PVH Corp

NYSE:PVH

Earnings Call Transcript 2022-Q3

[Operator]

Good day and welcome to the PVH Third Quarter 2022 Earnings Call. Today’s conference is being recorded.

At this time, I would like to turn the conference over to Sheryl Freeman, Senior Vice President of Investor Relations. Please go ahead.

[Sheryl Freeman, SVP, IR]

Thank you, operator. Good morning everyone and welcome to the PVH Corp. third quarter 2022 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 December 1, 2022 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 a 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 the second quarter earnings release and its 2021 sale of assets of and exit from the Heritage Brands business to focus on its Calvin Klein and Tommy Hilfiger businesses.

Significantly, the COVID-19 pandemic, global inflationary pressures, the strength of the U.S. dollar against most of the foreign currencies in which PVH does business and the war in Ukraine continue to have impacts on PVH’s business, cash flow and results of operations. There is significant uncertainty about the duration and extent of these impacts. As a result, 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 regarding revenue or earnings.

Generally, the financial information and projections to be discussed will be on a non-GAAP basis as defined under SEC rules. Reconciliations to GAAP amounts are included in PVH’s third quarter 2022 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 this release.

At this time, I’m pleased to turn the conference over to Stefan Larsson.

[Stefan Larsson, CEO]

Thank you, Sheryl. Good morning everyone and thank you for joining our call today. We are pleased to share that we delivered financial performance in the third quarter ahead of the guidance we provided for both the top and bottom line on a non-GAAP basis. Top line results exceeded our expectations on a reported and constant currency basis and the underlying growth, excluding the impact of currency and the Russia-Ukraine exit, was plus 9% in the third quarter, driven by better than expected growth rates for both Tommy and Calvin.

Delivering this strong performance in the face of ongoing macroeconomic challenges is a testament to our disciplined execution of the PVH+ Plan and the strength of our two global brands. We managed our business in a prudent and disciplined manner and underlying revenue growth combined with an increased cost focus drove the outperformance of non-GAAP EPS.

Our international businesses continue to execute very well across both brands, with increased product strength and strong consumer engagement driving performance, even in the face of a challenging macro backdrop in Europe and ongoing COVID restrictions in China. And with respect to North America, we are encouraged that our business is starting to show green shoots, although we recognize that we still have work to do to win more with the domestic consumer.

We have doubled down on improving our own execution, and this quarter we delivered double digit growth for Tommy and Calvin, led by our D2C stores even against the soft consumer backdrop and intense promotional environment. Given that we're in the middle of the very important holiday season, I've been traveling extensively with our leaders around the world.

This past Thanksgiving week, I was with our North American leaders in several of our U.S. markets. Before that, I spent a week in Asia with our leadership team, visiting both Korea and Japan. In a week's time, I'm heading to Europe to spend time with our leaders there. Being out in the markets this holiday season, I feel very good about our performance and the hard work our teams put in to make the PVH+ Plan come to life with the consumer. There is a lot of progress being made, and I want to take the opportunity to say a big thank you to our leaders and teams. Your work is making a big difference.

One market visit that stood out over the past few weeks was our visit to Korea. This was my first time returning to Korea after COVID where I could in person experience the strong execution of the PVH+ Plan and our Calvin Klein brand in the market. Calvin in Korea is a great example for how executing the PVH+ Plan will drive strong impacts over time across all regions and markets. In Korea, we have taken the key growth drivers of the PVH+ Plan and made them come to life in a uniquely strong way, driving year-to-date revenue growth of plus 22% in local currency.

We have accomplished this by leaning into our key product growth categories like underwear, denim, outerwear, big categories where we have the right to play to win. Within each of these, we are then focused on winning with the best hero products in the market, one concrete example being the modern cotton underwear program. We have then connected this strong product focus with some of the strongest talent in the market, like Jenny Kim, HoYeon Jung, [indiscernible] to name a few.

Finally, we make all these parts come to life on social media and in the consumer experience both online and in stores. The results from executing this, both brand and financial, have been outstanding, generating increasing brand relevance, double digit growth in revenue with significant pricing power and gross margin expansion. Since the PVH+ Plan growth drivers are the same across our brands and all regions, this Korea example is so valuable because it shows how we deliver results through disciplined execution of the plan.

As a reminder, our PVH+ Plan is about connecting our two global brands closer to where the consumer is going than any time before through five growth drivers; winning with product, winning with consumer engagement, winning in the digitally led marketplace, developing a demand and data-driven operating model and driving efficiencies while investing in growth. Let me share a brief update on where we are within each of these.

In winning with product, our hero product strategy continues to be key to our plan. And we have seen a strong response to our product assortment from both Calvin and Tommy consumers. At Tommy, we're globalizing our strong product assortment developed by Tommy’s global product engine based in Europe, building capabilities that deliver products that meet unique local demand across the world.

