Good morning, and thank you for joining us for this next session of the Goldman Sachs Global Retailing Conference. My name is Brooke Roach, and I cover the apparel and accessories brands here at Goldman, and I'm very pleased to introduce our next fireside chat with PVH. Here today, we have Stefan Larsson, CEO, and Zac Coughlin, CFO. Welcome, Stefan. Welcome, Zac.
Thank you, Brooke.
Stefan, maybe we can kick it off with a discussion of the PVH+ Plan. It's been a little bit over a year since you unveiled this plan, which targets $12.5 billion in revenue and a 15% EBIT target by 2025. Can you give us an update on the progress that you've seen so far, and what are the most important opportunities that you see as you look ahead?
Absolutely. Thanks for having us back. We were here last year. We had just set out the plan last year when we had a similar fireside chat. What's different now is that we have a year of execution behind us. Let me just, just ground everyone in what we have set out to do. What PVH is, is a brand group owning two of the most iconic brands in our sector, in the fashion sector, Calvin Klein and Tommy Hilfiger, where roughly half of the company is Tommy, and half of the company is Calvin. What we have set out to do is, we have set out to grow these brands, brand desirability, to become the most desirable lifestyle brands in the world. That's our vision. That's the starting point. That's the vision, that's the direction.
And then, to your point, we set out the PVH+ plan, which is a brand-building growth plan, where we, in a very systematic, repeatable way, drive towards the vision of building desirability quarter by quarter, month by month, day by day, into these two brands. And what, what I'm excited about and what led me to PVH, because my background is, I started being part of the team that grew H&M. So we grew it from $3 billion-$17 billion and 23% operating profit. And I had to leave to realize that that was quite good. But we didn't think we were good. We just were relentless in continuously improving the consumer offering.
And then I came to the US roughly 10 years, 10 years ago, to turn around Old Navy, and then we turned around Old Navy and drove 13 consecutive quarters of growth. Then I came into Ralph and repositioned Ralph for the growth that they have been driving now. It's just two years I'm here. Why am I here? I had a lot of choices on what to do in my career. I'm here because I love the space in general, and I love iconic brands. Part of the reason why I believe it's a really good investment opportunity to invest in iconic brands, but only if one thing is true. So what I see in the space, in the fashion space, is the barriers of entry have come down.
Anybody can start a fashion brand, but it's become very difficult to break through. So if you look at the fashion space, building another Calvin, another Tommy, another Ralph, another Levi's, another Nike, very, very difficult. So if you already have a consumer that globally loves your brand, then it's our job, and that's the PVH+ Plan is all about, is to tap into that beloved DNA of Calvin and Tommy and make it more and more desirable. And we have five growth drivers: product, winning with product in a very, very systematic way as well. I can come back to more of the details. Winning with product, winning with consumer engagement, and winning in the marketplace. Those are the three consumer-facing parts of our plan. And if you think about the market, the market is...
There is a sea of generic brands and stuff down in the market, and then there are some brands that just stand out from a consumer-facing perspective. They are hyper-relevant to the consumer. That's where we are taking Calvin and Tommy. The brand love is already there. We are known globally as those brands. The brand desirability part is what we are driving up. So those are the three first drivers, the consumer-facing drivers. The next part, the second part, is building a demand-driven supply chain, like the underlying engine of a demand-driven supply chain, and that's what I did early in my career. I did that for 15 years within the H&M Group.
So think about it as we are taking Calvin and Tommy, based on the beloved DNA, making it more current and relevant than any time before, in a way that the consumer-facing, the product, the marketing, the experience, should feel super premium. We still keep the premium positioning available for many people, and then we connect that with a demand-driven supply chain. That's the reason to invest in us. It's like, I know we are very focused on quarter by quarter and what are we gonna deliver, and we have delivered. So if I look at last year, we came out of pretty tough macro with strong almost double-digit growth for both brands. We continue, so this year, we have continued to start growing both brands. All regions, D2C, is grown significantly. So it's just to...
