PVH Corp (PVH) 2020 Q2 法說會逐字稿

Good day, and welcome to the PVH Q2 2020 Earnings Call.

At this time, I would like to turn the conference over to Dana Perlman.

Please go ahead.

Thank you, operator.

Good morning, everyone, and welcome to the PVH Corp.

Second 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 September 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 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.

Reconciliation to GAAP amounts are included in PVH's second 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 very much.

Good morning, everyone.

Joining me on the call are Stefan Larsson, our President; Mike Shaffer, our Chief Operating Officer and Chief Financial Officer; and Dana Perlman, Treasurer and Senior Vice President, Business Development and Investor Relations.

I want to thank you all for joining us on the second quarter earnings call and also hope that you and your families are healthy and safe.

Our better-than-expected results reflect the hard work, determination and flexibility of our talented associates across the world, and I can express how grateful I am for their determination and dedication.

I would like to specifically acknowledge the incredible efforts from our store and distribution center associates who are on the front line and have kept our businesses running over the last couple of quarters despite the challenging times and unconventional working dynamics.

The current backdrop has changed how we will all live, probably forever, from the COVID-19 pandemic and its impacts to our everyday lives and to the social issues that we are embracing to drive positive changes across our communities.

We continue to live by our purpose, which is to drive fashion forward for good.

One of our most noteworthy recent announcements was the hiring of our first-ever Chief Diversity Officer last month.

Together with our expanded inclusion and diversity team, we believe that we can continue to accelerate our work to create an inclusive environment where every individual is valued and every voice is heard.

We also took key actions to evolve our business and drive an accelerated recovery.

We accelerated our digital agenda and reallocated additional resources to drive growth in this critically important channel.

We continue to optimize our brick-and-mortar presence, including announcing the closure of our Heritage retail business in mid-2021.

We will continue to review our footprint and what our footprint looks like post-COVID in our owned and operated network and through our wholesale partners.

We are focused on every expense line item, including our previously announced headcount reductions in North America, and we will continue to evaluate further measures as we go forward.

We managed our inventories prudently while also increasing our inventory buys towards the comfort and casual products that are working exceedingly well with consumers right now.

And lastly, we were opportunistic in the capital markets in early July and efficiently raised additional capital to further support our already strong financial and liquidity position.

We are confident that these actions will position us well to navigate the COVID-19 pandemic and emerge as a stronger organization.

Turning to our second quarter performance.

While our second quarter results continue to reflect a significant disruption from the COVID-19 pandemic, they exceeded our expectations both from a top and bottom line perspective.

Our revenues declined 33% to $1.6 billion as our owned stores and wholesale partner stores were closed for about 1 month on average during the quarter and our stores are operating at significantly reduced hours and occupancy levels.

We experienced better-than-expected performance across all markets and channels as the casual brand lifestyles that Calvin and Tommy represent were even more relevant with our consumers spending more time at home.

Digital continues to outperform, with total digital sales up 50%, including almost 90% growth in our owned commerce sites.

We continue to believe that digital sales can reach 20% of our sales in the next couple of years while also contributing favorably to profits.

In our stores, while traffic was down, particularly in international tourist locations in North America, our conversion was very strong.

Gross margins were up 80 basis points driven by the mix shift benefit to our international markets as well as more favorable markdown rates compared to what our expectations have been.

As we expected, our SG&A deleveraged versus last year.

However, there was a significant sequential improvement versus the first quarter due to the higher revenue base as well as the full quarterly benefit of our cost initiatives.

All in all, we were quite pleased with our second quarter results, with us delivering EPS of $0.13 a share.

Before I pass things over to Stefan, I'd like to address how we are approaching the second half of the year, particularly holiday.

This will clearly be a unique holiday season, and we are highly strategic in our approach to be competitive and gain share during this period.

We are also being conservative in our sales outlook for the fourth quarter given all the uncertainties resulting from the potential impact from the COVID-19 virus.

We believe we are in an excellent position given our inventory position and our sourcing base to be able to meet any sales demand that comes that will be over our expectations.

While our brands and positioning are strong, we expect that the second half of the year will present itself with a fair amount of volatility, especially if COVID-19 cases resurge.

Our assortments will be focused on relevant categories, and we are in a position to chase inventory if better-than-expected demand materializes.

We expect that brick-and-mortar traffic will remain under pressure and are looking into creative ways to work around that while also driving people into our stores.

We will be redirecting resources to digital to support strong growth on our own sites as well as our pure-play partners and other wholesale partners online.

From a regional standpoint, we expect to see continued outperformance in our international businesses.

China continues to gain momentum for both Calvin and Tommy.

And we are pleased to see positive growth in the region, reflecting our brand health and successful consumer engagement initiatives.