For spring '23, nearly 90% of the assortment as our stores in North America will be aligned with global bestsellers. At the same time for Calvin, we remain focused on doubling down on the key essential products the brand is known for and staying true to the brand's DNA. We are connecting our hero products through winning with consumer engagement. We're connecting our brands together with hero products with culturally relevant talent.

For Tommy, we continue to build on our ongoing partnership with Shawn Mendes who is a big fan of the Tommy brand and coupled that with brand heat driving moments such as Tommy’s recent fashion show at New York Fashion Week. For Calvin, we're continuing to drive strong consumer engagement through clear product stories centered around hyper relevant talent.

We're executing our strategy to win in the digitally led marketplace by building direct-to-consumer connections, led by our own digital business to drive engagement. For example, CK.com in North America recently successfully launched its new platform with enhancements including faster site speed and strong product imagery. In addition, we are focused on fueling high quality growth by working with best-in-class digital partners.

With David Savman having just joined the PVH team as our Chief Supply Chain Officer, we are actively working to improve our supply chain and build a demand and data-driven operating model. We are investing in important building blocks to enhance our end-to-end planning capabilities to better match inventory to consumer demand.

Lastly, we remain focused on driving efficiencies and investing in growth. As we continue to proactively managing what's within our control, we increased our focus on ensuring that our cost structure matched external demand environment. Through discipline execution, we control our cost which has translated into solid operating margin performance, at the same time enabled us to invest in the PVH+ growth drivers.

The PVH+ execution and investments we are making today are building the foundation for long-term growth. This is where we remain intensely focused. Over time, the macro challenges we are navigating today will abate and we will then be in a strong position to further capitalize on improved external conditions.

During the third quarter, despite the challenging consumer sentiment, which has become further challenged over the last few months, particularly in North America, we feel good about our team's execution and how well we delivered, a theme we expect to continue for the fourth quarter.

So looking ahead, based on our underlying performance trends, we are reaffirming our revenue and EBIT margin guidance and increasing our EPS guidance for the full year, which incorporates our planning for a more promotional environment in the fourth quarter and continued focus on prudently managing our expenses.

Our guidance is based on our current view on the macroeconomic environment, and we continue to carefully monitor developments and potential impacts on the consumer for each of the regions in which we operate. We also feel good about the start of the holiday. Through the Black Friday weekend, performance has been in line with our expectations and we are on plan.

In Europe where Black Friday has become increasingly irrelevant, we drove strong performance across all channels for both Tommy and Calvin, which include strong increases in traffic. More than ever, great brands such as ours stand out during this important shopping period.

And for North America, against the backdrop of soft consumer sentiment and a highly promotional environment, we executed well. We have significantly better in-stock levels versus last year and we saw better conversions in our stores along with some improvement in international traffic.

We expect that the strength of our product and better in-stock levels of hero product will continue to support performance in Q4. With respect to leadership for our North America businesses and the Calvin Klein global brand, we are making strong progress on the respective searches and look forward to sharing an update shortly.

Now turning to our regional performance and how we are executing our PVH+ Plan across each region, starting with Europe. Both our brands remained strong and continued to resonate with the European consumers with both Calvin and Tommy showing improvements in relevance and consideration compared to last year.

Adjusting for the impact of our exit from the Russian market and FX, we generated mid single digit growth on an underlying basis, consistent with our growth in the second quarter and achieved a record €1 billion in revenue for the third quarter. This is on top of very strong growth the prior year. Product elevation remains a key priority with a positive impact on ASPs for Tommy. And for Calvin, we remain focused on growing the CK Lifestyle through elevated commercial collections connected to a strong consumer experience and marketing campaigns.

Even as we build on our brand strength, we continue to closely monitor the headwinds in the macro environment and the related impacts to consumer spending, particularly in the UK and Germany where the pressures of high inflation and the energy cost are the greatest. Southern Europe continues to perform very well. Demand in our future order books across brands continue to hold with the spring 2023 season firming up to be high single digit growth on top of double digit growth in spring this past year.

Moving on to Asia Pacific. This past quarter, we continued to see strong momentum with all markets demonstrating solid local currency growth. Excluding China, the region demonstrated nearly 30% year-over-year growth, inclusive of a 15% headwind from foreign currency. Sales growth was driven by double digit growth in Australia, Japan, Korea, and Southeast Asia. Despite restrictions, we drove mid single digit local currency growth in China.

In addition, e-commerce delivered solid double digit growth led by China, Korea and Australia as we continue to expand our presence on the most important digital growth platforms in the region. As I shared in my Korea example earlier, across the region, we are connecting our PVH+ product and consumer engagement initiatives all the way to the stores where we meet the consumer. We saw strong performance for our fall collections and we continue to build brand heat and strong engagement, particularly around key holidays.

We're delivering strong hero products, coupled with ongoing locally relevant product collaborations. These efforts are driving strong growth in underwear, led by new silhouettes and functionality; outerwear driven by buy now, wear now transitional products as well as denim fits that resonates with the Gen Z consumer.

