PVH Corp

NYSE:PVH

Earnings Call Analysis

PVH Corp Delivers Solid Growth and Raises Outlook

PVH Corp delivered a strong Q2 performance, with revenue up 4%, topping expectations, and non-GAAP EPS exceeding forecasts due to disciplined execution of the PVH+ strategic plan. Direct-to-consumer (D2C) channels, essential in driving growth, saw double-digit increases. The full-year non-GAAP EPS outlook was raised, reflecting confidence in the continued execution of PVH+ and planned doubling of share buybacks to $400 million. Asia Pacific region excelled with 16% revenue growth, and the company anticipates a 25% inventory level decrease by the end of 2024 while improving product availability. The full-year outlook remains robust with an unchanged revenue guidance, operating margin outlook, and increased non-GAAP EPS guidance to a record $10.35.

Strengthening Performance with Optimized Operations

The company is forging ahead with solid top-line growth and double-digit EPS advancement, as a result of astutely implementing the PVH+ Plan. With a keen eye on direct-to-consumer avenues and a vigorous share buyback initiative, the company's second-quarter earnings bubbled with a robust 4% growth in revenue and a notable surplus on bottom-line expectations. The strategic pivot to direct-to-consumer channels, both physical and digital, empowered a double-digit surge, underscoring the organization's agile adaptation to the fast-evolving retail landscape.

Empowering Brands with Strategic Marketing and Talent Association

The company is not just selling products; it's curating experiences. The backbone of recent successes is the symbiotic meld of celebrated products with marquee events and influential talent. Embedding products like the timeless Oxford shirt within the tapestry of New York Fashion Week and Formula One Grand Prix played a pivotal role in skyrocketing sales. Case in point, a campaign onslaught led to a staggering 170% lift in sales for the Oxford shirt. Leveraging the magnetic pull of sports, exemplified through a timely Formula One film sponsorship and strategic alliances with top athletes, the company is mastering the art of relevance and reach.

Revolutionizing Supply Chain for Competitive Edge

The company is not just trimming the fat; it's reinventing the supply chain mechanism for a leaner and more responsive operational framework. Aiming for a striking 25% reduction in inventory levels by 2024, the company plans to enhance product availability across all consumer touchpoints, marrying inventory precision with consumer demand. This strategic move positions the company to improve cash flow, reduce logistical strain and inspire a new efficiency paradigm that transcends financial metrics, tapping into the very core of operational excellence.

Geographical Performance and Future Outlook

The tale of growth doesn't end within the country lines. Internationally, the company boasts commendable growth in Europe and Asia-Pacific, with a 30% jump in European business since pre-pandemic levels. In North America, amidst a challenging wholesale landscape, the company's refined focus on its direct-to-consumer model yielded mid-single-digit growth, translating to a healthier margin and profitability trajectory.

Financial Foresight and Shareholder Value

Looking ahead, the company stands firm on its 2023 revenue and operating margin projections, with a refined EPS guidance reflecting growing confidence in its blueprint for the second half. Keenly focused on lean operations and strategic investments, the company aims for a full year operating margin around 10%. Coupled with strategic share repurchases and potential ventures, the company eyes not just growth, but fortified shareholder returns.

Earnings Call Transcript 2023-Q2

[Operator]

Good morning, everyone, and welcome to today's PVH Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, you will have an opportunity to ask questions during the question-and-answer session. [Operator Instructions] Please note this call will be recorded and then I will be standing by should you need any assistance.

It is now my pleasure to turn today's call over to Sheryl Freeman, Senior Vice President of Investor Relations. Please go ahead.

[Sheryl Freeman, Vice President, Investor Relations]

Thank you, Operator. Good morning, everyone, and welcome to the PVH Corp. Second Quarter 2023 Earnings Conference Call. Leading the call today will be Stefan Larsson, Chief Executive Officer; and Zac Coughlin, Chief Financial Officer.

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 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 August 30, 2023, 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 include PVH's right to change its strategies, objectives, expectations and intentions and the company's ability to realize anticipated benefits and savings from divestitures, restructurings and similar plans such as the planned cost efficiency action announced in August 2022 and its 2021 sale of assets of, and exit from, its Heritage Brands business to focus on its Calvin Klein and Tommy Hilfiger businesses.

PVH does not undertake any obligation to update publicly any forward-looking statement, including, without limitation, any estimates 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 second quarter 2023 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 call over to Stefan Larsson.

[Stefan Larsson, Chief Executive Officer]

Thank you, Sheryl, and good morning, everyone, and thank you for joining our call today. For the second quarter, we delivered another strong performance. We grew revenue by 4% on a reported basis and 2% in constant currency, and we beat the expectations on our bottom line on a non-GAAP basis driven by our disciplined execution of the PVH+ Plan, our long-term brand-building growth plan.

In the quarter, we again drove double-digit growth in our direct-to-consumer businesses with double-digit increases in both our stores and in our owned and operated e-commerce, which are the channels where we are able to impact the shopping experience the fastest. Our D2C business will increasingly create a halo for our brands, that benefit the entire marketplace and we are excited about the accelerated momentum we are building there.

Looking ahead, we are increasing our full-year outlook for our non-GAAP EPS guidance based on the confidence we have in our ability to execute to PVH+ Plan in the back half of the year. By focusing on what we can control, for the full year 2023, we remain well-positioned to deliver solid top-line growth in addition to double-digit EPS growth.