Europe, which has been our strongest market over the past few years, continues to demonstrate a strong recovery.

And we believe that we can continue to gain market share for holiday with our best seller capsules planned and leverage our compelling brand propositions.

We expect that most -- the most pressure to continue to be felt in our North America businesses for several well-telegraphed reasons.

First, the resurgence of COVID-19 cases in states significantly impacting consumer shopping and spending patterns.

We expect store traffic will be pressured where the virus resurges.

Secondly, while back-to-school was never a big business for PVH, it was a traffic driver for outlet centers and department stores that we are not experiencing at the same level this time this year.

And lastly, international tourist traffic to the United States, which typically represents about 30% to 40% of our revenues, is down over 90% so far this year.

And we do not expect it to come back during the second half of 2020.

That said, the domestic consumer is shopping our stores and is excited and invigorated with our brands.

Our efforts for holiday in the U.S. will be focused on engaging with the local consumer in the United States, leading with our hero products and offering compelling price/value propositions.

We are also prepared to begin the holiday sales season early, as a number of our retail partners, including Amazon Prime, which will now be held in October instead of its usual timing in the summer, are all beginning the holiday selling at an earlier time.

Overall, I am [opportunistic] about the opportunities ahead for PVH, both for the balance of this year and as we look into the next few years.

We have a very powerful business model led by our incredible people, our iconic global brands and our strong business and financial fundamentals.

And I believe these competitive advantages will position us to deliver long-term sustainable growth.

And with that, I'd like to turn it over to Stefan to go into some more detailed business perspective.

Thank you, Manny, and good morning.

Since we spoke last, our focus for our brands and regions in the second quarter has increasingly been to lean into the execution towards an accelerated recovery and in doing that to position our businesses to win with the consumer in the new normal coming out of COVID and to drive sustainable, profitable market share growth.

Due to the COVID pandemic, just the first quarter, the second quarter and the rest of this year will not look like any other year.

Having successfully navigated through the immediate first phase of the crisis, I will now share some key insights on how we grow performance in the second quarter and what our key priorities are to drive towards an accelerated recovery.

Just like last quarter, Mike will then share more financial details on our second quarter performance and how we are thinking about the second half of the year.

In the second quarter across the board, as Manny mentioned, we were able to drive a stronger-than-expected recovery both top and bottom line from a number of proactive actions.

First, we quickly turn to supercharging e-commerce across owned and operated as well as third-party digital commerce for both pure players and the partner store, dot-com.

As a result, for the quarter, we grew total digital sales over 50%, including an 87% increase on our owned sites, where new user growth continue to be very strong across all regions, particularly within the younger age brackets.

Next, we continue to increase our focus on driving product relevance, which drove stronger-than-expected demand and margin in key categories.

We continue to experience strong performance in casual core essentials within underwear, loungewear and athleisure.

We saw favorable pricing power in underwear, and we are chasing inventories to be best positioned to capture demand in the second half.

We also drove a more effective and interactive consumer engagement.

And based on our data insights, we were able to better connect the consumer to the product they're looking for and follow how their shopping patterns have changed across our channels.

From an inventory management perspective, as a result of stronger-than-expected sell-throughs of spring/summer 2020 product, we are carrying over less-than-expected product into the spring 2021 season.

Our teams are focused on ending the year as clean as possible, and we will continue to liquidate any liable product.

Lastly, we were successful in taking steps to rightsize our cost structure to better reflect our revenue levels influenced by COVID.

This include -- this includes our decision to streamline our North America business by reducing 12% of our workforce and closing our heritage retail business in 2021.

As I provide a regional update, you will see that the recovery continued to be very strong throughout the quarter in both China and Europe.

While in North America, even though our digital channels performed very well, we felt increasing pressure towards the end of the quarter, particularly the brick-and-mortar channels where we saw virus resurgence, and we have significant exposure to international tourist traffic.

Let me start with Asia, specifically with China, which is the furthest ahead in terms of the recovery.

Our direct-to-consumer sales in China increased double digits in the second quarter.

And we continue to experience double-digit growth for the third quarter to date.

Digital continued to outperform for Asia as a whole, with our owned business up about 75%.

We also experienced strong Tmall performance, with new live stream events growing very strong traffic and new customer growth.

Our marketing events in China focused on maximizing sales around key consumer moments, including our 618 digital commerce event with Tmall where both brands drove over 80% growth versus last year.

During the campaign, we performed over 30 live streams and 70% -- 72% of our consumers were new to the brands.

Given continued traffic pressure in brick-and-mortar locations, our promotions in that channel focus on driving conversion and basket size while limiting discounts on better-performing products.