During the quarter, we drove strong e-commerce performance for key consumer moments such as the Chinese Valentine's Day. And most recently, we delivered double digit GMV and comp growth during China's 11/11 activation, outperforming the industry. Importantly, both Tommy and Calvin gained market share and moved up the rankings on Tmall.

In addition, both brands’ live streaming events achieved a record 10 million views and each also delivered a record RMB100 million GMV, which very few brands achieve. Our collaborations with Tmall, with product development led by our innovation center on the platform continue to fuel our results. We are leveraging data and insights in these collaborations to quickly be able to read and react and replenish these products to maximize sales.

We've also continued to rationalize our assortment to improve SKU productivity and inventory efficiency while simultaneously enabling the region to activate near and onshore product supply chain for speed and margin expansion. We remain excited about the progress and underlying performance in the region and the future whitespace opportunity, particularly digital, which remains underpenetrated.

Lastly, for North America, we remain in the early phase of our multiyear journey to unlock the significant opportunity in the region. We are doubling down on driving improved execution through our PVH+ Plan. Most importantly, we're seeing positive performance indicators, especially in our D2C stores, underscoring the effectiveness of the PVH+ execution.

As we have moved through the year, even with external challenges, we have driven sequentially improved domestic consumer comps, which returned to pre-pandemic levels in the third quarter. In the third quarter, D2C stores delivered double digit positive comps, driven by higher traffic. We continue to make step-by-step progress, starting with product and our assortment.

As we shared with you last quarter, we have been allocating more inventory to select doors to showcase the full assortment of our most important hero products. This past quarter, we further scaled our learnings to additional stores with significantly improved inventory levels in these hero product programs and improved in-store experience to generate stronger results. This select group of stores continued to show a very strong sales lift against controlled doors with higher transactions and AURs.

For Tommy, our number one category men's Polo significantly improved to achieve 2019 levels during the third quarter. We are seeing a lift as traffic and inventory positioning improves. Our global bestseller initiative which puts the best products from our global design center into North America continued to grow its impact in the third quarter, up from 50% in the second quarter, and we are seeing strong performance from these products.

In wholesale, we are deepening the work we do together with our key wholesale partners. We are re-merchandizing doors with improved stock levels, and we will intensify field team coverage and create clearer product presentation. In addition, we're seeing good improvement in on-time delivery. A significantly larger portion of spring orders are projected to be on time compared to the fall and holiday season.

Lastly, as we just announced, we're extending our licensing agreement with G-III in North America and we're doing that in a way that over a multiyear time period, step by step, we will transition our business back in-house. We are grateful to G-III for their partnership and long-term commitment to Calvin Klein and Tommy Hilfiger, and they will continue to be a key partner as we work together over the next few years to internalize the direct operation of these businesses.

This is an important long-term step to unlock the full potential of our brands in North America. By bringing these core product categories in-house over time, we will be able to draw on the power and expertise of our global brand teams and have them fully connected to the demand-driven supply chain we are developing.

Next, I'll share a few key global brand highlights on how we're bringing both brands to life for the consumer, beginning with Calvin Klein. We have continued to drive strong brand relevance through our exciting brand campaigns, featuring mass aspirational talent for the millennial and Gen Z consumer.

In September, we launched Calvins or nothing, a new underwear campaign starring actor Maya Hawke and Belgium professional footballer, Romelu Lukaku. The campaign channels the brand's iconic impactful aesthetic and featured the latest underwear offerings. On Instagram where Calvin has over 22 million followers, the campaign exceeded our expectations and outperformed our engagement rate benchmarks.

Most recently, ahead of the World Cup, Calvin Klein taps soccer players; Trent Alexander-Arnold, Antonee Robinson, Kai Havertz, Richarlison and Virgil Van Dijk in the latest installment of the campaign, expanding on the strategy of working with culturally relevant of the moment talent with global appeal.

In addition, Calvin Klein Jeans launched a capsule collection and campaign in partnership with leading European online retailer, Zalando. The campaign launched first for Zalando Plus members a loyalty program that gives consumers early access to new releases before becoming available on Zalando, calvinklein.com and Calvin Klein retail stores in key European countries.

In Asia, as I mentioned earlier, we leveraged mega talent to drive brand relevance by featuring Jenny Kim, Jessica Jung, HoYeon Jung, Park Seo Joon and others in images that captures the versatile nature of this season's Calvin Klein offerings across the region and increasingly globally.

Turning to holiday, we recently launched our curated Gift Guide, which includes iconic styles of underwear and apparel, focused on elevated classics for going out and super soft layers for staying in. In addition to our brand-driven holiday campaign, through our brand ambassadors and collaborators, we will pump out [ph] holiday content to drive relevance and engagement throughout this important shopping period.