We have strong conviction in the long-term potential of our brands and business and one of the ways we show it is through our share buybacks. In just the second quarter alone, we completed $200 million in buybacks, which was our initial plan for the full year. We are now planning to increase our buybacks for a total of up to $400 million for the full year.

Independent of the macro-climate, the PVH+ Plan combined with our strong ability to execute will enable us to drive profitable long-term brand accretive growth, and geared towards our vision to build Calvin Klein and Tommy Hilfiger into the most desirable lifestyle brands in the world and made PVH one of the highest-performing brand groups in our sector.

Each of the five key growth drivers of our PVH+ Plan plays an important role on its own. And when we make them play altogether, which we increasingly do, we create something really powerful. Let me bring this to life across both brands with a few examples of how we are activating our consumer-facing growth drivers to win with product, win with consumer engagement, and win in the digitally-led marketplace.

First, within Tommy, the team is doing a lot of exciting work around our talent amplification, which is starting to create a flywheel effect across product and consumer engagement, all the way through commercial impact. For Q2, the team connected our most iconic Tommy products like the Polo shirt, the Oxford shirt, and the Chinos with the network of the most influential talent and some of the spring and summer's biggest cultural events, ranging from New York Fashion Week to Formula One Grand Prix around the world to really cut through in the marketplace.

One example where the team executed this really well was with a focused activation with talent toward our iconic Oxford shirt, styled in their unique way at the Tommy New York Fashion Week Dinner and Formula One Grand Prix in Miami, and they then engage their own audiences through personal and authentic social content, which in turn drove significant engagement on our channels and ultimately drove traffic into our stores and e-commerce. And through the network effect of this initiative, the brand drove triple-digit increases in sales of the Oxford shirt, which were up nearly 170% in the week following our campaign.

In parallel to this, our talent partnerships continue to gain momentum in the quarter as part of the launch of our Mercedes AMG Formula One and Awake collaboration, we rolled out dedicated activations across Europe and the US, including a launch event in Miami with super talent like Lewis Hamilton. In addition, retail activations were held across Europe with personal appearances by George Russell in Budapest and Lewis Hamilton in Milan.

Approximately 70% of Mercedes AMG Formula One fans, named the Tommy Hilfiger Awake collaboration as the most exciting and memorable partner content of the weekend, with half of fans highlighting they are much more likely to consider purchasing Tommy Hilfiger as a result of seeing the collaboration.

And to cap it off, with super relevant timing, we are leveraging the sports rising popularity to connect on new levels with our customers, boosted by Netflix' Drive to Survive and our recently announced Formula One film sponsorship featuring Brad Pitt and Damson Idris.

So what you can see here from these Tommy examples is how we leverage the unique strength of our iconic Tommy brand. Combined with very engaged long-term ambassadors who love the brand then we supercharged everything by connecting it all to culturally relevant global events to really cut through in the marketplace. This is a systematic and repeatable approach, but we are only just in the beginning to tap into.

So looking ahead, we will continue to build out this work, starting with Tommy's fall campaign, which is right now underway, featuring seasonally relevant key categories and iconic American families.

Let me now share a few Calvin Klein examples. The Calvin Klein brand is continuing to generate historically high levels of impact and engagement with our consumers in all key global markets. Propelled by our strategy of launching cut-through campaigns and igniting the talent engine.

And in May, the brand launched a highly successful collaboration with Jennie Kim, sold through globally within days. They also launched an exciting partnership with some of the world's most iconic female athletes ahead of the much viewed World Cup. Across the quarter, this strategy generated a significant PR and social reach.

Specifically, in Q2, the Calvin Klein influencer engine was ignited by brand ambassadors, including Jennie Kim, Kendall Jenner, Jungkook, Kid Cudi and more. These digital first campaign initiatives drove a stunning 828 million social impressions and 770 million PR impressions, both up significantly versus last year. Calvin added 1.7 million new followers to Instagram and now has well over 1.5 million followers on TikTok.

The brand recently launched its fall 2023 campaign, highlighting iconic underwear denim. And in the first time in many years, more refined sportswear products that we know our Calvin Klein consumers really love. When looking specifically at Calvin product progress, and we have a lot of progress coming there.

As we focus on winning with the best product in the market, our teams have created the best global hero products for men's and women's that will be consistent across global assortments, which together with Core Essentials will account for 20% of the SKUs and a much bigger share of the total sales from the fall '24 season and onwards.

We're also accelerating innovation within our core product categories. For example, in underwear, we're bringing new fabrication platforms and performance elements into established programs, such as the iconic modern cotton. Just like in the example from Tommy, Calvin is fueling a very strong product category focus, creating the best hero products in the market than engaging their long-term talent partnerships and combining both to cut through in the marketplace.

In parallel to improving the consumer-facing growth drivers, we're also committed to develop a demand and data-driven supply chain for both brands and we are making a significant progress here. Our supply chain improvements continue to accelerate and will provide us with drastically improved inventory to sales ratio over the coming years with much higher on-time and accuracy in deliveries, shorter transportation lead times, more responsive production models and more data-driven planning tools across our supply chain, we are now targeting a 25% decrease of our inventory levels as percent of sales. This decrease will be accomplished progressively as we move through the balance of this year and throughout 2024.