It's, I just want to give you the overall, because it's, I feel like what I do with my team, and I just came back and got a little bit of a cold, because I'm out seeing stores all the time. And when I look at the consumer on a daily basis, I've seen six countries in six days, and I just came back home Sunday night. And what I see is, there is this strong consumer love for our brands. And then I look at product, I look at consumer engagement, I look at the execution, demand-driven supply chain. We have 90% left to do. So that's the, that's where I see why- where we are, and I also see that that's the key reason why to invest in PVH.
That's really great. That's a great intro. Really appreciate that. You know, as you think about what's left to do, and the success that you've had so far, one of the things that's been top of mind is that supply chain optimization-
Yes.
-that helped you unlock the plan so far. Maybe you contextualize a little bit more, the benefits that you're seeing in supply chain today. What does that mean for PVH's margins overall, both in terms of the near-term easing of the supply chain, which is just an industry driver, but also the PVH specific action?
Yes. Yes, absolutely. So, on a supply chain... Do we have an extra chair here or? Ah, here, we have a chair over there. So back to supply chain. We, when I came in, I realized that, so the difference between the 15 years of growing a demand-driven business versus the past 10 years coming into big American iconic brands, is that in big American iconic brands, I found 20-25% unproductive inventory at any given time. So a big mismatch between what is being created, and bought, and planned, and allocated, and shipped, and what's what the end demand actually is.
So one of the improvements of the management team that I've done since we saw each other last year was to hire the head of global supply chain from the H&M Group with 20 years of experience from doing this into our team. So what he did was that he got the fundamental basics back, because when we sat here a year ago, we had supply chain delays. We were not competitive, supply chain-wise. So we quickly fixed the fundamentals, and now we're in a place where we're able to cut the lead times and connect the supply chain to how we build the assortment. So we were able to, when we released Q2 two weeks ago, to communicate that we are gonna target 25% lower inventory in relation to sales.
By end of 2024, we're starting already now, but 25% less inventory in relation to sales, and that's good. I'm excited about it as a leader because I've tried over the last 10 years to really get that going in a number of different brands. It's proven quite hard when you took my initial approach, which is, Please, organization, tell me why it is this way, and here comes all the reasons why, why and why not?
But now with David's help and with my experience of trying new ways to be successful in this, which eventually became successful at Old Navy and, and, and was the beginning at Ralph, is you, you, you start with an end goal and say: We should be able to drive 25% less inventory and drive more sales and less. And then you say, what has to be true in the assortment creation? You have to be really clear on the category offense. You have to be really clear in each category on the role of each product, then how you plan that closer to demand, so you start to cut lead times. Then, how you allocate that based on data versus gut feeling. So it's... I have a funny story from Q2.
After we have our earnings, we have all hands and town hall, and then it's live Q&A with 26,000 team members, and sometimes we learn a lot from the questions. But one question was, It's a choppy macro. How are we gonna continue to create value, et cetera? And then I just gave some specific examples, because I believe when you sit in the office on a high floor, this business is quite difficult. When you're out in stores, walking stores, looking at what's really happening, you see value everywhere. So I took the example of, I was in the Southeast U.S. market a while ago, and the market leader told me that for two years in a row, we had allocated heavyweight down jackets to Puerto Rico.
So, and then I took that as an example of saying, not doing that this year is a margin opportunity. And so, and then I came back from London, and I was on Saturday night in stores with our London teams just before the White City Westfield closed, and it was a good Tommy store there. And I said, "What would it take to drive 20% more business?" And often, the store manager has the best insight. So she said, "Well, you know what? The basic flag T, the Tommy flag T, we get it, and then we sell it out, and then we don't get it replenished for four to six weeks. Or, we don't get it in eight colors that I know my customer asks for. We get it in four.
And then it's the same with the Oxford shirt, the same with the chinos." So, and then you start to add those building blocks, and the real value-creating opportunity for us is that relentless focus in the five value drivers, because that will, from a consumer-facing side, drive brand desirability up, up, up, up. And then it's, it's the demand-driven side. So 25%, I'm happy because it's a real commitment. It's real, we will do it, but it's not heroic. It's not the end state.