Moving on to Tommy Hilfiger, our marketing initiatives in the third quarter delivered brand heat. Brand campaigns and immersive experiences where the highlight was our return to New York Fashion Week, which kicked off with a multi-verse Tommy Factory Runway experience that launched our new Tommy Hilfiger Monogram collection, and included a star studded guest list, generated global visibility and strong consumer engagement.

We generated approximately 6.2 billion impressions from August to October and approximately 27 million social engagements over the same period. The Tommy Factory Runway show ranked the number two on the list of the most talked about shows in New York, generating significant media interest, with the most brand mentions around inclusivity, American, sustainable compared to other top participating brands in the New York Fashion Week.

The brand campaign this fall generated 1.1 billion social media impressions and 44 million in organic reach. The TikTok video featuring Tommy Hilfiger is our best performing video on the platform to date. In addition, we generated strong consumer engagement, reaching 14 million followers on Instagram and drove strong engagement on the platform.

The brand has seen strong consumer demand following the launch of Tommy Hilfiger Monogram. In Europe, the campaign featuring celebrities such as Kate and Lila Moss, Travis Barker, Jon Batiste and Anthony Ramos drove a higher sell through rate twice that of the rest of the fall collection range, with double digit increases in ASP and very strong retail activations. We saw incredibly strong impressions and share of voice in Asia, North America as well.

In addition, as part of the Tommy Hilfiger Monogram collection, the brand collaborated with British designer Richard Quinn on the limited edition capsule, which highlights the refreshed logo and received exclusive Tier 1 retail distribution globally, including French premium retailer [indiscernible].

We're excited about our upcoming holiday campaign and collection featuring American iconic stars with distinctive modern aesthetic, inspired by Andy Warhol's factory paying tribute to Warhol's famous parties and the joy of gifts giving during the holiday. The collection is available at Tommy.com, Tommy Hilfiger stores globally and key wholesale partners.

And for Tommy Jeans, the label is collaborating with Martine Rose from their Americana inspired capsule collection with modern wardrobe essentials fusing streetwear style with prep details. It's currently available on Tommy.com and Tommy Hilfiger stores globally. For both brands, we're looking forward to an exciting holiday season.

In closing, I feel very good about the strong underlying performance we delivered in the quarter that enabled us to beat both our top and bottom line expectations. And I'm confident in our ability to deliver our full year commitments. And we are delivering this despite the macro challenges and volatility we're all navigating through.

Looking forward, I'm incredibly optimistic for how in a very disciplined manner through the PVH plan, every quarter we will unlock more and more of the full potential of our two iconic brands, Calvin Klein and Tommy Hilfiger across all our regions leveraged by PVH as a high performing global growth platform. We will be relentless in our execution of this.

Before I turn the call over to Zac, I would like to again thank all our associates around the world for your hard work, important contributions this year, and I wish everyone a happy, healthy and safe holiday season.

I'll now turn the call over to Zac to discuss the financials in more detail.

[Zac Coughlin, EVP and CFO]

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 to report strong third quarter results which exceeded our top line guidance by 2%, delivering underlying revenue growth of 9% versus last year and significantly exceeding our earnings guidance with earnings per share of $2.60.

We remain laser focused on what is within our control as we continue to navigate a challenging and increasingly complex macroeconomic environment. And that discipline is reflected in our performance for the quarter. Our underlying revenue growth was driven by strong growth across all regions in both our Tommy Hilfiger and Calvin Klein brands. We delivered continued solid performance in our international businesses and sequential improvement in North America, driven by the direct-to-consumer business.

On just a reported basis, revenue was down 2%, which reflected a 9% negative impact from exchange and a 2% negative impact from the war in Ukraine. We continue to focus on driving performance in our direct-to-consumer business where we have the closest connection to our consumer and DTC was up high single digits on an underlying basis. On a reported basis, DTC revenue was down 5% compared to last year, which reflected a 10% negative impact from exchange and a 2% negative impact from the war in Ukraine.

From a regional perspective, we drove underlying growth across all markets. Third quarter revenue for our international businesses was up 7% versus last year on a constant currency basis, continuing to significantly exceed 2019 pre-pandemic levels. Within our international business, our European business had a record quarter, exceeding €1 billion in revenue for a quarter for the first time ever.

Our Asia Pacific business, excluding China, grew nearly 30% compared to last year, even with a negative impact of exchange of 15%. And importantly, we drove mid single digit growth in China in local currency as COVID restrictions there lessened compared to the first half of the year. While we remain optimistic about our business in China, it continues to be a challenging environment as restrictions have once again intensified in the fourth quarter.

In North America, revenue in the third quarter was up 10% overall for Tommy Hilfiger and Calvin Klein and above our plans, despite the inflation and interest rate pressures that continue to weigh on consumer sentiment in the region. Our North America retail store business was up double digits versus last year, even as we continue to be impacted by the lack of international tourism from Asia. And we drove sequential improvement versus the second quarter as we improved inventory levels in store and grew sales to domestic consumers with our comp base now back to 2019 levels. Our wholesale business was also up double digits versus last year.