And the exciting part with this is that we will be able to do this while at the same time, improving product availability for our consumers across channels and geographies. Importantly, this will significantly improve our ability to match inventory to demand, one of the highest value drivers in our business. There are several additional positive outcomes of this, including improving our cash flow and capital employed ratio from a financial perspective and even more importantly, reduce the pressure on operational cost of our logistics infrastructure.

Lastly, as we are investing to fuel growth, we remain focused on driving cost efficiencies, enabling us to reinvest in the key growth drivers I just took you all through. During the quarter, we took the concrete actions we have previously shared in rightsizing our organization to simplify how we work, allow us to get even closer to the consumer and increased speed in our decision-making. Now turning to our regional performance and how we are connecting our brands and executing the PVH+ Plan across each region.

Let me start with Europe. We continue to intensify our execution of the PVH+ Plan to further strengthen our market position in the region. For the second quarter, we delivered high single-digit year-over-year growth on a reported basis and low single-digit growth in euros. Our European business is now nearly 30% larger than pre-pandemic levels in euros. For the quarter, we drove strong performance in our direct-to-consumer business, where we continue to focus our efforts around elevating the consumer experience.

For Tommy, through our hero product focus, we drove success in our key categories, like the shirt category, which was tied to impactful summer marketing programs around key essentials. We also continued to reinforce our key product categories by leaning into our top performers, such as the 1985 program. And at the same time, continuously evolving our essential product programs across men's, women's and kids.

And for Calvin in Europe, we are further sharpening our hero product focus, and exciting with newness across categories. We are deepening our hero product offer and lifestyle expansion with cut through marketing, while at the same time, creating brand heat for exclusive product activations in power cities like London, Paris, Milan.

A notable highlight for the region in Q2 was the grand opening of the Tommy Hilfiger store in Rome, Italy. It's our first ever owned and operated store in the city, situated on Via del Corso, Rome's Prime and best shopping street at the heart of the Italian capital.

Looking ahead, our forward wholesale order book for the spring 2024 season, on a constant currency basis, is expected to increase low single-digits on top of very strong high single-digit growth this past year as accounts remain conservative. And as we have mentioned before, we are well positioned to capitalize on stronger demand in season through our never-out-of-stock products.

Moving onto Asia Pacific. The region continues to deliver very strong performance by engaging consumers with product campaign launches and driving brand heat with locally relevant talent, underpinned by our hero product strategy, which generated double-digit increases at higher gross margins.

Our strong execution drove revenue growth of 16% in the second quarter on a constant currency basis, including over 20% growth in China in local currency and continued strong double-digit growth in Japan and Korea. We drove very strong e-commerce performance of nearly 25% growth in constant currency as we successfully captured key consumer moments including 6/18. During the holiday, both brands moved up the rankings on digital platforms and achieved live streaming records of over $10 million.

Newer digital platforms, such as Douyin continue to drive engagement. Looking ahead, we will continue to supercharge e-commerce and are gearing up for major consumer moments such as Double 11 and the Year of the Dragon with exclusive product capsules.

We are driving consumer excitement with product-led campaigns featuring regionally relevant and global impact for talent such as Jennie and Jungkook for Calvin to expand brand awareness in the region. In China alone, we are leveraging more than 100 talent catalysts to amplify Calvin Klein hero product storytelling. And for Tommy for fall, we are looking forward to introducing new brand ambassadors as part of the global campaign.

We're also seeing proof points in Japan as international tourists are starting to rebound. We recently refit our Tommy Omotesando flagship store in best location in Tokyo, which has generated strong improvements in sales with our central business growing plus 70% versus last year.

By leaning into the core growth drivers of the PVH+ Plan in Asia, we continue to have major untapped growth potential for both our brands by tapping into the underpenetrated brand awareness in China and across the region.

Turning to our business in North America. We continue to strengthen our North America PVH+ Plan execution across both brands, led by our direct-to-consumer businesses, which increased mid-single digits across Tommy and Calvin, driven by much stronger execution across all key elements of the PVH+ Plan.

We have also enhanced experience and performance of our owned and operated e-commerce businesses and we drove double-digit growth there. All this drove significantly improved profitability across the North America businesses in the quarter. And we are gaining very good traction in building a sustainable foundation for profitable brand accretive growth for the region. We're driving increased product strength with pricing power and improving the overall consumer experience and marketplace execution.

Beyond D2C, we continue to drive progress with key wholesale partners, working very closely with them to improve our brand's presentation in top doors and drive consumer demand by sharpening our category offense and leaning into our hero products and securing the inventory we need to fuel that demand.

Let me share some important proof points, which highlights how our efforts to build our brands and businesses in North America driving positive results. First, we are advancing our category offense with a re-established base of key essentials and hero products that resonate strongly with our domestic consumer and driving growth across Tommy and Calvin stores as well as e-commerce sites.

At wholesale, while our partners are more conservatively managing their business in a choppy macro, we are building a much stronger business with key partners such as Macy's. In fact, for Tommy indoors where we have strategically increased investments behind the brand to improve the consumer experience and inventory availability on the floor, we generated high single-digit growth versus the prior year.

Also for Tommy, we drove over 20% year-over-year increases in key categories such as tees, woven shirts, underscoring the success of our global best seller initiative that we have scaled over the last year in D2C and now scaling in wholesale. Polos were once again the number one category, up over 30% year-over-year with higher AURs as we are elevating these key essentials. For Calvin, core premium essentials in D2C where the standout up nearly 30%. And as we have done with Tommy, we have expanded this initiative to wholesale where the performance has also been strong.