... Zac, any comments on margin associated with those supply chain opportunities as well as that inventory target that was just provided? Any additional color that you can provide on the clarity of when we might see the cadencing of that inventory reduction?
Yeah, it's almost impossible to overstate the amount of impact across the P&L tied to this. Obviously, I think it starts with what Stefan has said, is it's not less inventory at the expense of availability. In fact, we expect availability to go up, so no impact to top line, if not, if anything, growth. On a gross margin perspective, obviously, it translates directly into, in the puffer example, lower discounts in terms of the need to require that. In SG&A, you take out the weight of managing all that inventory in the supply chain, and then ultimately, from a cash flow perspective, in our commitment of returning shares, returning capital to shareholders and increasing buybacks, all that flows through.
I think from a cadence of what we would expect to see from a gross margin perspective, we're gonna start to see impact of that by the end of this year. We had a tremendous amount of headwinds that we're facing, sort of, throughout last year and into the first part of this year. Many of those transitioned very quickly to tailwinds. We've got, obviously, the efficiency of the supply chains, eliminating all need for air freight. That's the easy step number one. Step two, beyond that, from a freight perspective, the rates are coming down significantly. We begin to pick that benefit up, increasingly from the third quarter and especially into the fourth quarter from there. Then I think the last piece around there, tied to this, is this getting closer, ordering closer to where the consumer is.
We're beginning to see the cost base from a cotton perspective, not just normalizing from a, sort of, a macro's perspective, but actually the work that David and the team are doing, beating the macro improvement. We'll pick up a little bit of that at the end of the fourth quarter, and that is really a powerful impact starting in 2024. So all of that's still ahead of us, sort of, at the run rate where we are today, building into the second half and especially in the next year.
What excites me the most is sometimes what we do, especially when we speak with investors, seems very technical, but it's... You start with the unique position of both brands. So Tommy started his brand with an idea of classic American Cool, like classic American with a twist to always make it current. It's a fantastic idea. It's the idea also of a lifestyle, of the American dream. So when you look at the Tommy brand and the brand promise and the dream, huge opportunity. Then you look at Calvin, which is modern, sensual, confident, started with fragrance, underwear, denim. And then what I'm excited about is when we play these different parts together, so we make the brands come to life like never before in the product promise. Then we do Tommy...
We just came out, we had a New York Fashion Week event on Sunday. Fortunately, I missed it. I was on a flight. But we had a fashion event where 300 talent, 300 influencers were invited by Tommy himself to do a Tommy brunch with a twist, all dressed in Tommy. There were 500 influencers who wanted to go. So 300. 300. Those 300 influencers are connected to 300 million people. So I sent a note to my team last night, the top 400 leaders. I said: "Guys, look at this. We take Tommy's dream of Tommy's dream of classic American style with a twist. We lean into the most iconic Tommy products. We connect that with 300 influencers.
Then we connect that at one brunch with the size of almost the U.S. population, and then we do it again and again and again. So that's it to me; it's. I'm working so actively to connect the five drivers to the dream of the brand. And it's. I also have an interesting story, quite fun story. So I started, because I'm always looking at how can I get the team to work as if we fit in one hand. How can we work more entrepreneurial? Because what tends to happen in big companies is, here are all the reasons why we have to go really slow, and it's really complicated. So I started an initiative a few weeks ago, say, with a. I launched an email that said, "Share it with stefan@pvh.com." Feel free to use it as well if you see him.
So I said, "Anyone on the team that sees opportunities, that are any green shoots, anything good, anything bad, you send it directly to me, and I'll respond immediately, and I'll share it with the rest of the leaders." And then I sat back. I was out traveling, so I launched it. Boom! I was like, "I wonder who the first leader is that's gonna be like, boom." Who do you think it was? It was Tommy Hilfiger, the man, sent the first email. That's pretty unbelievable, isn't it? That he was just like: "Great idea!
Let's do it." So we have—to me, it's just, it's the connection of Tommy and Calvin's dreams of these lifestyle brands that became larger than what anyone could imagine, and then 90% still to unlock, but playing it in, playing them together, the five drivers, and constantly looking at what works, what doesn't work, and then the compounded effect of improving that.