Our global brands also continued to deliver strong underlying growth with Tommy Hilfiger revenues up 7% on a constant currency basis and Calvin Klein revenues up 9% on a constant currency basis. Reported revenues were down 4% for Tommy Hilfiger and up 1% for Calvin Klein.

In the third quarter, we delivered gross margin of 55.9%, up approximately 130 basis points compared to pre-pandemic levels, but down approximately 180 basis points compared to last year. This includes a 40 basis point negative impact of exchange. While gross margin reflected planned price increases, that benefit was more than offset by higher costs and increased promotional selling as inventory levels are elevated across the industry.

SG&A expense as a percentage of revenue for the third quarter was better than planned at 46.2% and nearly flat to last year. We continue to take a disciplined approach to managing expenses, driving cost efficiencies while making targeted investments in strategic areas to fuel growth, in line with the fifth growth driver of the PVH+ Plan.

We also took actions this quarter to drive initial progress under the plan we announced last quarter to reduce people cost in our global offices by approximately 10% by the end of 2023. As a reminder, we expect that once completed, these reductions will generate annual cost savings of over $100 million, with a small benefit to 2022 and increased savings as we move through 2023.

In total, our EBIT for the quarter exceeded our guidance due to strong revenue performance and lower expenses. Operating margin was 9.6% as reported and 10%, excluding the negative impact of approximately 40 basis points due to exchange. On a GAAP basis, we also took a non-cash goodwill impairment charge of $417 million, which was non-operational and driven by significant increases in discount rates.

Earnings per share was $2.60 compared to $2.67 in last year’s third quarter and exceeded the top end of our guidance by $0.45, almost entirely driven by the improvement in EBIT. Earnings per share for the quarter also included a $0.35 negative impact compared to the prior year related to exchange and an $0.18 negative impact due to the war in Ukraine.

Inventory was up 32% at the end of the quarter compared to the prior year period due to a combination of factors. First, inventory levels were abnormally low last year in all regions and consistent with second quarter, we are normalizing to levels that support our plan to growth.

Second, as we've discussed previously, we have increased our inventory investment in core products to mitigate supply chain and logistics disruptions and ensure that we have the right product at the right time. While supply chain and logistics disruptions have not eased entirely, we have begun to see improvements in on-time delivery and decreases in in-transit times.

And lastly, inventory levels remain elevated in North America wholesale due to lower than expected demand. At the end of Q2, I mentioned that this was worth about 65 million of the increase in inventory versus the prior year. At this point, we have reduced that amount by nearly a third and are on track with our plan to normalize inventory levels in North America.

Additionally, we delivered on our commitment under the PVH+ Plan to return excess cash to shareholders returning over $100 million to shareholders during the quarter through the repurchase of 1.9 million PVH shares and our dividend.

Moving on to our outlook. To start with, we are reaffirming the top end of our projected revenue guidance, up 4% on a constant currency basis and our EBIT margin outlook of approximately 9%, and we are raising our full year EPS projection to $8.25. We continue to work relentlessly to drive results even in the face of the challenging macroeconomic environment and trends within the retail industry.

Our strong third quarter performance is a testament to our ability to react quickly in the short term, while continuing to be laser focused on strategic actions to support the long-term growth of our business powered by our two global brands, Calvin Klein Tommy Hilfiger.

For the full year, we continue to project underlying high single digit revenue growth, in line with our previous guidance. On a reported basis, revenue is projected to be down approximately 3% as reported compared to 2021 and reflects a 7% negative impact from exchange and a 4% reduction resulting from the Heritage Brands transaction, the exit from the Heritage Brands retail business and the war in Ukraine.

We expect total digital penetration as a percentage of revenue to be nearly 25%. We expect our full year gross margin rate to remain significantly above pre-pandemic levels, though approximately 130 basis points below record levels in 2021, which includes the negative impact of exchange of approximately 30 basis points. We continue to expect pressure on our gross margin for the remainder of the year due to promotional selling.

Overall, we expect gross margin in the fourth quarter will reflect a similar year-over-year decline versus what we reported for the third quarter, as we offset the negative impact of the increasingly promotional environment by driving our higher margin direct-to-consumer channel as a greater share of the business versus last year.

We continue to take a disciplined approach to manage expenses across the business in light of increased macro pressures weighing on our gross margin and we are accelerating cost efficiencies while prudently investing in the core pillars of the PVH+ Plan. SG&A expense as a percentage of revenue for the full year reflects an approximately 60 basis points improvement compared to our previous guidance and is now expected to be approximately 40 basis points higher compared to 2021.

Our full year operating margin projection continues to be approximately 9% and reflects a negative impact compared to last year of approximately 40 basis points due to exchange. Our interest expense projection is unchanged at approximately $85 million, and we continue to expect our corporate tax rate will be approximately 24%.

