that's exactly where I am. I think it's clearly going to be -- we're going to be chasing inventories. We don't know when this ends, so we'll play it cautious. We'll be buying more of the casual product, less of the dress-up product. And I think we're moving as quickly as we can into the categories that are outperforming.

Got it. And maybe one more. I think you mentioned that you expect current business trends to continue in North America, if I heard that right. How did you see the business trend as you went from September, October into November? And sort of what does that imply about where the current business stands today?

So right now, in North America, running down in the high 20s, which is ahead of our plan. And if you think about it, the beginning of this Black Friday season is where I think we stood to have the most risk in the business, the capacity issues, the stores not opening for the post-Thanksgiving period but opening the Friday instead. So I think a lot of that risk is behind us there. So that's where we are today.

Our next question comes from Jamie Merriman with Bernstein.

Stefan and Manny, I wonder, as you talk about some of these omnichannel initiatives, can you just give us a sense of where you are in terms of those capabilities? What you would still like to do on that front that could potentially be another driver of that customer acquisition? And then to what extent are you working with some of your e-commerce partners, whether it's the platforms like an Amazon or Zalando or some of your larger brick-and-mortar partners, to have a more integrated inventory position like you've worked on with your owned channels?

Thank you, Jamie. It's a continuous work to follow the consumer. And the consumer shops our owned and operated site. As you could see, we drove a 70% growth. And then they shop increasingly with the big platforms as well. So our partnership with Amazon, Zalando, Tmall is very, very close and also with the traditional department stores and their e-commerce platform capabilities. So we see the consumer increasingly shopping and browsing through the branded site, our owned and operated and third party. So that's the work that we will continue to do.

We saw it pay off Tmall -- the collaboration with Tmall that we really double down on a year ago roughly and we planned into this Singles' Day event, which is now 2, 3 weeks, and we planned in and came together with them and really won with the consumer. And then when it comes to Zalando, we are -- have very strong partnership with them and also connect our inventory in store.

So we were able to pivot. When the stores were closed, we were still driving significant sales through fulfilling online. So this is continuous work. And we have some ship-from-store capabilities that we were able to standoff within just a few months coming into the crisis. We -- it's a continuous work, but those are just a few examples of what we are doing and what we will continue to do. And the most exciting with that is that it resonates with the consumer.

Our next question comes from Kimberly Greenberger with Morgan Stanley.

Stefan, I heard you say that this year, your digital penetration is going to run over 20%. I think that's owned and partner digital. Could you just remind us within that, what piece is the owned piece of digital commerce?

And then I was looking at your international business. Both Calvin Klein and Tommy Hilfiger performed fairly consistently in aggregate internationally. I'm wondering if you look at each geography, Europe and Asia, are they performing similarly as well within those geographies?

And then, Mike, any sort of color you might have on Q4 gross margin and how we ought to think about that?

Yes. So let me start with the tail end of your questions. One, when it comes to our brands and the geographical performance, so where we see strength in both Europe and Asia, predominantly in -- driven by China in Asia, we see strength in both grounds. And Mike?

In terms of the percentage, our owned business is about 10% of the total business this year. And it is the fastest-growing piece of the business. And it's over double the size from the prior year.

I believe you had a gross margin question on the fourth quarter. When you think about the fourth quarter, I -- we are right now planning the gross margin basically flat to the prior year for the overall company. And if the trends continue, there is an opportunity there to outperform.

Our next question comes from Heather Balsky with Bank of America.

Stefan, a question for you. As you step into your role as the new CEO, what are you most excited about? And what do you view as the biggest opportunities for PVH?

So thank you, Heather. What I'm most excited about is by far -- again, coming back to the I've had the opportunity to work a year next to Manny is the strength of -- the many strengths that we have and the strength of our brands, the strength of our global brands, the strength of our global capabilities, the strength in Europe and Asia and the opportunity to continue to grow with -- where the consumer is going. So that -- what excites me the most is the opportunity to take the strength we have, really zoom into the core strengths and connect them closer to where the consumers go. And then underlying all that is the strength of our people.

So connecting to where Manny has always been consistent in speaking about our biggest strengths being our people, our team and our brands. It's the combination of those 2.

We'll take our last question from Matthew Boss with JPMorgan.

Stefan, you mentioned one of the company's key priorities is further improvement in the product offering and increased relevance. Maybe could you just elaborate on the opportunity you see to improve the product and the assortment across both Calvin and Tommy multiyear?

Yes. So high level, we live in the most disruptive time of our industry that at least I've seen, and I've been around for over 20 years. And the consumer has more choice than any time before. So the strength of having iconic brands with global brand awareness, it's a tremendous asset. And then that strength, what our job is on the execution side is to take the brand awareness and the brand love and execute relevance in products.

So being very focused on the core essentials, and we call it the Hero products. That the products that really makes a difference that sets us apart versus the sea of generic products that are out there in the market, that's what we are going after.

Great. And then maybe just as a follow-up. As you dug into the cost structure of the organization, where do you see opportunity for continued cost efficiencies? And any material investments that you see necessary to drive the next chapter of growth as you take the helm?

As we mentioned, we -- the consumer has shifted more in the last 12 months than in the previous 4, 5 years. So when it comes to the cost side, we have to make sure that we run leaner and more data-driven and with more speed than any time before. So there -- when I look at cost and investments going forward, the first priority is to connect the investments and the cost to what really drives winning with the consumer and then continuously drive efficiencies.

Great. Best of luck. And congrats on a great run, Manny.

Thank you. Listen, that closes the third quarter earnings conference call. I want to thank everyone for joining us.

I'd like to take a moment to thank the analyst community that's followed us over the years. We personally thank you for the time you've spent to understand PVH's business model and the time you've taken to really work with us to get that message out to our shareholders.

We wish everyone a safe and healthy holiday season. Christmas, Hannukah coming up, enjoy it with your families. And wishing you all the best for a happy, healthy and prosperous New Year. So have a great day, everyone. Thank you.

And that does conclude today's presentation. Thank you for your participation. You may now disconnect.