Let's dive into North America for a moment, because that's one of the areas where there's a lot of opportunity for the PVH+ Plan. But at the same time, as you mentioned, I think in one of your stories earlier, there is some concern about the macro overall. Maybe we could start with, you know, do you think that the consumer is going to face more or less headwinds next year?... And then how do you think about the PVH+ Plan and how that unveils in wholesale, given some of the choppier trends that we've seen amongst some of your wholesale partners?
It's a great question. So when we were here a year ago, part of the plan was to unlock North America, to drive brand accretive growth in North America. We had been too dependent on tourism, not focused enough on winning with the domestic consumer. So this past quarter, we were able to show for the first time what we have seen coming, which is we drove in both brands in our D2C channels, to start with, e-commerce and stores. We drove this past quarter mid-single-digit growth. And what's exciting about the growth is it's brand accretive growth. So it's the category offense, the hero products that are starting to come to life, higher AURs, higher margin, and better sell-through. So that's the D2C.
So we are starting to build now a foundation where we will drive brand accretive growth. And if you shop us, our brands in North America, on our e-commerce and in stores, you will see this come to life. Then in wholesale, what's also exciting there, despite that the wholesale channel in North America is challenged, and they're very cautious. What I'm excited about from a year ago is that we are working very closely with one of our most important partners, Macy's, and taking ownership together with them and saying, our doors in Macy's, we should run them as if they were our doors, our stores. And the reason why I'm so excited about that is...
Then we say: How do we make this? How do we change this, how we run the, how we execute this together? So we started with 25 doors, and we are driving now double-digit growth in those stores when the whole market is down in the channel. So it's, and my experience from Ralph is when we took ownership and got much closer with Macy's and said, "We're gonna, this is gonna be our full price representation in the North America market, and we're gonna take ownership of the assortment, the inventory replenishment, the pricing, the presentation, and make the shopping experience great," then it works. So we see it in our 25 doors, we see it in all 200+ stores today. Strong start of the fall.
So yes, the macro is choppy, is gonna remain choppy, most likely, but we have so much within our control to improve. I always say to my team, like, "Don't, don't talk with me about macro, because that's the only thing we cannot do anything about. But we can improve the category offense, the hero products, the newness, the consumer engagement, the marketplace execution, the supply chain." So and when I look at all of those value drivers, that will not change. So what you will know as investors from us, the vision remains, the value-creating focus remains, and then we are just what changes is the learning and the relentless execution.
Sounds like there's a lot of green shoots in North America-
Yes.
as you execute that plan.
Yes.
Maybe, Zac, as a follow-up, on that North American outlook, one of the most frequent questions we get from investors is how to think about the path to better margin delivery in North America.
Yep.
Can you talk about the key levers for improvement, and then how you think about the timeline for that as you execute this plan?
Yeah, I think, you know, we've stated publicly as a part of the PVH+ Plan to drive North America margins back up to low teens is sort of what the commitment is. I think we saw in the second quarter an important and sizable first step towards that, mid-single to high single digits across both of the brands. So I think an important step forward, and you consider that in the face of, as we talked a little bit earlier on some of the gross margin, some of those macros not yet turning to tailwind. So that's still ahead of us from there. So I think in terms of the composition, you know, we've been very clear, winning with the domestic consumer, an increasingly brand-relevant way, that will manifest itself in gross margin improvements, and we saw that already beginning in the second quarter.
That will continue, and then magnified by the macros that will come with us around freights and around material costs. And I think below that as well, making sure that we get the operating model and the cost structure oriented to the size of where the business is today. Those are still pieces that are ahead of us to drive beyond the, sort of, the mid- to high-single-digit operating margin we delivered for the second quarter. That will happen sort of steadily and sequentially towards that commitment in 2025 of low-teens operating margin for North America.
Maybe as we zoom out from the North America operating margin to the consolidated PVH entity, one of the things that's been moving around a little bit this year is your SG&A expense, both in terms of some of the cut-through marketing campaigns that you're investing behind, but also some of the efficiencies that you're finding in the organization as part of the PVH+ Plan. Can you provide a little bit more context into where those cut-through marketing campaigns are going and what that actually means for driving financial results? And then, Zac, maybe you can provide some context as well about how you're thinking about the driving of the inflection in SG&A leverage that you expect into the fourth quarter and beyond.