Similarly, we also drove double-digit growth in refined product in D2C as well as continue to strengthen our offering in performance, very well received by the consumer, and we will further expand both these areas as we move forward. Operationally across the regions, we have made significant progress with our delivery times, now shorter than pre-pandemic levels.

Lastly, with respect to bringing our North America women's business back from G3, we have made very strong progress, and we're in a great place with a multiyear integration work, both related to product development and the sourcing aspects needed and we are working very closely with our wholesale partners on co-creating the take back plan.

Looking ahead in North America, we continue to focus our efforts around the domestic consumer to drive the business forward and see significant opportunity to unlock our full potential in the region.

And before I close the Americas section, I would like to take a moment to address the recent wildfires in Maui, where we operated a Calvin Klein store that was completely destroyed in the fire. All our team members are safe, luckily, our hearts go out to our Lahaina team and the entire Maui community. We are doing everything we can to make sure our associates, their families and the broader community have the support they need during this incredibly difficult time.

In closing, we executed another strong quarter. I feel very good about how well our teams continue to deliver on our long-term PVH+ growth plan with a relentless focus on driving brand desirability for both Calvin and Tommy, where we connect a very strong product offers, highly engaging marketing with a winning marketplace execution. We are encouraged by our results, particularly our continued strong growth in D2C. And we are looking forward to tapping into the more than 90% of potential that still lies ahead of us.

With half of the year behind us, the other half still to go, we will continue our disciplined execution and successfully navigate this choppy macro environment as we have done so far. All while keeping our eyes locked on the long-term opportunity ahead of us to build Calvin Klein and Tommy Hilfiger into the most desirable lifestyle brands in the world, and make us one of the highest performing brand groups in our sector.

And with that, I'll turn the call over to Zac.

[Zac Coughlin, Chief Financial Officer]

Thanks, Stefan, and good morning. My comments are based on non-GAAP results and are reconciled in our press release. As Stefan discussed, we are pleased with our strong results for the second quarter, driven by our iconic brands and disciplined execution of the PVH+ Plan. We continue to build on our track record of strong performance, delivering on our top line guidance, while exceeding bottom line guidance as we compete to win in this highly dynamic global environment.

We delivered reported revenue growth of 4% for the quarter, with constant currency revenue growth of 2%, in line with our guidance, and we exceeded our earnings guidance with earnings per share of $1.98, driven by lower expenses and a lower tax rate. Additionally, we returned $200 million to shareholders during the second quarter through the repurchase of 2.4 million shares of common stock, which was earlier than planned and enabled by our strong balance sheet.

Importantly, our inventory levels at quarter end are well positioned, up 6% compared to last year and fully aligned with our projected sales growth. And as Stefan mentioned, with the significant progress we are making to deliver a demand and data-driven supply chain, we now expect our inventory levels to be significantly lower than 2022 in the second half of 2023, and that improvement will continue through 2024 with our announced 25% reduction in inventory as a percentage of sales.

As we look forward to the rest of the year, we expect our strong first half performance to continue into the second half. And as a result, our full year business outlook remains largely unchanged. We are reaffirming our full year revenue guidance and operating margin outlook and raising our non-GAAP EPS outlook to a record $10.35.

In addition to the continued strong delivery of our plan, the improvement in EPS is driven by two main factors, an increase in share buybacks and a decreased tax rate. On the share buybacks, we are increasing our planned buybacks from $200 million previously, up to $400 million.

This supports our conviction in the execution of the PVH+ Plan and its long-term value creation as well as our priority to deliver shareholder value. For the tax rate, our outlook for our full year rate is decreasing from approximately 24% to approximately 22%. This is another step towards our multiyear commitment to deliver a sustainable rate in the low 20s.

While our revised outlook reflects our growing confidence in our second half plan, we are also continuing to plan for 2023 with a healthy balance of optimism and prudence. I will now discuss our second quarter results in more detail and then move on to our outlook. Revenue was up 4% for the quarter, which reflected a 2% positive impact from exchange.

Second quarter revenue for our international business was up a strong 6% on a constant currency basis, with growth in both Asia Pacific and Europe. Revenues for Asia Pacific were up 12% on a reported basis, including a 4% negative impact from exchange, led by China, where revenues in local currency were up over 20% compared to last year. Revenue in our European business was up low single-digits in euros, in line with our expectations, driven by strong growth in the direct-to-consumer business.

In North America, our focus remains on driving strength in the direct-to-consumer business. We delivered another quarter of growth in both our retail stores and owned and operated digital commerce business with total DTC up mid-single digits and importantly, another quarter of improvement in sales to domestic consumers compared to the prior year.

We were especially pleased with the double-digit growth we drove in our digital commerce business in both brands, as the investments we have made in the platform and overall site experience have begun to resonate with consumers. Wholesale sales in North America were down as planned, primarily in our Calvin Klein business, as retailers continue to take a cautious approach and we focus on driving sell-through and healthy inventory across the channel.

From a channel perspective, we continue to drive strong performance across all regions in our direct-to-consumer businesses, where we have the closest connection to our consumer and can deliver the PVH+ Plan with greatest impact.

