PVH Corp. (PVH) CEO Manny Chirico on Q2 2020 Results - Earnings Call Transcript

PVH Corp. (NYSE:PVH) Q2 2020 Earnings Conference Call September 3, 2020 9:00 AM ET

Company Representatives

Manny Chirico - Chairman, Chief Executive Officer

Stefan Larsson - President

Mike Shaffer - Chief Operating Officer, Chief Financial Officer

Dana Perlman - Treasurer, Senior Vice President of Business Development, Investor Relations

Conference Call Participants

Bob Drbul - Guggenheim

Michael Binetti - Credit Suisse

Erinn Murphy - Piper Sandler

Jay Sole - UBS

Dana Telsey - Telsey Advisory Group

Jamie Merriman - Bernstein

Kimberly Greenberger - Morgan Stanley

Ike Boruchow - Wells Fargo

Matthew Boss - JPMorgan

Omar Saad - Evercore ISI

John Kernan - Cowen

Operator

Good day and welcome to the PVH, Q2 2020 Earnings Call. At this time I would like to turn the conference over to Dana Perlman. Please go ahead.

Dana Perlman

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

The information to be discussed includes forward-looking statements that reflect PVH's view as of September 2, 2020, of future events and financial performance. These statements are subject to risks and uncertainties indicated in the company's SEC filings and the Safe Harbor statement included in the press release that is a subject of this call. These risks and uncertainties include PVH's right to change its strategies, objectives, expectations and intentions, and its need to use significant cash flow to service its debt obligations.

Significantly, at this time the COVID-19 pandemic continues to have a significant impact on the company's business, financial condition, cash flow and results of operations. There is significant uncertainty about the duration and extent of the impact of the pandemic. The dynamic nature of the circumstances means what is said on this call could change materially at any time.

Therefore, the operation of the company's business and its future results of operations could differ materially from historical practices and results or current descriptions, estimates and suggestions. PVH does not undertake any obligation to update publicly any forward-looking statement, including without limitation any estimates or suggestions regarding revenue or earnings.

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

At this time, I'm pleased to turn the conference over to Mr. Manny Chirico, Chairman and CEO of PVH.

Manny Chirico

Thank you very much. Good morning, everyone. Joining me on the call are Stefan Larsson, our President; Mike Shaffer, our Chief Operating Officer and Chief Financial Officer; and Dana Perlman, Treasurer and Senior Vice President of Business Development and Investor Relations. I want to thank you all for joining us on the second quarter earnings call and also hope that you and your family are healthy and safe.

Our better than expected results reflect the hard work, determination and flexibility of our talented associates across the world, and I can't express how grateful I am for their determination and dedication. I would like to specifically acknowledge the incredible efforts from our store and distribution center associates who are on the front line and have kept our businesses running over the last couple of quarters, despite the challenging times and the unconventional working dynamics.

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

We continue to live by our purpose, which is to drive fashion forward for good. One of our most noteworthy recent announcements was the hiring of our first ever Chief Diversity Officer last month. Together with our expanded inclusion and diversity team, we believe that we can continue to accelerate our work to create an inclusive environment where every individual is valued and every voice is heard.

We also took key actions to evolve our business and drive an accelerated recovery. We accelerated our digital agenda and reallocated additional resources to drive growth in this critically important channel. We continue to optimize our brick and mortar presence, including announcing the closure of our Heritage Retail business in mid-2021. We will continue to review our footprint, what our footprint looks like post-COVID in our owned and operated network, and through our wholesale partners.

We are focused on every expense line item, including our previously announced headcount reductions in North America and we will continue to evaluate further measures as we go forward. We managed our inventories prudently, by also increasing our inventory buys towards the comfort and casual products that are working exceedingly well with consumers right now.

And lastly, we were opportunistic in the capital markets in early July and efficiently raised additional capital to further support our already strong financial and liquidity position. We are confident that these actions will position us well to navigate the COVID-19 pandemic and emerge as a stronger organization.

Turning to our second quarter performance, while our second quarter results continued to reflect a significant disruption from the COVID-19 pandemic, they exceeded our expectations, both from a top and bottom line perspective. Our revenues declined 33% to $1.6 billion as our own stores and wholesale partner stores were closed for about one month on average during the quarter, and our stores are operating at significantly reduced hours and occupancy levels.