Yep.
Absolutely. So let me start with the cut-through campaign. So if we look at Calvin, as I would say, they are really leading, not only between Tommy and Calvin, but leading in the market in cut-through campaigns. So we have record engagement through the cut-through campaigns in Calvin. So the way we build our cut-through campaigns is, we are very clear with the brand promise of Calvin. So the DNA of Calvin, make it come to life through the biggest highlighting, the most important product categories. So if it's Calvin, it's been underwear, denim, the jeans lifestyle, and increasingly, the refined lifestyle. So we are very disciplined when we build the campaigns on, here is the product component, and then we connect that on the highest level to super talent, like Jennie Kim, BLACKPINK, Jungkook, BTS, Kendall Jenner, et cetera.
So we have super A talent with, playing back into those products and categories that matters the most to the consumer, and then we make that cut through in the marketplace. So when we do that, we just added 1.5 million, almost two million followers on Instagram. We quickly built a big TikTok following. We are increasingly present in all the most important channels in China, social channels. So it's—that's the cut-through campaign. It's the combination of the super strong product offering with A-list talent, amplified with campaigns, marketing that goes out and communicate and engages the consumer. What's important to say, cut-through campaigns today, to work, have to be connected to what we call the influencer engine or the talent engine. So it's... When you look at influence, it's a network effect.
So you have to have, if you are us, you have to have the A, A, global A talent. But then, if you look at how you engage and the consumer engages, they get influence through Instagram and TikTok from a number of different tiers. So it's tier 1, tier 2, tier 3. Tier three could be influencers, style influencers, that are regionally specific to North America, that have 20 million followers, but 10%-14% engagement. So when they start to wear the Tommy flag or Calvin, that drives further down in the funnel of conversion. And when you see, it's a combination of seeing Jungkook and Jennie Kim and Kendall Jenner, and the style influencer that you follow to influence your purchase. So it's that, and again, everything we start to do, we do in a repeatable way, where we have...
By doing it, we're also learning that we have 90% still to do. So, Tommy, as an example, is probably the best on the local, regional influencers. They have been able to engage up-and-coming actress Madelyn Cline. You see, and they're like, most of our core consumers knows who Madelyn Cline is. 20 million influencers loves the brand, highly engaged content, and we give her our iconic product. She's a brand ambassador for us, and she starts to style it her way, and it's the backdrop is her life. Think about Tommy's brand proposition. It's an American dreamli- it's your dream life. So it goes really well into the life that influencers live.
One brand partner I had the opportunity to spend some time and take a coffee with two weeks ago is George Russell, the Formula One driver, and he loves the brand. His girlfriend loves the brand. Yes, he's part of Mercedes-AMG, and we are a brand partner, but they have many brand partners. He really likes the Tommy brand, and the benefit is, he goes on vacation. He shared that he was in Ibiza with his extended family and lived what I felt looked like a Tommy life. And it just cuts across, and then you have the consumer seeing that and experience that and be inspired by that. So it's, but it's not, it starts with, you have to have two beloved brands.
Like, you cannot get, get Jennie Kim or Jungkook or Kendall Jenner unless they like your brand. So it's like, but, but it's translating that love for the brand into long-term partnerships and cut-through campaigns and the talent engine. So it's, yeah, it's very exciting to see.
That's great. And Zac, the financial profile?
Yeah, I think, importantly, to fuel all of that growth-oriented investment, I think we committed at the Investor Day to drive 500-600 basis points of SG&A efficiency to make sure that we're able to continue to fuel investments in marketing and the other parts. I think the first major piece of that we announced around this time last year, which was the $100 million of people-related cost reduction by the end of 2024. We'll be completing that program by the end of third quarter, so we'll start to see that as the first piece in the fourth quarter, annualized effects. We'll get a little bit this year, and then have a significant impact of that next year. But that's really only the beginning.