We delivered another quarter of strong growth in both our stores and our owned and operated digital commerce business, with constant currency revenues up 10% and 11%, respectively, compared to last year. Our total DTC revenue was up 10% on a constant currency basis in the quarter and up approximately 350 basis points as a percentage of our total revenue compared to last year.

Wholesale revenue was down 6% on a constant currency basis as retailers continue to take a cautious approach, specifically in the US. On a reported basis, DTC revenue was up 11% and wholesale revenue was down 3%.

Our global brands also continued to deliver solid growth, with Tommy Hilfiger revenues up 6% and Calvin Klein revenues up 3% as reported driven by our hyper focus on investing to drive consumer engagement.

As Stefan described in depth earlier, across both brands, we work with culturally relevant global talent and influencers like Jennie Kim and Lewis Hamilton, to authentically connect consumers to our iconic hero products and through some of the biggest events like New York Fashion Week, F1 Grand Prix and the World Cup and drove significant engagement and demand for the brands. On a constant currency basis, revenue for both brands was up low single-digits.

In the second quarter, we delivered gross margin of 57.6%, an increase of 40 basis points compared to last year despite a 120 basis point negative impact to product costs due to exchange. Gross margin reflects a significant favorable shift in mix with our higher gross margin DTC and international businesses making up a larger portion of total revenue and a favorable impact from freight compared to the prior year, consistent with the first quarter as we used virtually no airfreight this quarter.

While we did experience a benefit from planned price increases, this was more than offset by higher product costs, including the negative impact of exchange previously mentioned, and the full impact of abnormally high raw material costs in effect when orders were placed in the latter half of 2022 as that inventory sold through during this quarter.

Raw material costs have improved in 2023 and will benefit our gross margins as we move through the second half of the year and especially in 2024. SG&A expense as a percentage of revenue for the second quarter was better than planned at 49.4%, largely due to timing of expenses between the second and third quarter.

We continue to make targeted investments to fuel growth throughout the quarter to drive the PVH+ Plan, including an increase in marketing compared to the prior year. G&A expense as a percentage of revenue was approximately 210 basis points higher than last year, reflecting the impact of the shift in mix to our DTC and international businesses along with a planned increase in the investments mentioned earlier.

In total, EBIT for the quarter was $182 million, exceeding our expectations. Operating margin was 8.3%, which included the 120 basis point negative impact of exchange on our gross margin. Earnings per share was $1.98 compared to $2.08 in last year's second quarter and exceeded our guidance by $0.28 with approximately half of that beat driven by the improvement in EBITDA discussed earlier and the other half driven by a lower tax rate. Our tax rate for the quarter was approximately 22%.

We continue to work relentlessly to drive results. Our strong second quarter performance is a testament to the power of our two iconic global brands, Calvin Klein and Tommy Hilfiger, our systematic progress toward developing a demand and data-driven operating model and driving cost efficiencies to enable us to invest in brand-building growth.

And now moving on to our outlook. For the full year, we are reaffirming our revenue and operating margin guidance and raising our EPS guidance by $0.35 from approximately $10 to approximately $10.35. We continue to project revenue to increase by 3% to 4%, as reported, and 2% to 3% on a constant currency basis and operating margin for the year to be approximately 10%.

Regionally, our outlook for Europe is unchanged, planned up low single-digits in euros. Asia Pacific is now planned up low teens compared to previously up low double-digits with broad-based growth in the region, led by China, where easing of COVID restrictions has led to a strong rebound in demand for both brands.

In North America, we are now planning full year revenue down low single-digits, compared to previously up low single-digits, which reflects a more tempered outlook on the improvement in the international tourist traffic in our US stores for the balance of the year based on continued trends. Our second half outlook for our North America business is otherwise unchanged as we continue to expect strong growth in our owned and operated digital commerce business and the current wholesale trends to continue for the remainder of 2023.

We continue to expect our full year gross margin rate to increase over 100 basis points compared to 2022 despite approximately 100 basis points of higher cost due to exchange. The improvement in our gross margin reflects an approximately 100 basis point benefit from a favorable shift in channel and regional mix as we continue to drive growth in our higher-margin DTC business in line with our PVH+ Plan strategies and our DTC and international businesses make up a larger portion of total revenue.

And as we've indicated previously, we can say with confidence that we will deliver approximately 100 basis points of improvement due to lower freight costs, a combination of both significantly lower air freight spend and a decrease of over 50% in ocean freight rates, both of which are an outcome of the significant improvements we've driven in stabilizing our supply chain. We expect gross margin improvement to grow an impact in each of the third and fourth quarters.

We continue to expect that SG&A expense as a percentage of revenue for the full year will increase approximately 70 basis points compared to 2022 with our investments in DTC and mix of international business driving higher expenses. Additionally, as we discussed last quarter, we continue to invest in key areas that drive growth, including increased levels of marketing with our full year target at approximately 6% of revenue for the year compared to approximately 5.5% last year.

We've also made significant progress in our plans to implement the people cost actions we have shared previously. With the actions taken in July and additional actions planned in the third quarter, we have completed our target 10% people cost reduction in our global offices by the end of the third quarter, earlier than initially planned with an initial cost savings ahead of our targeted $100 million of savings net of strategic people investments.

Our full year operating margin projection continues to be approximately 10% and reflects high single-digit percentage EBIT growth. Interest expense is projected to be approximately $100 million, and our tax rate for the year is projected to be approximately 22% versus approximately 24% previously.