Even though we continue to see virus flare-ups impact our business in Japan, parts of Australia, Hong Kong and now Korea, in the region as a whole, we continue to make good progress towards a continued strong recovery.

Moving on to Europe where we continue to drive a very strong recovery and we experienced performance trends that were meaningfully above expectations.

Our direct-to-consumer sales in Europe were down 10% in the second quarter, which was well above our expectations.

Digital commerce continued to outperform, with second quarter sales growing nearly 80% year-over-year.

The digital growth was driven by higher traffic and conversion, which is driven by strong product and marketing in combination with having the right inventory availability.

Given our position of brand strength, we narrowed our promotions and managed to maintain similar markdown levels to last year.

And while traffic in brick-and-mortar remains challenged, particularly in larger cities, conversion was very strong, and the team continues to find innovative ways to drive traffic into our stores.

While the virus is seeing some resurgence in Europe, our business in the third quarter-to-date remains very strong, with direct-to-consumer sales tracking mid-single digits.

We're also pleased with our spring 2021 order books, which showed a sequential improvement, where both brands are tracking down high single digits versus tracking mid -- down mid-teens in fall 2020.

Lastly, our North American business felt the most pressure relative to our other regions.

Our direct-to-consumer sales in North America were down about 45% in the second quarter and are currently running down in the mid-30s in the third quarter to date.

Our biggest challenge, as Manny mentioned, is the lack of international tourists, which historically represent 30% to 40% of sales of our business, which is down close to 95%.

As we look ahead, we do not anticipate this trend to improve before next year.

As a reminder, less than 30% of our EBIT was generated from the U.S. in 2019.

Despite the challenges with tourism, we are seeing strong engagement with the domestic consumer; however, softer as of late in the virus-surged states.

We experienced very strong digital demand during the quarter as we drove triple-digit growth for both Calvin and Tommy.com, including many new-to-site consumers.

Our business with Amazon was also a highlight as we saw strength in their new softline sale in June and outstanding growth in new-to-brand consumers, which has continued into the third quarter.

And as we look to the second half of the year, we will continue to manage our inventories prudently.

We will redeploy resources to those areas of the business that are performing, such as digital from a channel perspective and essential casual products from a category perspective.

As our performance across regions demonstrates, we have taken a very deliberate approach for each brand to get deeper connected with the consumer and enhance our brand positioning to gain profitable market share.

Now I'd like to share a few brief global brand highlights from the quarter, beginning with Calvin.

Calvin Klein's brand health remains very strong, and we continue to see strong consumer interaction across Calvin's social channels with an average follow increase of over 20% year-over-year.

We're implementing our evolved brand direction in our products and marketing.

And already now, you can see it in how we drive engagement on Instagram and other social platforms and you will see even more of it during the holiday season and the beginning of next year.

In addition, we took steps to gain greater control of the brand with announcement that we will buy back our European footwear business in spring of 2021, which represents a great opportunity as we leverage our knowledge from Tommy's successful footwear platform.

And lastly, we announced that Movado, our licensed partner for Tommy Hilfiger, will take over the brand's watches and jewelry license for spring 2022, and we feel optimistic about the partnership and the business potential.

Moving on to Tommy.

Tommy's global momentum continued in the second quarter, with the brand demonstrating strong awareness, visibility and consideration to purchase.

We continue to convert new consumers to the brand, including in growth markets like China where our livestreams generated over 60% of sales from first-time buyers.

In the quarter, we continue to launch limited edition brand collaborations that resonated well with our consumers.

We also recently launched Tommy's Make it Possible campaign, which is a bold sustainability program that builds on PVH's forward fashion strategy, which is set to reduce our negative impact to 0, drive positive impact and improve over 1 million lives across our value chain.

And now to our Heritage business.

Our Heritage Brands business was under significant pressure during the second quarter.

The casualization trend that's being accelerated by COVID makes working very well for us in Calvin and Tommy.

It's working against us in the more formal, wear-to-work product categories within Heritage.

Additionally, the mid-tier department store bankruptcies in North America have negatively impacted this business compared to Calvin and Tommy.

We are addressing the challenges by managing inventory levels more prudently, lowering our cost base and reviewing additional ways to optimize and streamline the business that goes beyond the next-year closure of our Heritage Brands retail business.

And before I hand it over to Mike, I would like to reiterate that we are balancing, driving the business here and now, which starts with, as Manny mentioned in his introduction, having the plans and execution to win with the consumer during the upcoming holiday season.

It also includes to making sure that we are focused on driving accelerated recovery coming out of COVID where our main priorities are, first, to continue to drive product strength by focusing on key growth categories and developing strong hero product franchises, all connecting to where the consumer is going, with special focus on casual essentials and athleisure.

