PVH Corp

NYSE:PVH

Earnings Call Transcript 2020-Q4

[Operator]

Good day and welcome to the PVH Q4 2020 earnings call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Dana Perlman. Please go ahead, ma’am.

[Dana Perlman]

Thank you Operator. Good morning everyone and welcome to the PVH Corp. fourth quarter and full year 2020 earnings conference call. This webcast and conference call is being recorded on behalf of PVH and consists of copyrighted material. It may not be recorded, rebroadcast or otherwise transmitted without PVH’s written permission. Your participation in the question and answer session constitutes your consent to having anything you say appear in any transcript or replay of this call.

The information to be discussed includes forward-looking statements that reflect PVH’s view as of March 30, 2021 of future events and financial performance. These statements are subject to risks and uncertainties indicated in the company’s SEC filings and the Safe Harbor statement included in the press release that is the subject of this call. These risks and uncertainties include PVH’s right to change its strategies, objectives, expectations and intentions and its need to use significant cash flow to service its debt obligations.

Significantly at this time, the COVID-19 pandemic continues to have a significant impact on the company’s business, financial condition, cash flow and results of operations. There is significant uncertainty about the duration and extent of the impact of the pandemic. The dynamic nature of the circumstance means what is said on this call could change materially at any time, therefore the operation of the company’s business and its future results of operations could differ materially from historical practices and results or current descriptions, estimates and suggestions. PVH does not undertake any obligation to update publicly any forward-looking statement, including without any limitation any estimates or suggestions regarding revenue or earnings.

Generally, the financial information and projections to be discussed will be on a non-GAAP basis as defined under SEC rules. Reconciliations to GAAP amounts are included in PVH’s fourth quarter 2020 earnings release, which can be found on www.pvh.com and in the company’s current report on Form 8-K furnished to the SEC in connection with the release.

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

[Stefan Larsson, Chief Executive Officer]

Thank you Dana and good morning everyone. Joining me on the call today are Mike Shaffer, our COO and CFO, and Dana Perlman, our EVP, Chief Strategy Officer and Treasurer.

It’s a true pleasure to be leading the call this morning and an honor to lead this great company as we drive towards an accelerated recovery from the COVID-19 pandemic and at the same time start to build our next growth chapter to win in the new normal.

Pre-COVID, there was already an unprecedented amount of change taking place in the apparel industry driven mostly by technology and the consumer, which the pandemic only accelerated. The new normal will not be a static state, rather an ever increasing rate of change that we will be ready to compete and win in.

2020 will be remembered as one of the most challenging moments for our industry from a geopolitical, economic and public health perspective due to the pandemic. Our teams not only came together to successfully navigate the crisis, we also positioned PVH to emerge in a stronger position. I would like to thank all our associates for their hard work, resilience and ability to rise up to any challenge we have encountered, in particular our dedicated retail store and distribution center associates who have managed to keep our business running throughout the toughest of COVID times.

Before the pandemic hit, I was fortunate to spend time traveling and visiting many of our teams and partners around the world. I saw firsthand many of the underlying strengths that we are now focusing in on and connecting closer to where the consumer is going than any time before, all in an effort to drive sustainable, profitable growth. Our focus is on winning with the consumer, driving brand relevance, taking profitable market share, and building further strength in our platform capabilities, and over time to do that more efficiently. To accomplish this, we will work with a strong consumer focus, become even more demand and data driven, and create value in a systematic, repeatable way where we will continuously learn and improve.

We have taken this time to proactively evolve our business with special focus on capturing where the consumer is going. We have been accelerating our digital businesses and reallocating additional resources to drive growth in this highly important channel. We also continue to shift our product towards the comfort and casual categories that are working with customers today, and lastly, we doubled down on our international businesses where we continue to see a very strong recovery and significant revenue opportunity for both Calvin and Tommy, while also contributing a higher operating margin.

Our increased and sustained focus on these aspects of the business will drive long term revenue and margin growth for our shareholders, driven by gross margin expansion and SG&A leverage, and importantly we will continue to live our strong corporate values, including our unwavering commitment to empower our people and help drive the fashion industry forward in sustainability and making a real and lasting positive impact within inclusion and diversity.

I will now share some key insights on how we drove performance in the fourth quarter and in our first quarter of 2021 so far, and how we are progressing towards an accelerated recovery. Mike will then share more financial details.

Even though our fourth quarter results faced greater than expected challenges due to virus resurgences and lockdowns throughout multiple regions, we were able to deliver on our expectations from a top line, gross margin, and EBIT perspective. We focused our execution around our strategic priorities and drove an above-plan performance for the holiday period, and we are pleased that we have successfully sold through our seasonal inventory, allowing us to enter spring 2021 in a very clean inventory position.