We are confident in the strength of the PVH+ Plan and our ability to execute in the back half of the year. And as such, for the full year 2023 and we are now increasing our non-GAAP earnings per share projection to approximately $10.35, up 15% compared to 2022 and a record high for PVH. Turning to the third quarter. Our overall revenue is in line with original plans and is projected to increase mid-single digits as reported and low single-digits on a constant currency basis compared to last year.

Third quarter earnings per share is projected to be approximately $2.70 compared to $2.60 in the prior year. As I mentioned, gross margin improvement in the third quarter is expected to grow an impact as the benefits we realized in the second quarter continue, including an even greater benefit from freight as we realize the full impact of lower ocean rates and the impact of abnormally high raw material costs begin to ease.

We are also planning higher SG&A investments in the third quarter with a particular focus again on marketing where our spend is planned to increase approximately 20% versus last year as we invest in cut-through brand campaigns that ignite our talent and influencer engine globally and elevate the brands across consumer touch points driving our continued momentum for the rest of the year. Our tax rate for the third quarter is estimated at approximately 22% and interest expense is projected to be approximately $25 million.

Before we open it up for questions, I want to reiterate that we are pleased with another strong quarter. As Stefan talked about earlier, we are laser-focused on delivering our commitments by executing the five key growth drivers of the PVH+ Plan, bringing together the consumer-facing value drivers of product, consumer engagement and marketplace with the underlying operating engines and delivering consistent results in a systemic and repeatable way.

And with that, operator, we would like to open it up to questions.

[Operator]

[Operator Instructions] Our first question comes from Bob Drbul with Guggenheim. Please go ahead.

[Robert Drbul, Guggenheim]

Hi. Good morning. Just a couple of questions for you. On North America, can you just elaborate a bit more just on the traction that you are gaining in North America, especially an update on the profitability? And then I guess the second question around North America is just some of the commentary you made around US wholesale. Can you just expand a little bit more in terms of what you're seeing in your assumptions into the back half of the year on the US wholesale business? Thanks.

[Stefan Larsson, Chief Executive Officer]

Well, good morning, and thanks, Bob. What's really exciting for us to see and to share this quarter is that the critically important work that we started a year ago to build this sustainable, strong foundation for brand accretive growth in our home market, both Calvin and Tommy be loved in America. We haven't put enough focus on the domestic consumer. So as part of PVH+, we put laser focus on building this sustainable foundation. And as we have mentioned through the quarters, we have seen under the surface improvement, but this is a pivotal quarter because you can all see it. And starting with Calvin and Tommy, both driving mid-single-digit growth in D2C in a very choppy macro. And we're driving this growth, both in stores and in e-commerce. And it's directly driven by the PVH+ execution in product, marketing and the marketplace execution. So what do we see? We see that AURs are up. We see that the gross margin rate is up. We see that through the simplification of how we work and get things done, we see that the flow through in EBIT rate improvements and Zac will be able to take you through a little bit more details on that. But it's really a pivotal moment where you now see the proof points that we have been working on over the past year. And mentioning a little bit more about how we do this from a PVH+ perspective. Because across both Calvin and Tommy, we start with leveraging the strength of the brand love for the brands then we build out category offense and best hero products. And you can see in Tommy, this quarter, the global bestsellers drove 20% growth. And this is, again, in these market conditions, 20% growth. And in Calvin, the premium essential drove 20% growth as well. So we see that the category offense and the hero products are paying off, resonating really well with the consumer. And then we have gotten better and better on connecting the brand and the products with the talent partnerships that we are building out. So we are building out long-term talent partnerships where we have talent amplifying our products, amplifying our brands, and then we connect the product, the brand, the products, the talent with big events that are culturally relevant, whether it's New York Fashion Week or its Formula One in Miami. So we are starting to create a flywheel with bringing the brands to life closer to their full potential. And then -- so that's the consumer-facing brand desirability improvements. But then we combine that with the underlying business engines. So as I shared in my prepared remarks, what's really exciting is that -- this quarter, we're also able to take a big next step towards a demand-driven supply chain. So think about it, we're setting out to drive higher growth with 25% lower inventory. And then you might ask, how is that possible. Well, it comes back to three things. It comes back to the category focus, the hero product focus, the increased discipline in how we build the assortment and then how we plan that closer to demand, we're cutting our lead times and then how we improve the allocations. So you have the consumer-facing improvements and then you have this underlying business engine. And then on top of that, you have the efficiencies and the simplification of how we do the work. And that is what you start to see now in the P&L. So Zac, if you want to complement that.

[Zac Coughlin, Chief Financial Officer]

Yes, I mean, a significant step-up in profitability for both Tommy and Calvin order in North America, greater than 6% in Tommy, greater than 8% in Calvin. And I think what we love about that result is how widespread that improvement was. Improvement across both brands, improvement across all channels across both brands and higher gross margin percent and stronger SG&A management. So really a widespread step forward. So mid to high single digits is really only the first step in our commitment towards low teens, but it's an important one and a sizable one this quarter.

[Stefan Larsson, Chief Executive Officer]

Yes. Thanks, Zac. And Bob, when it comes to US wholesale, we know that the channel is choppy and challenged. But what's exciting under the surface here, again, is that when we lean in with our most important partners like Macy's, and we focus on bringing PVH+ to life for Calvin and Tommy together, we see some really encouraging results. So this past quarter, as we mentioned, we were able to drive significant growth in the pilot doors in the doors where the top doors where we execute the category offense, the hero products, we have the inventory. We have the vendor. We work with Macy's to have more staffing on the floor. So we treated more as the best expression of our stores. And then we see immediately the performance driving. So it's another proof point that over the next few quarters, we will build out together with our best wholesale partners.