Next is to further supercharge our e-commerce growth and penetration, while at the same time, evaluating what our optimal brick-and-mortar presence looks like both in our own locations and with our wholesale partners.

And lastly, we will continue to review our cost base and determine where we can optimize our business model and organizational structure to operate an even leaner and more dynamic organization while also allocating additional resources towards our growth areas.

Overall, even though we're still in the early days of driving towards an accelerated recovery, as we intensify our focus to build on our core strength and connect them closer to the consumer than any time before, I feel very optimistic about the forward path ahead for PVH.

Every time we take steps closer to what the consumer wants and needs, we see the positive performance proof points, whether it is in product, marketing or e-commerce distribution.

The global brand power of Calvin Klein and Tommy Hilfiger is a core strength, and our diversified multi-region, multi-channel platform positions us to gain market share globally.

And we see examples every day that our teams are rising up to the challenge to make it happen.

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 second quarter 2020 results then move on to the current state of the business and our second half expectations.

While our business continued to be negatively impacted compared to last year by the COVID-19 pandemic, our overall results were an improvement compared to the first quarter and exceeded our expectations.

Overall, our reported revenues were down 33%.

Tommy Hilfiger revenues were down 28%, with international down 14% and North America down 51%.

Calvin Klein revenue was down 32%, with international down 16% and North America down 51%.

China showed positive year-over-year results in both Tommy Hilfiger and Calvin Klein.

Our Heritage revenues were down 51%, which included a 16% decline as a result of the sale of our Speedo business.

Our stores as well as those of our wholesale partners were temporarily closed during the first month of the quarter.

As a result, our revenue in the second quarter reflected a 40% decline in revenue to our wholesale distribution channel and a 24% decline in revenue from our total direct-to-consumer business.

That included an 87% increase in sales to our digital commerce businesses driven by strong growth across all brands and all regions.

While we continue to be negatively impacted by the pandemic, our earnings exceeded our expectations, and our earnings per share was $0.13 on a non-GAAP basis for the second quarter.

Our gross margin for the second quarter benefited from a favorable mix of business as our international businesses were a larger portion of our total revenue versus the prior year and generally carry higher gross margins in our North America businesses.

Additionally, earnings in the second quarter had the benefit of [expense] reduction initiatives, including salary reductions, temporary furloughs and lower discretionary spending, including marketing, travel, consulting and creative and design costs as well as onetime benefits from COVID-related government payroll subsidy programs in our international jurisdictions and rent abatements where we negotiated with certain of our landlords.

Full salaries and most furloughed employees were reinstated at the beginning of the third quarter.

Partially offsetting these savings were additional expenses associated with the implementation of health and safety measures to protect our associates, customers and business partners.

These safety measures are expected to continue, and the cost of them will be greater in the second half of the year.

Moving on to the current state of the business.

Currently, almost all of our stores in the U.S. and around the world are open, although they are operating on reduced hours and reduced occupancy levels.

Third quarter-to-date for our direct-to-consumer business, we are running down low single digits for total Asia, with China up.

We are running up mid-single digits in Europe and down 30 -- about 35% for North America.

Our owned and operated digital commerce businesses for the third quarter-to-date have continued to show strong growth.

Regarding wholesale.

Both our traditional and pure-play wholesale customers have seen strength in the digital commerce channel.

And this trend has continued into the third quarter, with accounts buying inventory to accommodate the strong trend.

However, we expect wholesale accounts to buy conservatively for their store-based businesses through the balance of the year, and the revenue decline in our North America wholesale business will be more significant than in Europe and Asia.

The expected revenue decline in North America includes the impact of recent bankruptcies.

We continue to be proactive in our response to the pandemic with ongoing focus on operational efficiencies and liquidity such as streamlining our North America operations by exiting our Heritage Brands retail business by mid-2021 and reducing our North America workforce by 12%.

We're tightly managing inventories.

They decreased 12% from this time last year.

We've reduced inventory commitments, consolidated future season collections and negotiated extended payment terms with suppliers.

As of the end of fiscal 2020, we are now projecting to carry approximately $125 million of basic inventory into spring 2021, which is a reduction compared to our prior projection of about $250 million.

Also during the second quarter, we issued $500 million in 4 5/8% senior notes due for 2025, and we ended the quarter with $2.7 billion of liquidity, including cash of approximately $1.4 billion, and $1.3 billion of available borrowings under our revolving credit facilities.

And now moving on to our expectations for the second half.

We expect that our second half revenue and earnings will continue to be negatively impacted by the COVID-19 pandemic.

We currently expect revenue in the second half to be down 25% versus last year.