I’d like to share some proof points demonstrating our progress against the three value creating areas that we have shared with your previously.

First, we continue to super charge our ecommerce channel. We are rapidly growing our overall digital penetration by both expanding our D2C digital business as well as deepening our strong relationships with third party digital partners. Fiscal 2020 represented our strongest ever digital sales performance, up over 40%, including nearly 70% growth on our own sites, and we’ve doubled our penetration to close to 25% of total company revenue all while driving a significant improvement in the channel’s profitability. Looking ahead, with robust new user growth our most significant opportunity is to drive continued conversion and leverage our data capabilities to further engage, personalize and simplify the shopping experience.

Secondly, we continue to increase our focus on driving product relevance across our brands and regions. Our teams have taken proactive measures to tighten and refocus assortments as well as rationalizing unproductive SKUs to improve overall sell through rates. We are optimizing our product development processes and leaning further into our key essentials and hero products which is driving positive initial results, including generating higher average unit retail prices. For Calvin, we are building on our global leadership in underwear and intimates with hero products such as the Modern Cotton program, while growing in casual categories including denim, tees, and sweatshirts. For Tommy, we are expanding on the brand’s casual lifestyle through our hero products, supported by collaborations for each lifestyle, Tommy Hilfiger and Tommy Jeans. We also have a meaningful opportunity to further advance our supply chain capabilities and react faster as consumers’ needs continue to change, resulting in shorter lead times that will benefit our overall margin structure.

Thirdly, we are continuing to evaluate our cost structure in the context of our evolving revenue base. Over the summer, we announced the exit of our Heritage Brands retail business and a reduction of our North America workforce. In addition, we will be executing on additional cost reduction efforts in certain international markets while also right-sizing our real estate footprint. We also see a notable opportunity to optimize our internal processes by further scaling our digital and data capabilities. As we realize the benefits from these strategic actions, we will over time enhance our overall profitability while allowing for investments in our strategic growth areas. While our regions are all in various stages of their recovery, these focus areas continue to guide our teams with clear objectives to operate against to drive an accelerated recovery.

Turning to our regional update, let me start with Asia, specifically with China which has emerged first in the recovery. We remain very pleased with our performance in the market where D2C sales trends continue to be positive with double digit growth in the fourth quarter and full year. The lack of travel and tourism continues to benefit local spending in the market. Our team has been successful in accelerating our performance through a number of initiatives, including the following: we’ve supercharged ecommerce, synced online and offline initiatives, driving conversion of sales growth in full price stores while online key events were taking place. We also leaned into our most successful and relevant cash flow categories and hero products for both Tommy and Calvin, better matching inventory with demand which drove higher full price sell-throughs and lower markdowns.

With respect to the first quarter, we are pleased with our trends to date, highlighted by a very successful Chinese New Year, including very strong sell-throughs of over 50% for our holiday capsule. We also generated strong performance during International Women’s Day, generating nearly full sell-throughs on exclusive SKUs while [indiscernible] gift sets sold out. In addition, we are currently experiencing encouraging consumer responses to our spring collections.

Overall, while we have seen some virus-related headwinds in certain parts of the region, specifically in Japan, we remain confident in our Asia region overall.

Moving onto Europe, despite the much more aggressive lockdowns across the region during the fourth quarter, our teams drove impressive execution which continued to generate profitable market share gains, underscoring the strength in Tommy Hilfiger and Calvin Klein. Given the virus resurgence, 70% of our stores in Europe were temporarily closed for portions of the quarter, which was significantly worse than what we had been planning when we spoke with you in early December. Still, we were able to navigate through this difficult time and gain market share through the following: driving the digital business both on our owned and operated sites as well as with pure players, coupled with our CRM efforts remained an important focus. This is especially important as many stores are closed and we are very well positioned relative to the market. Total digital sales grew by over 60% for the fourth quarter with even stronger performance on our owned and operated sites. Given temporary store closures, our investment in digital and omnichannel capabilities enabled us to fully leverage our connected retail inventory to serve our digital demand.

We also continued to win through product, where we saw great performance across both brands in key essentials in casual sportswear with an improvement in AUR. In addition, as part of Calvin’s expansion as a lifestyle brand, we are pleased with our newly in-house footwear division which represents a big long-term opportunity for the brand and region. Q2 order book demand remains strong with fall 2021 planned up high single digits versus the prior year and up significantly versus fall 2019, coming off strong double-digit order books for spring 2021. It’s important to note that our customers continue to take in spring 2021 goods despite extended lockdowns in certain markets. We also continue to invest in important growth areas and at the same time, we’re also controlling discretionary spend and initiating cost efficiencies in Europe.