We experienced better than expected performance across all markets and channels, as the casual brand lifestyles that Calvin and Tommy represent were even more relevant with our consumers spending more time at home. Digital continued to outperform with total digital sales up 50%, including almost 90% growth in our own commerce sites. We continue to believe that digital sales can reach 20% of our sales in the next couple of years, while also contributing favorably to profits.

In our stores, while traffic was down, particularly international tourist locations in North America, our conversion was very strong. Gross margins were up 80 basis points, driven by the mix sift benefit to our international markets, as well as more favorable markdown rates compared to what our expectations have been.

As we expected, our SG&A deleveraged versus last year; however, there was a significant sequential improvement versus the first quarter due to higher revenue days, as well as the full quarterly benefit of our cost initiatives. All-in-all we were quite pleased with our second quarter results, with us delivering EPS of $0.13 a share.

Before I pass things over to Stefan, I'd like to address how we're approaching the second half of the year, particularly the holiday. This will clearly be a unique holiday season and we are highly strategic in our approach to be competitive and gain share during this period. We are also being conservative in our sales outlook for the fourth quarter, given all the uncertainties resulting from the potential impact from the COVID-19 virus. We believe we are in excellent position given our inventory position and our sourcing base [ph] to be able to meet any sales demand that comes, that will be over our expectations.

While our brands and positioning are strong, we expect that the second half of the year will present itself with a fair amount of volatility, especially with COVID-19 cases resurge. Our assortments will be focused on relevant categories and we are in a position to chase inventory as better than expected demand materializes. We expect that brick and mortar traffic will remain under pressure and are looking into creative ways to work around that, while also driving people into our stores. We’ll be redirecting resources to digital to support strong growth on our own sites, as well as our pure-play partners and other wholesale partners online.

From a regional standpoint, we expect to see continued out performance in our international businesses. China continues to gain momentum for both Calvin and Tommy, and we are pleased to see positive growth in the region reflecting our brand health and successful consumer engagement initiatives.

Europe, which has been our strongest markets over the past few years continues to demonstrate a strong recovery, and we believe that we can continue to gain market share for holiday with our bestseller capsules planned and leverage our compelling brand propositions.

We expect that the most pressure to continue to be felt in our North America business, for several well telegraphed reasons. First, resurgence of COVID-19 cases in states significantly impacting consumer shopping and spending patterns. We expect store traffic will be pressured where the virus resurges.

Secondly, while back to school was never a big business for PVH, it was a traffic driver for outlet centers and department stores that we are not experiencing at the same level this time this year. And lastly, international tourist traffic to the United States, which typically represents about 30% to 40% of our revenues is down over 90% so far this year and we do not expect it to come back during the second half of 2020.

That said, the domestic consumer is shopping in our stores and is excited and invigorated with our brands. Our efforts for holiday in the U.S. will be focused on engaging with the local consumer in the United States leading our Heritage [ph] products and offer compelling price value propositions.

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

Overall, I am opportunistic about the opportunities ahead for PVH, both for the balance of this year and as we look into the next few years. We have a very powerful business model, led by our incredible people, our iconic global brands and our strong business and financial fundamentals, and I believe these competitive advantages will position us to deliver long term sustainable growth.

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

Stefan Larsson

Thank you, Manny and good morning. Since we spoke last, our focus for our brands and regions in the second quarter have increasingly began to lean into the execution towards an accelerated recovery, and in doing that, to position our businesses to win with the customer in the new normal coming out of COVID and to drive sustainable profitable market share growth.

Due to the COVID pandemic, just the first quarter, second quarter and the rest of this year would not look like any other year. Having successfully navigated through the immediate first phase of the crisis, I will now share some key insights on how we drove performance in the second quarter and what our key priorities are to drive tourism accelerated recovery. Just like last quarter, Mike will then share more financial details of our second quarter performance and how we're thinking about the second half of the year.

In the second quarter across the board, as Manny mentioned we were able to drive a stronger than expected recovery, both top and bottom line from a number of proactive actions: First, we quickly turned to supercharge in e-commerce across owned and operated, as well as third party digital commerce for both pure-players and the partner store dot-com.

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

Next, we continue to increase our focus on driving product development, which drove stronger than expected demand and margin in key categories. We continue to experience strong performance in casual core essentials, within underwear, loungewear and athleisure. We saw favorable pricing power in underwear and we're chasing inventories to be best positioned to capture demand in the second half. We also drove a more effective and interactive consumer engagement, and based on our data insights, we were able to better connect the customer to the product they are looking for and follow how their shopping patterns have changed across our channels.