When we think about gross margin, we expect that our second half gross margin will be relatively flat compared to the first half as we project heavy promotional activity across the industry in order to clear inventory, particularly in the United States.

When we think about second half expenses and when you compare to the second quarter, we expect our expenses as a percentage of revenue to be slightly higher in the second half than in the second quarter.

The second quarter expenses benefited from salary reductions, furlough, government payroll subsidy programs and rent abatements, which will not materially continue into the second half.

Although in North America, we will continue to have payroll savings as a result of the recently announced reduction in our workforce.

We also expect to incur even greater expenses for health and safety measures in the second half as opposed to the second quarter.

We are not in a position to issue more detailed guidance at this time 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) And we'll take our first question from Bob Drbul with Guggenheim.

I guess, Manny, a question for you, really.

So when you think about the business performing really well internationally at this point, when you think about the opportunities that are -- that you see ahead in North America in the second half, where do you think your sort of upside could come from or you think you're being most conservative in North America?

And I have a follow-up question after this.

Sure.

I think, Bob, the fundamental issue in North America is the lack of control of the virus compared to the rest of the world.

And I think that's having an impact on consumer spending.

So that's consumer spending, particularly in apparel, as it moves forward.

In addition, I think the fact that we are, as a company, really focused -- a big part of our business is tourism-driven, international tourist, in particular.

And that business has all but gone away.

And we're anticipating that that international tourist will not be back in the second half of 2020.

So that's where we're seeing the pressure on our owned retail stores, which are anywhere from 30% to 40% of our sales, all driven by international tourism.

And so that's where I think it is.

I think the opportunity lies in continuation of some of the trends we've seen, and moving forward, sees a sequential improvement over that as we go forward.

And from a bottom line point of view, I think our biggest opportunity is gross margin.

We are anticipating highly promotional environment for the third and fourth quarter, particularly holiday.

And if that were to back off, similar to how we saw in the second quarter where we were much more conservative about markdown rates in our thinking, that wouldn't materialize.

So I think there's an opportunity both on the top line, but there's also an opportunity that may be more significant on the gross margin.

Okay.

And then just like a quick follow-up, Manny.

So when you think about the trend to casualization, you think about sort of how you guys are positioned within the business.

You still have, I think, what you call the neckwear business and your dress shirt business, the ties and some tailored business.

Can you size up for us sort of where that business is today as a percentage of your total business and how you're thinking about it going forward in a more casual environment?

Well, Bob, the businesses you've talked about, our dress shirt business, our neckwear business and suitings as a percentage of our sales is less than 5%.

It's probably approaching 4% for 2019.

So even though we're the largest dress shirt company in the world, the component of our business is smaller.

And I think we've been able to really focus in on the casual nature, those components of both Calvin Klein and Tommy Hilfiger to really take advantage of those business.

Those key categories are intimates business, our men's underwear business, our loungewear business, our performance businesses, jeans, active sportswear.

That's clearly a vast majority of the business, and we've been able to capture that as we've gone forward.

The next question from Michael Binetti with Crédit Suisse.

Congrats on a nice quarter in tough backdrop.

Just wanted to ask one clarification, and then I had a question for you, Manny.

Just the roughly [34]% to 40% of sales in the North America business coming from tourists, down over 90%, and the negative mid-30s total D2C trends in North America today, does that imply that you're down low single digits with the domestic consumer versus last year?

That's a better number than we've heard elsewhere.

So I just want to make sure that I'm reading that correctly, if you feel that underlying strength was the domestic consumer.

The short answer is yes.

The numbers you calculated are right in the ballpark.

And I think it's a testament to the strength of the brands and how they resonate with the U.S. consumer.

So what we're seeing with that domestic consumer -- it's always hard with the cash component of it trying to factor that in, but that's not a big case.

It's kind of flattish to down slightly, what we're seeing in our own stores with the consumer.

We're very high in that component of it given the backdrop.

Okay.

Yes.

It sounded like it.

I just want to make sure the math was -- looking at like -- I think some of the other retailers have reported domestic-only consumers are a little lower, so that's -- it's nice to hear.

I guess then -- I know U.S. order books aren't as strong indications as they are for Europe because there's dynamics around cancellations and such.

But I guess it would really be helpful for us to hear how you're seeing the North America business, wholesale business, rebuild the path from here, connecting maybe the second half of this year into next spring.

Just anecdotally, what are the wholesale partners talking to you about?

So there -- look, I guess, fundamentally, and maybe Stefan will put a little bit more color on this, but fundamentally, they're being very cautious and they're open to buy and are -- and with the belief that inventory will be there if demand picks up as they go forward.

So we're trying to be smart about taking positions in categories that we see are accelerating, even though they might not be buying as backup.