Lastly turning to North America, during the fourth quarter we showed strong growth in our digital business while capitalizing on better traffic trends in stores during the holiday period to sell through seasonal inventory. The absence of international tourism and some wholesale bankruptcies continued to challenge our North America business. As I shared with you on our last earnings call, we still have work to do in the region in order to pivot more towards the domestic consumer and operate with the same strength as our international businesses; however, we do see positive developments in the region.

Digital remains an important driver of our results with sales in our owned sites up 75%, even with increased promotional activity from the competition and our tight overall inventory position, which partially offset additional headwinds in our stores from lockdowns in Canada.

Similar to international trends, consumers continued to gravitate to key hero products in comfort, casual, and athleisure categories for both Tommy and Calvin. Our fourth quarter marketing efforts continued to be focused to support our digital expansion. We created an interactive virtual holiday themed shop on Tommy.com which generated significant new consumer acquisition, while Calvin leveraged its global assets and campaigns to reinforce brand relevancy and hero product affinity.

Lastly, I’d like to welcome Trish Donnelly, who recently joined the PVH team in the newly created role of CEO of PVH Americas. Trish joined PVH following nearly seven years with Urban Outfitters. As the global CEO for Urban Outfitters, Trish successfully led the business to win with the younger consumer, rapidly scaled ecommerce to industry-leading penetration while driving very strong connected retail and consumer engagement. We look forward to her leadership in unlocking the region’s growth potential where we see significant opportunity across consumer engagement, product and distribution.

Our teams continue to take a very thoughtful approach to managing our iconic brands, and I’d like to share a few brief global brand highlights, beginning with Calvin Klein.

Global brand health remains strong at over 85% aided brand awareness with strong growth across our social channels. Responses to our spring ’21 campaign have been positive with growth in relevancy and consideration, continuing the momentum on the #MyCalvins platform for creativity and self expression. The campaign featured established and emerging talent, including recent Grammy winner Megan Thee Stallion and Euphoria star, Jacob Elordi. In addition, the brand partnered with L.A.-based PgLang and launched a first of its kind content series which authentically engaged new audience networks that was very positively received.

We are excited about the activations that we have planned. In the coming weeks, Calvin Klein will launch a global product collaboration which will be an important first one with more to follow, where we use Calvin Klein’s iconic brand and hero products as the canvas for creative exploration.

Moving onto Tommy, similar to Calvin, Tommy continues to generate strong global brand equity with increases across all key measures, including awareness, which reached 78%. In December, we launched Tommy’s Drop Shop, our newest platform for pop culture focused on limited edition releases, which has been received very well. In addition, our Tommy Jeans and Zalando exclusive European brand campaign produced 64 million views across multiple platforms and influencer channels with very strong double digit increases in brand consideration and purchase intent. We are pleased with the launch of our first Circle of Denim collection, a significant milestone in our forward fashion journey to build towards a more circular and inclusive fashion industry. In addition, we continued to build up on our strong Tommy team to bring our global brand vision to life, including welcoming our new Chief Marketing Officer.

Finally, to our Heritage business, our Heritage Brands business continued to face challenges in the fourth quarter. The exit of our brick and mortar retail business remains on track to be completed over the next few months. We are focused on increasingly shifting towards casualization with a recent focus on outdoor activities. We are continuing to actively address the business challenges, managing inventory, lowering our cost base, and reviewing additional ways to optimize and streamline the business.

Before I hand it over to Mike, I would like to reiterate that the actions we are taking now will make PVH come out even stronger to compete within the new normal. As we plan and execute 2021, near term visibility is limited by virus uncertainty, especially within Europe and extended lockdowns in certain countries; however, we are cautiously optimistic as we continue to lean into what’s within our control to drive the business forward, specifically intensifying our focus on our core strengths and executing against our strategic priorities, including supercharging ecommerce and leaning further to our product strength to drive revenue growth, pricing power, and gross margin expansion.

Our international businesses are recovering faster than North America and we are building on our strong performance in both Asia and Europe. We remain very confident in the recovery of these regions given the underlying strength and momentum of our brands, product and distribution, and expect revenues to exceed pre-pandemic levels in the first half year as we continue to take profitable market share.

We are prudently planning our North America business given ongoing pressures from the lack of foreign tourism, which we do not expect to return in any meaningful way until the end of the year. In the meantime, we are actively focusing on further improving our execution with the local consumer, amplifying our digital efforts as well as right-sizing our brick and mortar footprint under the region’s new leadership.