From an inventory management perspective, as a result of stronger than expected sell-throughs of spring-summer 2020 product, we are carrying over less than expected product into the spring 2021 season. Our teams are focused on ending the year as clean as possible and we will continue to liquidate any liable product.

Lastly, we were successful in taking steps to right size our cost structure to better reflect our revenue levels, in terms by COVID. This includes our decision to streamline our North American business by reducing 12% of our workforce and closing our Heritage retail business in 2021.

As I provide a regional update, you will see that the recovery continued to be very strong throughout the quarter in both China and Europe, while in North America even though our digital channels performed very well, we felt increasing pressure towards the end of the quarter, particularly in the brick and mortar channels where we saw virus resurgence and we have significant exposure to international tourist traffic.

Let me start with Asia, specifically with China, which is the furthest ahead in terms of the recovery. Our direct-to-consumer sales in China increased double-digits in the second quarter and we continue to experience double-digit growth for the third quarter to-date. Digital continued to outperform for Asia as a whole, with our own business up about 75%. We also experienced strong Tmall performance with new live stream events drawing very strong traffic and new customer growth.

All marketing events in China focused on maximizing sales around key customer moments, including our 618 digital commerce event with Tmall, where both brands drove over 80% growth versus last year. During the campaign we performed over 30 live streams and 70% – 72% of our consumers were new to the brand.

Given continued traffic pressure in brick and mortar locations, our promotions in that channel focused on driving conversion and [inaudible] while limiting discounts on better performing products. Even though we continue to see virus flare ups impact our business in Japan, parts of Australia, Hong Kong and now Korea, in the region as a whole we continue to make good progress towards a continued strong recovery.

Moving on to Europe, where we continue to drive a very strong recovery and we experienced performance trends that were meaningfully above expectations. Our direct-to-consumer sales in Europe were down 10% in the second quarter, which was well above our expectations. Digital commerce continues to outperform with second quarter sales growing nearly 80% year-over-year.

The digital growth was driven by higher traffic and conversion, which is driven by strong product and marketing, in combination with having the right inventory availability. Given our position of brand strength, we narrowed our promotions and managed to maintain similar mark down levels to last year. And while traffic in brick and mortar remain challenged, particularly in larger cities, conversion was very strong and the team continues to find innovative ways to drive traffic into our stores.

While the virus is seeing some resurgence in Europe, our business in the third quarter to-date remains very strong, with direct-to-consumer sales tracking mid-single digits. We're also pleased with our spring 2021 order books, which showed a sequential improvement where both brands are tracking down high single digits versus tracking down mid-teens in fall 2020.

Lastly, our North American business felt the most pressure relative to our other regions. Our direct-to-consumer sales in North America were down about 45% in the second quarter and are currently running down in the mid-30s in the third quarter to-date.

Our biggest challenge as Manny mentioned is the lack of international tourists, which historically represents 30% to 40% of sales of our business, which is down close to 95%. As we look ahead, we do not anticipate this trend to improve before next year.

As a reminder, less than 30% of our EBIT was generated from the U.S. in 2019. Despite the challenges for tourism, we're seeing strong engagements with the more domestic customer; however, softer as of late in the virus surge stage. We experienced very strong digital demand during the quarter, as we drove triple digit growth for both Calvin and Tommy.com, including many new to site consumers.

Our business with Amazon was also a highlight, as we saw strength in the new softline sale in June and outstanding growth in new to brand consumers, which has continued into the third quarter. And as we look through the second half of the year, we will continue to manage our inventories prudently. We will redeploy resources to those areas of the business that are performing, such as digital from a channel perspective and essential casual products from a category perspective.

As our performance across regions demonstrates, we have taken a very deliberate approach for each brand to get deeper connected with the consumer and enhance our brand positioning to gain profitable market share. And I’d like to share a few brief global brand highlights from the quarter, beginning with Calvin.

Calvin Klein's brand health remains very strong and we continue to see strong consumer interaction across Calvin social channels, with an average follow increase of over 20% year-over-year. We are implementing our evolved brand direction in our products and marketing, and already now you can see it in how we drive engagements on Instagram and other social platforms and you will see even more of it during the holiday season and the beginning of next year.

In addition, we took steps to gain greater control of the brand with the announcement that we will buy back our European footwear business in Spring of 2021, which represents a great opportunity as we leverage our knowledge from Tommy’s successful footwear platform. And lastly, we announced that Movado, our license partner to Tommy Hilfiger will take over the brands watches and jeweler license for Spring 2022 and we feel optimistic about the partnership and the business potential.