And we're also not looking to get ourselves in trouble in categories that are softer in nature.

So I think there is opportunity to do better, but it will have to -- the consumer will have to vote as they go forward.

And they're being very cautious on open to buy.

I think you can even see it in a relatively short period of time, when I look at some of my key customers' inventory levels, they've done a good job of getting inventory levels down in a short -- in a really short period of time relative to demand as they've moved into the second half of the year.

So I think there is opportunity if business backs up.

I just would want to remind everybody that, for us, the U.S. wholesale, we have no account that represents close to 5% of our total sales as a company.

And our exposure in that department store segment that keeps coming up is about -- in 2019, about 12%.

And I'd anticipate that for this year, it will be closer to 8% to 9%.

And I guess maybe Stefan can put a little bit more color on department stores and other wholesale partners buying.

Yes.

I just like -- just to build on what Manny just shared, Michael.

There is -- the U.S. -- our U.S. wholesale partners, as Manny shared, they take a cautious approach.

However, we see strong demand and strong recovery in underwear, the big casual essential product categories.

So we see stronger demand there, and we see quite strong or very strong demand in their e-commerce business.

We'll take our next question from Erinn Murphy with Piper Sandler.

Great.

Maybe just to build on the digital agenda.

I think in the prepared remarks, you referenced the channel contributing favorably to profit over time.

Maybe just walk through some of the initiatives to get there.

And then specifically in North America, what did you see in terms of profitability for digital in the second quarter?

Michael will talk about and I'll...

Yes.

Look, I guess a couple of things, Erinn.

I think we're seeing with the significant increase in revenues, we're obviously getting really great leverage on the fixed expenses.

We're also focused on the variable and just really keeping that expense base under control.

We're also seeing some improvement in AURs as the product is in such demand.

So it's been selling at great -- with great performance on gross margins.

In addition to that, we continue to focus on it for the balance of the year.

There's been a lot of discussion about freight rates and whatnot.

That's all in process at this point.

But overall, it's -- we're definitely starting to see improvement and the move towards profitability in that business.

Yes, and again, that's North America, and the rest of the world is highly profitable.

Sorry, Stefan.

Yes.

I was just going to say that, too, that internationally, the -- our e-commerce business is as profitable as our full price business.

And our next question will come from Jay Sole with UBS.

Great.

Great.

Yes.

My next sort of question about [cutbacks and] how you're thinking about hedging right now.

I mean, did the pandemic change how the company has traditionally thought about hedging foreign exchange?

And if so, if the dollar continues to be weak, how might the timing of when that impacts the P&L will be different based on whatever you might be doing to be able to face the pandemic?

So I guess, listen, when we think about hedging, we really don't place bets.

We try and keep a consistent policy of, let's call it, 80% of our inventory purchases being hedged at any point in time.

So we keep moving that forward and always have that 80% on the books.

So that is where we are today.

And look, if the dollar continues, that would be a benefit on purchases as we -- if the weakening of the dollar continues, we would see a benefit next year on those currencies that appreciated against the dollar in our 2021 inventory purchases and gross margin.

And we'll take our next question from Dana Telsey with Telsey Advisory Group.

How are you thinking about the marketing budget in the second half of the year compared to last year and especially given peppered throughout the conversation so far, has been a big focus on new customers it sounds like in all regions?

What are you seeing from those new customers?

What are they buying?

And what are they informing you about the product go-forward by each brand?

Yes.

Dana, from a consumer-facing perspective, what we have done from the get-go when we got into the COVID crisis to pivot our resources towards e-commerce and that has really paid off for us, and that's what we will -- we will continue to follow where the consumer is going.

And what the consumers' behavior is informing us about is that they, from a product perspective, that we come back to the casual essential products, athleisure product, performing very strongly across all regions.

Yes.

And Dana, the only add to that I would make is that in the second -- in the first half, when the pandemic hit in each of the regions, we did pull back on marketing.

We never docked, but we did pull back.

And as we move into the second half, we will be accelerating the spend back to more normal levels, so you will see an increase on a percent of sales basis for the second half.

And what we're doing, Dana, the connection, we are strengthening the connection between the product offering with the distribution channel that the consumer is shopping at with the engagement that we are driving.

So we're connecting those 3 stronger and stronger.

And Stefan likes to say that the focus is really on hero products that's driving the business because that's where the connection with the consumer is happening in those key categories that we've talked about on this call that are working so well.

We'll take our next question from Jamie Merriman with Bernstein.

Stefan, in your prepared remarks, you made a comment about supercharging the digital and e-commerce efforts.

And I was wondering if you could just give us a little bit more color in terms of what that means either from an investment perspective, capabilities that you're trying to deploy, or is it really focus on marketing?