As we further leverage the power of PVH, I’m confident that we will drive brand relevance, cost efficiencies, and deliver long term, sustainable growth while driving fashion forward for good. We look forward to sharing details with you on the long term plan for PVH’s next chapter of growth at our upcoming investor day later this year.

With that, I would like to hand it over to Mike.

[Mike Shaffer]

Thanks Stefan. The comments I’m about to make are based on non-GAAP results and are reconciled in our press release. I’m going to begin by discussing 2020 and then move onto ’21.

Overall, revenues for the fourth quarter were down 20% as reported and down 23% on a constant currency basis compared to the prior year, and they were in line with our prior revenue guidance despite significantly more extensive lockdowns in Europe and Canada. When we released our third quarter earnings in early December, approximately 10% of our stores were closed in Europe and our guidance anticipated that those stores would reopen soon. However, lockdowns in Europe were significantly more extensive than we expected and as a result, approximately 70% of our stores in Europe were closed in the fourth quarter. In addition, approximately 75% of our stores in Canada were closed during the quarter as a result of the virus resurgence.

Our total direct-to-consumer business was down 20% versus the prior year, including a 60% increase in digital commerce. All regions and brand businesses continued to experience strong digital growth and we continued to experience positive overall direct-to-consumer trends in China. A lack of international tourists coming to the U.S. continues to challenge our North America brick and mortar retail business. Our wholesale revenue was down 19% versus the prior year, which included double digit growth in our sales to digital channels.

Looking at our segments, Tommy Hilfiger revenues were down 16% as reported and 20% on a constant currency basis, with international down 10% as reported and 17% on a constant currency basis, which reflects the extensive lockdowns in Europe. North America was down 28%. Calvin Klein revenue was down 17% as reported and 20% on a constant currency basis, with international down 10% as reported and down 16% on a constant currency basis, which also reflects the extensive lockdowns in Europe. North America was down 25%.

Our Heritage revenues were down 41%, which included a 17% decline resulting from the sale of our Speedo North America business.

Loss per share was $0.38 on a non-GAAP basis for the fourth quarter, which reflected the negative impact of the COVID-19 pandemic on our business as well as an unplanned $0.13 negative impact due to a settlement of a multi-year tax audit. Gross margin of 53.9% for the quarter was approximately flat to the prior year and in line with our expectations. Inventory is clean and ended the year down 12% compared to the prior year. We’re carrying approximately $75 million of basic inventory into spring ’21 - that’s a reduction compared to our prior projection of approximately $100 million.

Expenses for the quarter were 52.5% of revenue and favorable to our expectation in the mid-50s as we reduced discretionary spending to offset the impact of the store closures. We ended the full year 2020 with revenue of $7.1 billion and non-GAAP loss per share of $1.97, which reflected the negative impact of the COVID-19 pandemic on our business. Our digital penetration for the year doubled compared to 2019 to 25% in 2020.

Moving onto our outlook for ’21, we’re providing our 2021 outlook despite the significant uncertainty due to the pandemic and as such, it could be subject to material change. Our outlook doesn’t contemplate new store closures, new lockdowns or extensions of current lockdowns beyond what we know already. In addition, our outlook does not contemplate further supply chain disruptions, including any greater impact beyond the minimal impact currently expected from the shipping disruption occurring as a result of the temporary blockage of the Suez Canal. Our actual 2021 results could differ materially from our current outlook as a result of the occurrence of any un-contemplated events.

Despite the ongoing store closures in Europe, we are encouraged by the recovery we are seeing in our international businesses and expect those businesses to exceed 2019 pre-pandemic revenue levels within the first half of the year. We expect our North America business to remain challenged through ’21 as we expect international tourism, which has historically represented 30% to 40% of our regional business, will not show improvement throughout the year.

Overall for the full year, we’re projecting revenue to approximately grow 22% to 24% as reported and 19% to 21% on a constant currency basis, compared to the prior year. We expect gross margin to increase in 2021 versus 2020 due to significantly reduced promotional activity as inventory levels are significantly lower at the end of 2020 and a change in revenue mix with our higher margin international businesses will make up a larger portion of our total revenue.

When we think about our operating expenses, despite an expected increase due to revenue mix as our higher expense international businesses make up a larger portion of our revenue, we expect operating expenses overall to decrease as a percent of revenue in ’21 compared to 2020, and we will continue actions that we began in 2020 to reduce costs and reallocate resources to support strategic growth areas of the business. This includes in 2021 reducing our workforce in certain international markets, reducing our office space, and closing select stores. We expect to realize $60 million of annualized savings from these actions, which are in addition to the previously announced actions we took to streamline our North America operations, including reducing our North American workforce by 12% and exiting our Heritage Brands retail business by mid-2021.