[Operator]

Thank you. We'll take our next question from Jay Sole with UBS.

[Jay Sole, UBS]

Great. Thank you so much. Stefan, I'm interested in your comments on delivery times, improving the inventory reduction you're talking about, you just mentioned simplification. Can you maybe just talk about the developments in the supply chain side of the PVH+ Plan over the last 90 days and give us such an idea about how that part of the plan is trending and what you're seeing there and how you're getting some of these improvements that you're talking about?

[Stefan Larsson, Chief Executive Officer]

Yes, absolutely. Thanks, Jay. So let's just start with -- we really strengthened our supply chain leadership when David joined us with his H&M Group experience. And he was able to work with our strong team to just get them more focused on and get us more focused on getting the basics right to start with on-time delivery, shorter transportation lead times, more responsive production solutions and models, more data-driven planning tools. And in doing that work like and this is my experience having deep experience in the supply chain side is you have to get the foundational pieces right, then you have to work super closely upstream with the product creation teams. And once you have that done, which we got done sooner than expected then we started we started looking at what could be a next breakthrough step. And then we realized that, that breakthrough is much closer than what we expected. So that's what enabled us to set the target of 25% less inventory in relation to sales by the end of 2024. And we are already internally driving to our staff. And that comes back to what I mentioned earlier. It's just -- it starts with how we plan the assortment, how we build the assortment and having an intention behind every single product and then connecting that to better demand planning and then connecting that to better allocation. And we see so part of the D2C growth in North America right now is fueled by that better planning and that better allocation. But we're just in the beginning, but the 25% is significant. And if you look at the value creation potential is that it's real. And then you look at even the sustainability component of -- instead of running the business with too much inventory at any given time that most do in our sector, we're able to get much better match between what we create, plan and produce is actually much closer to what the consumer wants. So, yes, very exciting.

[Jay Sole, UBS]

Got it. Thanks.

[Operator]

Thank you. We'll take our next question from Ike Boruchow with Wells Fargo.

[Unidentified Analyst]

Hey, this is Robert on behalf of Ike. Just had a quick question on -- do you have any reads on your fall product by brand?

[Stefan Larsson, Chief Executive Officer]

Yes. Thanks, Rob. So early days for fall but positive response. So both Zac and I mentioned that we are in great shape inventory-wise. And there are perspectives -- two dimensions of inventory. One is the level. So we're in great shape across the brands and across regions when it comes to the levels. We're also in great shape when it comes to the composition. So we all know that it's so important in our sector to have fresh inventory to when you start to fall season to have more fall season product, more fresh products this year than what we had last year, and that's exactly where we are. And then we look at the initial sell-through reads fall and positive across both brands all regions, early, but very positive.

[Unidentified Analyst]

Thank you.

[Operator]

Thank you. We'll take our next question from Chris Nardone with Bank of America.

[Chris Nardone, Bank of America]

Great. Good morning, guys. I wanted to talk a little bit more about some of the moving pieces in SG&A. First, if you could talk about the cadence and when we should start recognizing the $100 million in net savings. I think you actually said it might be greater than that. And then secondly, in terms of marketing, is the 6% target this year a level where you feel comfortable over the medium term to drive towards your PVH+ targets or is there a need to continue to drift that percentage higher? Thank you.

[Stefan Larsson, Chief Executive Officer]

Yes. Thanks, Chris. So let me start, and then I'll hand it over to Zac. But from a cost efficiency perspective. What's most -- what's always been most important for us is to find the most simple, close to consumer way of working that gives us speed in decision-making. And that's what made us set out the initiative this year to right-size the organization to the PVH+ Plan. And Zac will take you through more in detail how we executed on this. And that's going to be a continuous work for us to get closer to the consumer and to get faster because at the end of the day, we have the brands, we have the vision, we have the plan to win and outcompete our competition on medium, long term is our ability to execute. And most big companies get slow, gets bureaucratic. And that's -- I'm out a lot working with our teams to say, how can we work like a small company? How can we get the speed of when we are out seeing in stores, what we need from the consumer how can we cut the time in half to take action? So that's the beginning on the efficiency part. The second part is then connected to the marketing piece, which is investing into growth. So part of the efficiencies we free up is to invest in the growth. And marketing the 20% increase in marketing, as Zac mentioned, it's -- we feel really good about that on the near term and medium term to your perspective because there is also a lot of effectiveness work we have to do in terms of how are we spending those investments. So are we spending them to cut through? Are we spending them in consumer-facing initiatives? Are we spending them in the talent? Are we spending them in the -- in the big events that we have to cut through? So it's both the investment levels that we are increasing, which I feel really good about. And then it's the effectiveness. And then we just continuously monitor to see that we are reinvesting enough to cut through.