Yes.

So let me start with where -- it starts with following where the consumer is going, so we see the demand.

We see the consumer during the COVID time increasingly shopping in e-commerce.

So what we drive -- what we have been driving and will continue to drive is growth in owned and operated and third-party e-commerce.

And the key drivers there is the key product categories, the casual categories.

And then within those categories is, to Manny's point, is the hero products.

And then it's all the different components relating from products relating to the experience all the way to fulfillment and logistics.

So what's really exciting to see is that the pivot that we made is really paying off.

And all I would add is, obviously, our marketing budget spend by type is really -- continues to shift greater and greater to digital marketing away from some of -- a lot of the more traditional areas and the investments on the back end on logistics, which are all in the numbers that Mike has shared with all of you is also there.

And where we're not spending as much capital is in our owned stores and in fixturing.

In those areas, because we're really spending where the consumer is shopping and where we can have the most impact and can make those investments.

Yes.

And I would just add, it's not just on the logistics side.

We are also spending on the IT side.

So we've implemented a consumer data platform that gives us better understanding of our customer, access to our customer and the ability to communicate with that customer, which we've never been able to do to this level before.

And we drive -- it's the -- we are trying to get the flywheel more and more going from product strength to showing up in the e-commerce channel that the consumer wants to shop and engage with our brands and then adding on the marketing strength of that.

So it's the product e-commerce channel with the marketing strength.

It's that flywheel we are working to get going more and more.

And we'll take our next question from Kimberly Greenberger with Morgan Stanley.

Manny, I wanted to just follow-up on a point you made earlier.

You indicated you're in an excellent position to deliver on sales opportunities if they come your way here through the second half of the year.

And it sounded like you were taking some sort of selective inventory on board where you feel really confident about the product.

I'm wondering if there's also an element here of supply chain agility where you think you might be able to chase the business.

I'm just wondering if you can talk about the multipronged approach to maximizing the sales opportunity particularly since it looks like many of your wholesale partners are coming into the back half in a pretty lean inventory position.

Yes.

This is where art and science come together, trying to make a determination, seeing what's working right now in some of the key core categories where there's minimal inventory fashion risk and willing to take much more [of the risk] there to continue to service that business and to keep our customers and our consumers satisfied.

We're making those, I don't want to call them debts, but we're making those investments as we go forward and continually adjust our supply chain as we move forward.

But I also don't want to kid anyone.

Look, you've heard the disruptions that are going on in supply, the issues with China and the U.S., even if we're not sourcing directly from China, getting raw materials out of China like cotton and other categories.

It's a bit of a puzzle.

But I think given our -- it's an area of expertise with PVH.

It's an area where we have great capabilities.

And I think our on-the-ground presence with the team and our offices there allow us to really be on top of it to react to the market to stay in product categories and service those businesses.

So we're trying to do it thoughtfully.

And to be in a position, if we are projecting somewhat -- you've heard the numbers that were projecting conservatively especially in the fourth quarter, if that's the case, we want to be able to capture those incremental sales.

And Stefan, you want to add?

And the core -- the focus on our core essentials, as we have mentioned, both Manny and I, are also unlocking supply chain sourcing capabilities because focusing on those essentials enables us to plan capacity, to platform the fabric and to have much, much faster lead times on those.

So that's an added benefit with following where the consumer is going.

And we'll take our next question from Ike Boruchow with Wells Fargo.

Manny, I wanted to ask you about the trajectory of both brands in North America, Tommy and Calvin.

Just at a high level, it seems like Calvin's pace of recovery in North America should be much smoother than Tommy, just because it's got better product mix for what's working in the environment right now, and they don't have the tourism exposure.

But I'd love to kind of hear your thoughts on the pacing of recovery by brand in North America and how that could work out, puts and takes.

Well, I think we don't see much of a difference, I guess, I would say.

And I think if you think about it is Calvin has a tremendous, as you know, intimates, underwear business, loungewear business, that just drives off of this -- and it also has a big performance component to it where -- and a big jeans business that really plays into the casualization.

But Tommy is probably, as a brand, much more of a casual brand, much more of an active brand.

So our sportswear there really transcends that and works extremely well for us.

Tommy has always had a big jeans component to their sportswear business, almost a similar size to where Calvin is.

So both brands, I think, are in a strong position.

Calvin does, by the nature of its brand, just have this huge designer underwear and women's intimate business.

Tommy's business is probably about 1/3 of the size, still very [soft and] substantial.

But I think the 2 brands really are able to take advantage of the -- you're talking about 2 of the probably top 5 brands by size in the world.

So they have a very diversified product offering that plays across the spectrum.