As a reminder, our outlook for 2021 reflects approximately $20 million of estimated operating losses in the first half of the year associated with the wind down of the Heritage Brands retail business.

We expect that the increase in gross margin percent in 2021 versus 2020 and the decrease in operating expenses as a percent of revenue in 2021 versus 2020 will be relatively similar in magnitude, with each worth a few hundred basis points.

For the full year in 2021, we are projecting non-GAAP earnings per share to be approximately $6 versus a loss per share of $1.97 in 2020. Our tax rate for the year is estimated at 17.5% to 19.5%. When we think about our tax rate by quarter, we currently expect that the rate for the first three quarters will be relatively similar with the fourth quarter expected to benefit from certain discrete items which bring down the overall rate for the full year.

We expect our interest expense to decrease in 2021 to approximately $110 million. We’re planning voluntary debt repayments of $700 million for the year, which is equivalent to the incremental borrowings we took on in 2020 to manage through the pandemic. As of today, we have already made repayments of $400 million. We expect our capital expenditures in 2021 to be $300 million to $325 million and will include continued investments in platforms and systems, including digital commerce and enhancements in our warehouse and distribution networks.

For the first quarter, our revenue is projected to increase 42% to 44% as reported and 34% to 36% on a constant currency basis. Revenue from directly operated digital commerce businesses continues to experience strong growth globally, but our stores continue to face significant pressure as a result of the resurgence of COVID-19 cases in Europe and Canada, with approximately 75% of our stores in Europe closed early in the quarter and 50% that currently remain closed today. In addition, inventory and sales volumes during the first quarter have been impacted by a recent global vessel and container shortage which is leading to delayed spring 2021 inventory receipts and in turn has delayed deliveries to our wholesale customers and affected product available in our direct-to-consumer businesses.

First quarter non-GAAP earnings per share is planned in a range of $0.80 to $0.83 compared to a loss per share of $3.03 in the prior year period. We expect interest expense to be about $30 million and taxes to be about 40% in the first quarter.

With that, Operator, we’ll open it up for questions.

[Operator]

[Operator instructions]

We will take our first question from Bob Drbul of Guggenheim Securities. Please go ahead, sir.

[Bob Drbul, Guggenheim Securities]

Thanks, good morning Stefan, and good morning Mike and Dana.

I guess the first question that I have is can you comment on current trends in China, sort of what you’re seeing there, maybe even update us on current trends in Europe, especially relative to the U.S.?

[Stefan Larsson, Chief Executive Officer]

Good morning Bob. We are feeling good about the current trends in China. We’re feeling good about the current trends overall. We are impressed--as I mentioned in my prepared remarks, we are impressed by our European team’s ability to execute so well in a very difficult backdrop.

[Mike Shaffer]

Bob, I would just add that European business has done an incredible job of moving as things close and shift around, so we ship from store, they sell digital in a big way on some of the pure plays as well as customer.com, so they’ve done a really great job of moving product and selling it there.

[Bob Drbul, Guggenheim Securities]

Just a second question if I could - Mike, can you talk about how you’re planning the European inventories given the lockdowns and given the trends, and just sort of--I know you guys said you’re comfortable with your inventory levels, they seem good, but maybe you can just give us a little more color in terms of that specific region. That would be helpful for us, thanks.

[Mike Shaffer]

Sure. Look, the inventories are down coming into the year, but as you think about the total company, I would say we’ve made investments in select markets where we believe there’s an opportunity to do more business, and Europe and Asia have really proven that they can deliver. As you think about the year, we’re down to start but we will continue to see a ramp-up in building working capital as we move through the year. Last year did not reflect a normal year. It’s a horrible comparison and it’s been difficult.

I would also just add that some of the delays on inventory with the Suez and some of the issues around container shortages, a big piece of that will impact Europe. It’s reflected in our numbers, the Suez seven to 10 days, and it’s all manageable and we have it reflected now, but that is also going to move inventories around in Europe in terms of when they get receipted and processed.

[Bob Drbul, Guggenheim Securities]

Great, thank you.

[Operator]

Thank you. Our next question comes from Erin Murphy of Piper Sandler. Please go ahead.