Moving on to Tommy, Tommy’s global momentum continued in the second quarter with the brand demonstrating strong awareness, visibility and consideration to purchase. We continue to convert new customers to the brand, including in growth markets like China where our live streams generated over 60% of sales from first time buyers.

In the quarter we continue to launch limited edition brand collaborations that resonated well with our consumers. We also recently launched Tommy’s Make it Possible campaign, which is a bold sustainability program that builds on PVH forward fashion strategy, which is set to reduce our negative impacts to zero from the positive impact and improve over 1 million lives across our value chain.

And now to our Heritage business. Our Heritage brands business was under significant pressure during the second quarter. The cash utilization trend that's being accelerated by COVID is working very well for us in Calvin and Tommy. It’s working against us in the more formal wear to work product categories within Heritage.

Additionally, the mid-tier department store bankruptcies in North America have negatively impacted this business compared to Calvin and Tommy. We are addressing the challenges by managing inventory levels more prudently, lowering our cost base and reviewing additional ways to optimize and streamline the business. That goes beyond the next year closure of our Heritage brands retail business.

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

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

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

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

Overall, even though we're still in the early days of driving towards an accelerated recovery, as we intensify our focus to build on our core strength and connect them closer to the consumer than any time before, I feel very optimistic about the forward path ahead for PVH. Every time we take steps closer to what the customer wants and needs, we see the positive performance proof-points, whether it is in product, marketing or e-commerce distribution.

The global brand power of Calvin Klein and Tommy Hilfiger is a core strength and our diversified multi-region, multi-channel platform positions us to gain market share globally, and we see examples every day that our teams are rising up to the challenge to make it happen.

And by that, I would like to hand it over to Mike.

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 discuss our second quarter 2020 results, then move on to the current state of the business and our second half expectations. While our business continues to be negatively impacted compared to last year with the COVID-19 pandemic, our overall results were an improvement compared to the first quarter and exceeded our expectations.

Overall our reported revenues were down 33%. Tommy Hilfiger revenues were down 28%, with international down 14% and North America down 51%. Calvin Klein revenue was down 32% with international down 16% and North America down 51%. China showed positive year-over-year results in both Tommy Hilfiger and Calvin Klein. Our Heritage revenues were down 51%, which included a 16% decline as a result of the sale of our Speedo business.

Our storage, as well as those of our wholesale partners were temporarily closed during the first month of the quarter. As a result our revenue in the second quarter reflected a 40% decline in revenue through our wholesale distribution channel and a 24% decline in revenue from our total direct to consumer business. That included an 87% increase in sales through our digital commerce businesses driven by strong growth across all brands and all regions.

While we continue to be negatively impacted by the pandemic, our earnings exceeded our expectations and our earnings per share was $0.13 on a non-GAAP basis for the second quarter. Our gross margin for the second quarter benefited from the favorable mix of business, as our international businesses were a larger portion of our total revenue versus the prior year, and generally carry higher gross margins in our North American businesses.

Additionally, earnings in the second quarter had the benefit of expenses reduction initiatives, including salary reductions, temporary furloughs and lower discretionary spending, including marketing travel, consultant and creative and design costs, as well as one-time benefits from COVID related government payroll subsidy programs in our international jurisdictions and renovating and slowly negotiated with certain of our landlords.

Full salaries and most furloughed employees were reinstated at the beginning of the third quarter. Partially offsetting these savings were additional expenses associated with the implementation of health and safety measures to protect our associates, customers and business partners. These safety measures are expected to continue and the cost of revenue will be greater in the second half of the year.

Moving on to the current state of the business. Currently almost all of our stores in the U.S. and around the world are open although they are operating on reduced hours and reduced occupancy levels. Third quarter to-date for our direct-to-consumer business, we are running down low single digits for total Asia, with China up. We are running up mid-single digits in Europe and – down 30% – about 35% for North America. Our owned and operated digital commerce businesses for the third quarter to-date have continued to show strong growth.

Regarding wholesale, both our traditional and pure-play wholesale customers have seen strength in the digital commerce channel and this trend has continued into the third quarter, with the Calvin Klein inventory to accommodate this strong trend. However, we expect wholesale accounts to buy conservatively for the store-based businesses through the balance of the year and the revenue decline in the North America wholesale business will be more significant than in Europe and Asia.