For the full year 2022, we are raising our projected earnings per share to be approximately $8.25 compared to our previous guidance of $8.00. The increase versus our previous guidance is primarily due to our strong Q3 performance. Our planned stock repurchase in 2022 remain at approximately $400 million, with approximately 330 million of repurchases completed year-to-date.

For the fourth quarter, we are projecting mid single digit revenue growth in our underlying business. On a reported basis, revenue is projected to be down approximately 4% as compared to 2021 and reflects an 8% negative impact from exchange and a 2% negative impact from the war in Ukraine.

Fourth quarter earnings per share is expected to be approximately $1.65, which reflects the negative impacts of approximately $0.27 due to exchange and approximately $0.15 from the war in Ukraine compared to the prior year. We expect our tax rate in this year's fourth quarter will be an expense of approximately 25%, which is relatively in line with our full year rate expectation.

As a reminder, in last year's fourth quarter, we benefited from non-cash tax rate relief tied to our purchase of the Calvin Klein brand back in 2003. This benefit ran out in 2021. As a result, our tax rate in the fourth quarter of last year was a benefit of approximately 33%. We expect our interest expense for the fourth quarter to be approximately $24 million.

Before we open it up for questions, I want to reiterate that we are pleased with our strong third quarter results and that we were able to continue to drive strong underlying growth across the business even in the tough macroeconomic environment. We remain focused on driving our strategic priorities despite the continued volatility. Through the PVH+ Plan, our global brands and businesses are well positioned to drive long-term value creation and deliver sustainable profitable growth and shareholder returns.

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

[Operator]

Thank you. [Operator Instructions]. Our first question will come from Bob Drbul with Guggenheim. Your line is now open.

[Bob Drbul, Guggenheim]

I guess the question that I'd actually like to spend some time on if you could is, Stefan, can you just talk us through the strategic rationale for taking the G-III licenses back and sort of how you structured them and why now and sort of how you really approach this? I think that will be pretty helpful. Thanks.

[Stefan Larsson, CEO]

Absolutely. Thank you, Bob. So as we communicated yesterday, we are extending the licensing agreement with G-III in a way that over a multiyear period will bring these categories back in house. And the rationale for that is very much connected to the PVH+ Plan and what that is about, because, in essence, the PVH+ Plan is a growth plan. It's a brand-driven growth plan. So it's about unlocking the full potential of our brands. And the brands, both Calvin and Tommy are the brands for the most valuable assets we have. So when we look at over time, over the next few years, in housing this, it's about giving us complete control of those brands. So when you look at the PVH+ Plan, we have five growth drivers and this very much connect to what creates value in unlocking those brands. So product design, the product assortment, the pricing, the market channel mix, enabling us to connect to demand-driven supply chain, so all those parts are value-creating growth drivers and that's what we will be able to be in control of and it will help unlock more of Calvin and Tommy and bigger value creation over time. But it will also help us build Calvin and Tommy to truly global cohesive aspirational lifestyle brands.

[Zac Coughlin, EVP and CFO]

Yes. And then maybe, Bob, I can give a bit of context from an economics perspective to complement the strategic element to this. So first of all, I think it’s useful to size the current business impact. These are predominantly U.S. women's wholesale categories for Calvin Klein and Tommy Hilfiger. And today these licenses make up approximately one third of our global licensing revenue. And from a profit perspective, the profit comprised less than 10% of our 2021 EBIT. I think also important to note is that due to the structure of the agreement, we do not expect any material impact to our financial results between now and the end of our PVH+ Plan commitments in 2025. Beyond that, in 2026 and beyond, we do expect the impact to become more material. We expect the intake of this business will be accretive to our financial results as we take advantage of the scale of what the rest of the business has.

[Bob Drbul, Guggenheim]

Great. Thank you very much.

[Operator]

Thank you. Our next question will come from Michael Binetti with Credit Suisse. Your line is now open.

[Michael Binetti, Credit Suisse]

Hi, guys. Thanks for all the detail today. Congrats on a nice quarter. I know it's a tough backdrop. I guess a quick one on the model, Zac, for the EBIT guidance in fourth quarter. It seems like it implies a decent step up relative to third quarter on both a year-over-year and a three year basis. Maybe you could unpack that a little bit. How much of that's cost savings or mix dynamics? Help us understand that a little. And then I guess what I found interesting was the U.S. DTC comments to stores. Stefan, I know this has been a focus for you. It seems like there's a bigger unlock emerging there. I know you said -- I think you said domestic consumer traffic across the back above 2019 levels for the first time. It's great to hear and even fighting that hard. I think you told us 30% of sales in those doors, or at least in the outlet doors was tourist volume. Maybe talk a little bit about how far below 2019 levels those doors are today in productivity and in margins and what you think are some realistic medium-term expectations for how much those can progress back to pre-COVID levels?