[Erin Murphy, Piper Sandler]

Great, thank you. Good morning. I guess Stefan for you, as you laid out 2021, you talked about the international segment growing relative to pre-COVID levels, North America still below. I guess two parts: one, on the composition of the European order book for fall at high single digits, can you talk a little bit more about how that’s composed between physical and digital, new accounts versus existing, and then in North America, just given the ongoing pressure you’re seeing in this market, are there any further distribution changes contemplated in the guide? Thank you.

[Stefan Larsson, Chief Executive Officer]

Good morning Erin. To your first part of your question, when it comes to European order books, we see the strength in the order book as a result of the overall strength in our execution, the strength of our brands and the strength especially in ecommerce that we see now. We see the collaboration that we have had since a long time back with our European pure players are really working well, and that’s a big part of it.

[Mike Shaffer]

Erin, would you remind repeating the second part of the question? You broke up here.

[Erin Murphy, Piper Sandler]

Oh, sorry about that. Just on North America, obviously that market, I think you talked about ongoing pressure in 2021. I was curious if there’s any future distribution changes contemplated in the guidance.

[Stefan Larsson, Chief Executive Officer]

No, what’s contemplated in the guidance is that there would be a recovery of tourists over time, and that will take time, and in parallel we will double down on our accelerated recovery efforts which it’s very focused on continuing to drive strength in ecommerce, and continuing to drive strength in ecommerce owned and operated and with our partners.

[Erin Murphy, Piper Sandler]

Got it, and then if I could just add one, just for Mike on the cost reduction plan for 2021. Can you just share with us what’s the kind of net savings that you’re expecting in this current fiscal year and if there’s deeper phasing beyond this year for the net savings that you’re seeing? Thank you.

[Mike Shaffer]

Yes, so look, we’ll start with--you know, we took a charge in ’20 and then another charge in ’21. Our total gross savings, including the charges related to those reserves, as well as discretionary expense, gets us about $250 million of gross expense savings. We’re going to invest about $100 million, so on an annualized basis, we have a planned reduction of about $150 million, and about 60% of that will fall into 2021.

[Erin Murphy, Piper Sandler]

Very helpful, thank you.

[Operator]

Thank you. The next question comes from Michael Binetti of Credit Suisse. Please go ahead.

[Michael Binetti, Credit Suisse]

Hey guys, good morning. Thanks for taking our questions here.

Stefan or Mike, as I think about the guidance you gave, I think it pencils out to an EBIT margin for the year about 7.2 or 7.3., maybe 750 or 800 basis points above last year, which I know is a tough compare. But Mike, you described it as about half and half the contribution from gross margin and SG&A to get to that year-over-year improvement. That could put you at a range of gross margin close to 57%, above where we’ve seen the business in the past. I know there’s some regional differences, but could you help maybe bridge us from the 54.7% you had in 2019 up to that level? I think that also would imply SG&A back to maybe $4.4 billion in 2019, just over $4.4 billion, so. I know the revenues are guided a little bit lower here, so with the cost cuts you did last year and the new ones coming in that you mentioned, maybe you can speak a little bit to what some of the offsets to the investments are there, or investments that are offsets there, if you could.

[Mike Shaffer]

Well, [indiscernible] big question. Look, as it relates to the gross margin, when you think about gross margin, we have a mix component, so the mix piece is being driven--we’re growing faster in the international businesses, so we are seeing some mix there. We started the year very clean and we are improved in each region as it relates to gross margin, just through less promotion. I mean, we are really clean and at this point we’re right on, being down 12%, so I think those are the real drivers.

We continue to make--see the business move towards the digital piece and we get better utilizations of inventories wherever we can, which I think is also helping, and that’s part of the systems and the investments which we talked about as well.

When you think about the expenses, it’s also being driven by the mix piece. We are--the international businesses are higher EBIT margin, higher gross margin, higher operating expense businesses, and as we grow those faster, we do see an increase on the expenses as a percent of revenues, and that’s a piece of it as well.

The biggest driver on gross margin, I just want to call it out, is improvement in the business on really being cleaner and being less promotional.

Did I get it all?

[Michael Binetti, Credit Suisse]

And Stefan--yes, you did. Stefan, if I could ask one maybe bigger picture, I realize it’s our math, but if we take the licensing businesses out of the U.S. and make some assumptions about how profitable we think those are, the margins in the categories that you do operate directly are quite low relative to international markets in North America. Can you just maybe give us an early thought on what you think medium or longer term, how to approach the margins in North America, excluding licenses? Where do you see the opportunities to improve those margins, especially if the--you know, to your point, the high margin tourism component could be below the high water mark for a bit?