If you think about the rest of the SG&A elements, you know, we were a company that was built by acquisition and was largely left to run autonomously and decentralized. We're building... The PVH+ Plan is a single strategy that's gonna drive the two major brands and one operating engine below that, and the efficiency you get there across real estate, as you go to market as a single-scale company. You get the same around technology, as a single technology platform. Those will be the next waves that you'll begin to see impact of that beginning next year and increasingly through 2024 and into 2025 from there as well.
... So maybe, Zac, one more with you. As we put those things together, you talked a little bit about the North America margin, you talked a little bit about the SG&A efficiencies. You've committed to a 15% operating margin target by 2025, well ahead of the 10% that you're on track to deliver this year. Put all those building blocks together for us. What's still ahead, and how do you think about the cadencing and the delivery of each of those buckets between gross margin and SG&A?
Yeah. I mean, what's exciting about the 10%-15% is that all of that is still in front of us, and all of it is in, directly in our control. So let's start with gross margin from there. We've talked a lot about, we've got the tailwinds emerging from freight costs. That's still ahead of us, from the 10% towards the 15%. We have the emerging work around product costs. Those are coming off. Those are negotiated into spring 2024. Plus, that's still-- That's now known and ahead of us. Beyond that, Stefan had mentioned David Savman coming in. Our goal is not just to sort of ride with the macros, it's always to beat the macros. So that's also embedded in what we're seeing already come to life in spring 2024. David's real first season with his hand on the product.
Those are still all ahead of us from a gross margin perspective. And then below that, on SG&A, so the components we just talked about. All the headcounts, people, cost reduction, all still ahead of us. The efficiencies driven around the elements of sort of, whether it be real estate or whether it be technology efficiency, that's actually all still ahead of us, and identified and work ahead of us to do. And in the 10% already is the step up around marketing. So in terms of we've begun to put many of the investments into the business, we've faced off, I would say, sort of once in a generation, levels of macros, held the line there. And so as all of those pieces that are directly in our control and macros coming towards us, all still ahead of us.
And so our confidence in driving from the 10%-15% has actually never been higher. And as Stefan said, completely independent of wherever the choppy macros may go.
Half, roughly, I don't know if you said that, but half is gross margin-
Gross margin.
Rate, half will come from SG&A. And we see, to Zac's point, a really clear path. And what I wanna make sure that everyone hears before we run out of time, is the management team matters. So if you think about PVH of being an acquirer of brands with an unclear path on how to grow what has been acquired, we have now set out to build Calvin and Tommy into the most desirable lifestyle brands in the world, and make PVH one of the highest performing brand group. To do that, yes, strategy is important, but people are even more important. So since we were here last year, and I was alluding to, we're gonna build a management team. I'm gonna build a management team with the experience and expertise to do this. So David Savman on supply chain.
Eva Serrano came in six months ago as head of Calvin, the global brand. She was one of the key leaders behind growing Inditex, the highest performing group in our sector, and specialist in women's. That matters, because when we decided to take back the G-III, the women's. Historically, we have licensed out women's in North America. While we did women's in Europe and Asia successfully, we licensed it out. We realized where we are taking the brand, we need to be in control of product creation, supply chain, distribution, price. But to do that, we need talent that knows what great looks like in. So Eva is an example of that. Donald Kohler came in with 10 years experience from the successful turnaround of Burberry. So we have Zac came in before that.
So Zac, with extensive experience from the LVMH group, DFS, then Converse, Nike. So Zac, David, Eva, Donald, and then I would say we are 80%-90% there from having the team that are able to do this. Because at the end of the day, you can have a great vision, great strategy, but it's the ability to get it done, and that's the biggest difference. So seeing Eva coming in and showing that: Here is how we're gonna take back G-III, here is how we-- Here is the product we're gonna create to meet that consumer with a better product offering. Here is how we're gonna source that, here is how we're gonna partner with Macy's and others to do it. It's, it's-- Suddenly you start to see, okay, that's real value creation, because she is in it and driving it.
That's so great. Thank you so much for sharing your thoughts. Thank you all in the audience for tuning in today.
Thanks for having us.
Thank you.