[Stefan Larsson, CEO]

Thanks, Michael. So before I let Zac unpack more detailed financials in the outlook for Q4, so what excites us with Q3 is that we were able to compete to win in a difficult macro backdrop. And we continue the outlook for Q4. It's based on that we will continue to do that in Q4. And we had an on planned start of the holiday. And then we continue to compete to win through Q4, and that's the underlying driver of the Q4 outlook. But, Zac, feel free to give more.

[Zac Coughlin, EVP and CFO]

I think as we saw as we looked through the third quarter, overall August and September strong and then some of that macroeconomic backdrop as Stefan mentioned, we began to see some softening consumer sentiment in October. We fought hard and we believe competed for our fair share there. As we look forward, we've incorporated that sort of outlook as we sort of worked through the third quarter into the fourth quarter results or into the fourth quarter outlook and expect that to sort of be the underlying dynamic that we're competing in. More broadly from a gross margin perspective, we expect our gross margin impact versus last year to be approximately the same as the third quarter. The composition of that obviously a little bit different as we do expect that higher level of promotional environment to continue through the fourth quarter we saw at the end, but we get the lift there from a much heavier DTC retail focus quarter, but the overall margin impact from there. And then I think from a SG&A perspective, we expect to see continued efficiency as we work our way through being really disciplined and focused on the spending from an outlook for the fourth quarter heading into there. So that's all incorporated into the guidance that we've provided.

[Stefan Larsson, CEO]

And, Michael, to your question about North America, the green shoots we are seeing in DTC stores, yes, it's exciting because we've worked really hard to double down on the execution, starting with our hero products and making sure we have those best essentials that we are known for in both brands that we have them in stock. So what we saw in Q3 was that we were able to navigate through most of the supply chain issues. So we had better in stock levels in more of our hero products. And then we were really focused on the channel execution. And we saw that drive this double digit growth in our store. So we saw the comps coming up with the domestic consumer. So still early days, but very encouraging. If we take Tommy as an example where we increasingly connect our products to the global design center of the brand and have those bestsellers, even for the North America market, we see that the category is like men's knits, which is our number one category for Tommy, we were up 42% versus last year. So Polo’s iconic essential bestsellers are driving significant growth and led by global bestseller. So we're able to get more of the hero products in stock, better product execution, leveraging the global brand design, higher AURs on that, and then we see that we're starting to come up and climb up against 2019. So early days in North America, but very encouraging.

[Michael Binetti, Credit Suisse]

Very helpful. Thanks a lot, guys. Congrats.

[Stefan Larsson, CEO]

Thanks, Mike.

[Operator]

Thank you. Our next question will come from Jay Sole with UBS. Your line is now open.

[Jay Sole, UBS]

Great. Thank you so much. I wanted to follow up on some of the comments made about SG&A. SG&A controls part of the PVH+ Plan. But can you help us understand how much of the really strong SG&A control in the quarter was sort of a response to the consumer environment versus how much is sort of identifying opportunities to streamline costs and get more efficient, which will sort of continue into next year and really beyond? Thank you.

[Stefan Larsson, CEO]

Thanks, Jay. So Zac has really done a great job coming in and helping us execute on the fifth growth driver of the PVH+ Plan, which is about driving efficiencies and freeing that up to invest in growth drivers. So what you see now in Q3 and going forward increasingly you will see that we are step by step becoming more cost competitive. Of course, one aspect of that that's even more important when we operate and compete to win in a tough macro, but this is something that Zac and I will drive throughout the whole PVH+ journey and beyond.

[Zac Coughlin, EVP and CFO]

Yes, I think just more specifically, there was really no one single item driving the 3Q SG&A efficiency. Instead, the efficiency was across the board as our disciplined focus on spending on only the most impactful elements of the PVH+ Plan really paid off. This is about focus and prioritization. And we actually are confident we can both invest in growth and deliver SG&A efficiency. So we also continue to invest in those areas most important for growth that was included in, we're spending. So digital as we platformed our U.S. Calvin.com site, it continued to build out our European digital ecosystem supply chain as we're building the technology infrastructure across Asia and logistics capability in Europe. And increasingly moving forward, you'll see spending in the U.S. retail network and global marketing. So we believe that we actually do have the ability to do both, to invest in those things most important and really drive those efficiencies as well.

[Jay Sole, UBS]

Got it. Thank you so much.

[Operator]

Thank you. Our next question will come from Chris Nardone with Bank of America. Your line is now open.

[Stefan Larsson, CEO]

Hi, Chris.

[Chris Nardone, Bank of America]

Good morning.

[Stefan Larsson, CEO]

There we go. We got you now.

[Chris Nardone, Bank of America]

Okay, perfect. Can you provide an updated State of the Union on your performance in some of your major Western European markets, and then how some of those trends have evolved quarter-to-date relative to 3Q? And then just as a quick follow up into some of your vacancies for head of Americas and head of Calvin, this Q3 announcement change, how you're looking at the attributes to fill some of those roles? Thanks.