[Stefan Larsson, Chief Executive Officer]

Michael, it connects back to our recovery priorities in North America, where we see that we have opportunities and work to do to better connect with the domestic consumer, doing that from an ecommerce perspective, doing that with strength in product and get higher pricing power and higher margin expansion coming out of that, and then over time see the stores coming back and recover, because what we do see is when countries or regions recover from the COVID resurgence, we see the consumer going back to shopping physical stores, and they keep shopping and the big growth will continue to be in ecommerce, but we see the consumer is truly shopping across channels.

[Michael Binetti, Credit Suisse]

Thanks a lot, guys.

[Operator]

Thank you. The next question comes from Dana Telsey of Telsey Advisory Group. Please go ahead.

[Dana Telsey, Telsey Advisory Group]

Good morning everyone. Hello Stefan, Dana and Mike.

Stefan, as you think about channel distribution, we’ve heard about Kohl’s entry in fall of 2021. How do you think about the landscape in North America for your distribution for Calvin? What does Kohl’s add, do you go into all stores, and are you looking at other physical channels or digital channels where you think you could drive sales, market share and margin? Thank you.

[Stefan Larsson, Chief Executive Officer]

Good morning Dana, and thank you for your question. Our distribution strategy and plans and execution will always follow where the consumer goes, so when we look ahead, owned and operated ecommerce is going to be increasingly important. Our direct-to-consumer channels overall, both ecommerce and brick and mortar, is going to be important. Our wholesale ecommerce is going to be increasingly important, and our wholesale brick and mortar, when we recover out of COVID, is also going to be important, so the most important here for us is to win in the marketplace and have that approach.

When it comes to distribution choices going forward, it’s going to be where our consumer wants to shop and how they want to shop, and we will follow that.

[Dana Telsey, Telsey Advisory Group]

Thank you.

[Operator]

Thank you. The next question comes from Jamie Merriman of Bernstein. Please go ahead.

[Jamie Merriman, Bernstein]

Thanks very much. Stefan, you talked in your remarks about the importance of the connected inventory position in Europe, and clearly that’s been really key as you’ve navigated through lockdowns. Mike, you just talked about the opportunity to use ecommerce to help get better utilization of inventory, so I’m just wondering where are you on that connected inventory position in other regions. Is that something that still could be a driver of improved inventory utilization in Asia and North America? How should we think about that?

[Mike Shaffer]

Yes look, I would say Europe has the lead on it and we’re learning from how they operate. We then move to China, where we see they’re starting to make connections with T-Mall and really starting to benefit through those connections, and the balance of Asia as well. North America is the furthest behind, but we’re making progress. We’re starting to get connectivity through our warehouses and some of our stores where we’re able to do some shipping, so it’s allowing customers to shop where they want, when they want, how they want, and as Stefan said, follow the consumer. We’re making those moves, but we’re lagging in the U.S. and moving fast to recover.

[Jamie Merriman, Bernstein]

Great, thank you.

[Operator]

Thank you. The next question comes from Jay Sole of UBS. Please go ahead.

[Jay Sole, UBS]

Great, thank you so much. My question, I just want to follow up on the gross margin. To what extent is foreign exchange going to be an impact on gross margin this year? Also, you talk about inventory being very clean. Is there a quality of sale initiative going on, sort of intentionally trying to get out of some maybe lower margin business, or is it just that the inventory is so clean that the amount of markdowns will be less?

Then Stefan, on SG&A, when you think about the amount of SG&A that’s budgeted this year that’s sort of implied in the guidance, how do you feel about that SG&A in terms of its ability to drive the key investments that you think are most important for the business going forward versus how much you’re trying to balance short term earnings growth and maybe postponing those investments for a later date? Thank you.

[Mike Shaffer]

I think as it relates to getting out of low margin product, we always look to move our business and prune off low margin and add higher margin product. The mix of business definitely helps drive that - as we move more towards international, it just shows up in our numbers as higher gross margin as the piece of pie grows there.

There is a transaction benefit this year. I would just caution you it is about $40 million over ’20, but it’s an apples to orange comparison as just purchases were so different and the business was so different, timing of receipts is--it’s a very hard comparison to make, but it is about $40 million.

I think [indiscernible]. Anything, Stefan?

[Stefan Larsson, Chief Executive Officer]

Jay, when it comes to your question about SG&A and if we have the SG&A needed to drive the growth areas and drive the execution to win the consumer coming out of COVID, the answer is yes. As Mike mentioned, we had $250 million of gross savings, we reinvested $100 million in the growth areas, so we will never compromise long-term growth for short term sales.