[Zac Coughlin, Chief Financial Officer]

Yes. Thanks, Chris. I think we're really proud of the work we started last year on redefining how we spend SG&A. So we've seen already in the first half of the year, significant investments in DTC, which comes with margin expansion and the marketing spend we've talked about, which we know comes to the benefits there. So as we look forward into the second half, we absolutely expect to continue on those investments of driving DTC growth and marketing as key SG&A investments. But to your point, on the other side of things, what starts to become an increasingly powerful impact is the work we've done on our previously committed 10% people cost reduction. So the program, we took some significant steps in the second quarter. We will finish the program in the third quarter. So a quarter early from what we had planned previously and the impact is slightly ahead of the $100 million we've committed. So I think we'll see some impact of that in the third quarter. But in reality, we start to see that pick up most impact really into fourth quarter, and then that will carry forward into how that annualizes for next year.

[Operator]

Thank you. We'll take our next question from Paul Kearney with Barclays.

[Paul Kearney, Barclays]

Good morning. Thanks for taking my question and great to see the progress in North America. A question on guidance. I think it was mentioned that the change in guidance was mostly driven from lower tax and share repurchases. Given the supply chain improvements and finishing the SG&A improvements a quarter early, just wondering whether you're seeing anything incremental offset this benefit in the back half or if it's just some conservatism on the demand side? Thanks.

[Stefan Larsson, Chief Executive Officer]

Thanks, Paul. So this is Stefan. Let me just start by saying we're able to take our guidance up because we continue to deliver what we said we were going to do from an operational standpoint on how we drive desirability in the brands and how we execute those in the marketplace. And then that leaves us to be able to invest back in the business and invest in growth. And that leads to -- that's the foundational strength that leads to us taking up the guidance. And then Zac if you want to mention what it means in terms of our ability to -- because when that works really well, we are first investing back into growth. And then secondly, as we shared this quarter, we are able to invest back more into ourselves through the increased doubling of the share buyback.

[Zac Coughlin, Chief Financial Officer]

Yes, the year continues to shape up nearly exactly as we had planned really across all dimensions from there. So the small sort of puts and takes on the business. But -- so that's leading us with significant confidence. And I think if we take a look at the second half, really gaining confidence in our ability to drive the continued profitability improvements that we've got committed. On the increase side of things, two important impacts. One is on the share buybacks. And I think it's really important to comment on the value of that inventory improvement we're seeing that frees up working capital to turn around and invest in either other elements of the PVH+ Plan to drive growth or as we saw with the announcement we made on the share buybacks, a significant increase from $200 million to $400 million full year, including $200 million of share buybacks in the second quarter alone. And so as you mentioned, some of that work around inventory and of the plans, what that does is it frees up capital there to return back to shareholders. And the other half of that is the tax improvement from 24% to 22%. That increasing as well representing the rest of the increase as we continue to work a tax rate down as we committed to over the prior year. So I think overall, we feel great about where the operating business is coming in and what that sort of certainty is allowing us is to free up the capacity to return cash back to shareholders via the share buyback and that's what's leading to the increase.

[Stefan Larsson, Chief Executive Officer]

Operator, we have time for one more question.

[Operator]

Thank you, sir. That question will come from Brooke Roach with Goldman Sachs.

[Brooke Roach, Goldman Sachs]

Good morning and thank you very much for taking our question. Stefan, I was hoping that you could elaborate a bit more on the outlook that you see for AUR and pricing opportunity as you balance the brand and product investments you're making as you develop a PVH+ Plan? And then secondly, Zac, can you remind us the opportunities that you see ahead to recapture some of the outsized promotions that you saw last holiday as you move into this holiday season? Thank you.

[Stefan Larsson, Chief Executive Officer]

Thanks, Brooke. So on the AUR side, it's exciting to see because I spend a lot of my time in product category, work and product category reviews and looking at product development and the pricing opportunity. So we have a significant AUR opportunity over time leaning into the category offense. And every time we lean into a category, every time we develop the best hero products in the market better than our competition, we see an opportunity to sell through at a higher AUR. So very encouraged early days still. And that is something that over time, we just continue to create better product value for the consumer.

[Zac Coughlin, Chief Financial Officer]

Yes and I think on the promotion side, Brooke, we, of course, will continue to participate actively competing to win in the marketplace of where this is. But one of the reasons why we're so excited about where the inventory levels are today and will continue to improve throughout the back half of the year is that, that's going to allow us to make sure that we're able to, ourselves practically make those choices. And I think we can think about annualizing what last year holiday season was. There was a lot of things in the industry on the other side of this. We will have the chance to choose where to participate or not. And so we would expect to see gross margin improvement versus last year because of that strength of getting our inventories into the spot. We feel great about them heading into the back half of the year.

[Stefan Larsson, Chief Executive Officer]

Thanks, Zac, and just to --

[Brooke Roach, Goldman Sachs]

Thank you very much.

[Stefan Larsson, Chief Executive Officer]

Thank you, Brooke, and just to wrap up. So what we have is Tommy and Calvin, two unique absolutely unique and globally iconic brands. And what the PVH+ Plan is all about is us leaning into the DNA of each of these brands and drive brand desirability in product, marketing, marketplace and then at the same time, build out that underlying growth engine business engine that enabled us to build the brand and drive growth in an increasingly systematic repeatable way. So the real strength and the real value will come from the compounded effect of us doing this quarter after quarter, month after month, week after week like consistent in direction, consistent in focus and just relentless in step by step by step. So thank you for being on this journey with us and have a great week everyone.

[Operator]

This concludes the PVH Second Quarter 2023 Earnings Conference Call. You may disconnect your line at this time and have a wonderful day.