And I think if we can manage the inventories by components, we should be able to really do well with that.

And we'll take our next question from Matthew Boss with JPMorgan.

Great.

On gross margin in the back half and your forecast year-over-year, just to get a sense, is that based on actual elevated promotional activity that you're seeing in the landscape today or is that your anticipation of markdowns do you think necessary to work through inventories?

And then assuming you do exit the year clean on inventory, I'm just curious how you'd rank gross margin drivers multiyear.

Okay.

Matt, it's clearly the anticipation.

We're not seeing anything in the business.

And in fact, we've been, as you could see in the second quarter, we've been really pleasantly surprised with the level of clearance and promotion that's gone on.

We were anticipating much more of a clearance aspect when stores reopened, particularly in North America, and we just haven't had to be that promotional.

Nothing has changed in August that -- from that perspective.

So it's clearly just us anticipating that there will be a level of activity as we -- as potentially what you're hearing in the market, and much more in the United States is -- back-to-school is not happening at the same level for all the reasons that everyone can imagine and the fact that -- the uncertainty around the holidays.

So I think it's -- partially, it's us being prudent in how we are projecting the business.

So that's the real opportunity as we go forward.

There's nothing from a costing point of view of products, the mix of product.

The only thing I would say is, in the second quarter, the mix of international was probably skewed a little bit more than it will be for the balance of the year.

But absent that, there's no real difference.

And we'll take our next question from Omar Saad with Evercore ISI.

Manny, I wanted to ask kind of a follow-up on the inventory and promotional environment for the second half you're talking about.

Help me reconcile your expectations for heavy promotions.

But at the same time, your inventories are clean, and then we're looking at off-pricers are down 20 to 30.

Department store inventories are down big.

Is it that -- do you think that all these kind of the channels planning inventory is to significantly ramp up in the back half above demand?

Or do you expect the demand levels to remain lower than even those reduced inventory levels?

Just kind of help me piece together that framework for the landscape in the back half.

Look, I don't know how else to say this.

I don't -- first thing is retailers are not buying extra inventory.

They're not ramping up.

And I think their open-to-buy is very [consistent].

I think if we're going to be faulted for anything, it's that we're being too conservative on our gross margin expectations.

If that's the case, then we'll do better on the gross margin.

I think that's a potential big opportunity for a second half of the year.

And the key will be how much goods are out there that need to be cleared from a fashion point of view or whatever.

We don't see any real buildup.

As Mike talked about, we were planning to carry out as much as $250 million of goods.

That number has already been cut in half.

And it factored into all of our second quarter numbers and into third quarter numbers.

And I think we'll continue to get that number down compared to where we originally thought.

So I think it's really good for us.

Gross margin is a big opportunity.

But given all the uncertainty in the business, we're just trying to be cautious about how we think about margin going forward.

And we'll take our last question from John Kernan with Cowen.

And congrats on managing the business through a difficult time period.

Just wanted to go back to the revenue guidance for the back half of the year and how we should think about the international piece of the business, which does seem to have momentum right now both in Tommy and Calvin.

If you just look at the run rate of decline in Q2 in both Calvin and Tommy, I'm wondering if that's the type of run rate you continue or are things going to -- are you planning a little bit weaker trends internationally?

And the balance between domestic and international back half revenue.

I think -- okay.

It's a fair question on the sales.

I think it's -- the fourth quarter -- if business continues to improve sequentially, and when we look out and see how some other -- a number of our retail partners, department stores and others are talking about the second half of the year particularly fourth quarter, I think they're being more bullish about their fourth quarter sales projections than we are as we go forward.

And so I think from that perspective, there's sales opportunity potentially in the fourth quarter both internationally and potentially domestically as we move forward.

And right now, I think we talked about, I think, both Stefan and Mike mentioned that our direct-to-consumer business globally is running about -- is down 15%, which is running ahead of where we would have planned the business at this point.

So we haven't seen anything that discourages us at all and actually creates a lot of opportunity.

No.

There is -- it's just on Q4, just to build on what Manny is saying.

There is a -- and we flagged it in our prepared remarks, it's not going to look like any other Q4 and holiday season.

So there is a big shift from brick-and-mortar to e-commerce, which enters this overhang from the resurgence of the virus risk.

Then in China, just to mention, we have the Chinese New Year moving out from this year to next year.

So it's a different kind of holiday season with more risk.

Thanks, John.

Okay, everyone, thank you very much.

Everyone stay healthy and safe.

Enjoy the -- in the United States and North America, enjoy the holiday weekend that's coming up in the end of summer, and we look forward to talking to you in our third quarter press release.

Thank you.

And that does conclude today's conference.

Thank you for your participation.

You may now disconnect.