[Jay Sole, UBS]

Got it, thank you. Then maybe one more, if I can follow up, Mike, just on the cadence of the sales growth through the year, quarter to quarter as it’s implied in the guidance. Can you just talk about how you see sales trending, say Q1 versus 2019 versus how Q2, Q3 and Q4 might look versus 2019?

[Mike Shaffer]

Look, I guess what I’d say is the way we’ve guided is the way we’re actually trending, and that’s really--that’s how we see trends today. We’re on plan and we feel comfortable with the numbers we’ve given you.

What I would say is as we think about the year, I think looking at ’19 takes out a lot of the noise with the closures and issues around last year, so if we prune that out for the year, we’re planning to be down about 10%, and for the first quarter we’re going to be down about 18%. If you then look at the balance of the year, that falls relatively evenly for quarters two, three and four, so I hope that helps in terms of some cadence.

[Jay Sole, UBS]

That does help, thank you, Mike. Thank you very much.

[Operator]

Thank you. The next question comes from Kimberly Greenberger of Morgan Stanley. Please go ahead.

[Kimberly Greenberger, Morgan Stanley]

Okay, great. Fantastic, thanks so much. I wanted to follow up on the strength and the momentum you’re seeing in international markets with, I think, first half revenue expected to be above first half of 2019 internationally. Obviously there were a number of headwinds in Europe that you cited, so are we to read into that, that what you’re seeing is just absolutely tremendous growth in Asia, a little more sluggish in Europe and you expect Europe to catch up in the back half of the year? I’m just wondering how we should think about those two regions relative to one another. Thanks.

[Mike Shaffer]

Yes look, when you think about--we are planning--Europe is 50% closed today. We are planning those stores to open as the governments had laid out their plans. That’s our date, give or take. We’re not planning this revenge buying, this huge spike in business. We’ve planned relatively conservative around opening dates that were given, but Europe has shown incredible resilience even with the closures, being able to move goods to channels that they can ship to or from, and it’s just been a really good story coupled with the strength in China.

I wouldn’t say Europe is a second half recovery at all. I’d say that international for the first half is going to be ahead of pre-pandemic levels, which we’re really excited about.

[Kimberly Greenberger, Morgan Stanley]

It’s so amazing. Mike, can I just follow up with long term gross margin targets and just looking at what you’ve laid out here for this year? The gross margin looks extremely encouraging. If you were to look out three to four years, is there a gross margin target that we should have in mind, just given the culling of some of the lower profit areas, growth in international? Anything in mind for that?

[Mike Shaffer]

Yes, look - we’re putting our arms around trying to gather the information and looking forward to an investor day in the future in the latter part of this year where we will walk you guys through our thoughts. Coming through the pandemic, the mix of business by channel and by brand, we just need some time to put those together and we will walk you through it later in the year.

[Kimberly Greenberger, Morgan Stanley]

Understood, thank you so much.

[Stefan Larsson, Chief Executive Officer]

Just connecting back to your question around Europe and Asia and just building on what Mike was just saying, at PVH we have two of the most iconic brands in the fashion industry, and what we can see in Europe and Asia is that the strength of those brands, the relevance of those brands coupled with execution really, really close to where the consumer is going in terms of ecommerce growth, omnichannel, connected retail, strength in product, so for us internally, it’s just very good benchmarks.

We have time for one more question.

[Operator]

Thank you. The next question comes from Kate Fitzsimons of RBC Capital Markets. Please go ahead.

[Kate Fitzsimons, RBC Capital Markets]

Yes hi, good morning. Thank you for taking my question.

Stefan, you’re really reiterated your focus on the more hero casual products. I am curious as we come out of COVID and we potentially see pent-up demand in more fashion categories, how are you balancing potential shifts in consumer preferences with your forward inventory buys, and perhaps refer to your ability to leverage some of the advancements on the supply chain?

Then just real quick, Stefan, you’ve made a slew of new hires more recently. Any other holes in the organization that we should be thinking about looking out? Thank you.

[Stefan Larsson, Chief Executive Officer]

Thank you. On the product side, it’s just--that’s one of the areas where it’s one of the key value creating engines and the importance of staying close to the consumer. It’s something we really lean into, and so we’re building on our core strengths on the categories where we--big categories where we have the right to play and win, and then we follow the consumer as closely as we can.

On the team side, I just want to reiterate what I’ve said throughout since I joined. The team is one of the core strengths of PVH, and it will be one of the key drivers for our ability to execute on the accelerated recovery and coming into a post COVID world, where we are ready to compete and win.

[Stefan Larsson, Chief Executive Officer]

With that, we thank you for joining us, and wishing you a great day. Thank you.

[Operator]

Thank you. Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.