[Stefan Larsson, CEO]

Yes. Thanks, Chris. So starting with Europe, we had a record quarter. We never made a quarter before in Europe over 1 billion. It is the first time we did over €1 billion for the first time in a quarter, so very strong execution by our European team drove underlying growth of mid single digit. Again, we were able to do this despite the tougher macro. For sure, there is a tougher macro situation I will say globally, but in Europe it was a good example of when we were able to navigate through that successfully. And then we go into the start of holiday where Black Friday has become increasingly irrelevant in European -- increasingly irrelevant and big. And we just came out of that and drove strong performance across both brands of channels. So feeling good about how our teams continue to execute really well.

[Zac Coughlin, EVP and CFO]

I think if we take a look then just more broadly on the European performance, as Stefan mentioned, continued to see strength there. And as we look forward, there's all important order books, the fall order book holding well, spring order book as we've talked about in prior quarters landing at high single digits. And in fact, as some of the supply chain -- global supply chain challenges have loosened, product is showing up on time or a little bit early and reconfirming the strength of the brand as those accounts are eager to take that product. So I think moving forward as well, we feel good about the strength that Europe is continuing to drive.

[Stefan Larsson, CEO]

And then, Chris, when it comes to the leadership searches we have, I'm excited to share that we're making really strong progress. So within the next few weeks, I look forward to update you all on what that means, both for the Calvin Klein global brand and for our North America businesses. And to your questions about how this connects to the talent choices, the leadership choices connect to the transition of the G-III categories, definitely it connects to the PVH+ Plan. So we are about to land leaders who will bring some different forms of best-in-class experience that helps us unlock both Calvin and Tommy. So yes, very excited and looking forward to in a few weeks time to just give you an update.

We have time for one more question.

[Operator]

Thank you. Our last question will come from Ed Yruma with Piper Sandler. Your line is now open.

[Edward Yruma, Piper Sandler]

Hi. Good morning, guys. Thanks for taking the questions. I guess one short-term question as you think about the G-III licenses, I know you said there's no near-term financial impact, but how do you think about building talent in preparation for taking those licenses in '25 through '27? And then Stefan as a longer term question, it seems like U.S. wholesale, one of your competitors is kind of advocating some of these more premium price points. So can you talk about the whitespace you think that you have, given that you're able to kind of reposition some of your brands as a more premium product? Thank you.

[Stefan Larsson, CEO]

Yes, definitely. So starting from your questions about whitespace or opportunity, so as I mentioned in my prepared remarks, I've been out traveling extensively this past week and Thanksgiving weekend while seeing a number of our U.S. markets. And just seeing the love for both Calvin and Tommy, the consumer love in the North America market and the opportunity we have too in a more disciplined way tap into that. So we have great partnerships with our wholesale partners. We have great locations within those stores. And we have an end consumer that loves our brands. So where we have opportunity, it connects to the PVH+ focus which is better disciplined on the product categories that really matters that are big for the consumer essential and where we have the right to play to win, and that we build the best hero products within those. And when we do today -- it's early days, but where we do that today, we see that we win. We win immediately. It's one to one. As soon as we play in the right category with the right hero products, we drive the revenue and we drive -- we don't see any price resistance. So it's very exciting to see that getting closer to excellence in product and then combining that with the consumer engagement and the talent that then the product and the consumer engagement that shows up in social media, shows up in e-commerce and increasingly in our stores, it's just exciting potential. Every time I'm out walking stores, I see it and it's so concrete.

[Zac Coughlin, EVP and CFO]

And then I think to add, I'm sure Stefan will want to comment on the build out of the talent capability for the categories coming in. But just to sort of start a little bit, I think if you think about from a financial perspective on that, we already do great product creation all around the world and we've got great supply chain capabilities as well. And so I think we believe that we've got a good amount of the infrastructure in place from a financial perspective that we talked about not seeing a material impact to the financials over this medium-term period. That's what gives us the confidence, as Stefan will talk about how we go about building out some of the actual capabilities themselves.

[Stefan Larsson, CEO]

Yes, we have both the time -- the time plan is setting ourselves up in a very good way to, as Zac mentioned, that one is to leverage the capability we already have because we have a lot of these capabilities and we see that with those leaders and teams and capabilities we’re able to drive winning and winning big in both Europe and Asia. So we see that, one is tapping into that. And two is to complementing our team strength, leadership strength here. So we're doing both and having this time to ramp that up.

[Edward Yruma, Piper Sandler]

Thank you.

[Stefan Larsson, CEO]

Thank you very much, Ed. And with that, we want to thank all of you who are following us and wish you a really good restful holiday and looking forward to catching up in the new year. Thank you.

[Operator]

Thank you. Ladies and gentlemen, this concludes today's event. You may now disconnect.