The expected revenue decline in North America includes the impact of recent bankruptcies. We continue to be proactive in our response to the pandemic, with ongoing focus on operational efficiencies and liquidity such as streamlining our North America operations by exiting the Heritage brands retail business by mid-2021 and reducing our North America workforce by 12%.

We are tightly managing inventories. They decreased 12% from this time last year. We’ve reduced the inventory commitments, consolidated future season collections and negotiated extended payment terms with suppliers.

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

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

And now moving on to our expectations for the second half. We expect that our second half revenue and earnings will continue to be negatively impacted by the COVID-19 pandemic. We currently expect revenue in the second half to be down 25% versus last year.

When we think about gross margin, we expect that our second half gross margin will be relatively flat compared to the first half as we project heavy promotional activity across the industry in order to clear inventory, particularly in the United States. When we think about second half expenses and when you compare it to the second quarter, we expect our expenses as a percentage of revenue to be slightly higher in the second half than in the second quarter.

The second quarter expenses benefited from salary reductions, furloughs and government payroll subsidy programs and rent abatements, which will not materially continue into the second half. Although, in North America we continue to have payroll savings as a result of the recently announced reduction in our workforce.

We also expect to incur even greater expenses for health and safety measures in the second half as opposed to the second quarter. We're not in a position to issue more detailed guidance at this time due to the uncertainty related to the duration and severity of the pandemic.

And with that operator, we’ll open it up for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And we'll take our first question from Bob Drbul with Guggenheim.

Bob Drbul

Good morning. Nice job!

Manny Chirico

Good morning Bob.

Bob Drbul

Manny, question for you, really. So when you think about, the business performing really well internationally at this point, you think about the opportunities that are –that you see ahead in North America in the second half. What do you think your sort of upside could come from or do you think your being most conservative in North America and I have a follow-up question afterwards.

Manny Chirico

Sure. I think Bob, you know the fundamental issue in North America is the lack of control of the virus compared to the rest of the world, and I think that’s having an impact on consumer spending. So that's – and consumer spending particularly in apparel as it moves slowly.

In addition, I think the fact that we are, as a company really focused – a big part of that business is tourism driven, international tourists in particular, and that business is all but gone away and we are anticipating that that international tourists will not be back, just through the second half of 2020. So that’s why we’re seeing depression on our own retail stores, which are you know anywhere from 30% to 40% of our sales driven by international tourism, so that's what I think it is.

I think the opportunity lies in continuation in some of the trends we’ve seen and moving forward to seeing sequential improvement over that as we go forward. And from the bottom line point of view, I think our biggest opportunity is gross margin. We are anticipating a highly promotional environment for the third and fourth quarter, particularly holiday, and if that were the backlog, similar to how we saw in the second quarter where we were much more conservative about mark down rates and [inaudible] that’s going to materialize. So I think there's an opportunity of both on this top line, but there’s also an opportunity that maybe more significant on the gross margin.

Bob Drbul

Okay. And then just like a quick follow-up Manny. So, when you think about you know the trend to casualization, you think about sort of how you guys are positioned within the business. You still have, I think what you call the neckwear business and your dress shirt business, the ties and some tailored business. Can you size up for us sort of where that business is today, you know as a percentage of your total business and how you're thinking about it going forward in a more casual environment? Thanks.

Manny Chirico

Well Bob, business as you’ve talked about, our dress shirt business, our neckwear business and suiting as a percentage of sales is less than 5%, it’s probably approaching 4% and that’s for 2019. So even though we’re the largest dress shirt company in the world, as a component of our business it’s smaller. And I think we've been able to really focus in on the casual nature of those components of both Calvin Klein and Tommy Hilfiger, to really take advantage of those business those key categories are intimate business, men’s underwear business, our loungewear business, our performance businesses, jeans, active sportswear, that’s clearly a vast majority of the business and we'll be able to capture that as we’re going forward.

Next question?

Bob Drbul

Thanks again.

A - Manny Chirico

Thank you, Bob.

Operator

The next question is from Michael Binetti with Credit Suisse.

Michael Binetti

Hey guys, congrats on a nice quarter in a tough backdrop. I just wanted to ask one clarification and then I had a question for you Manny. Just the roughly you know 30% to 40% of sales in the North America business coming from tourists down over 90%, and the negative mid-30’s, total B2C trends in North America today. Does that emphasize that you're down low single digits with the domestic consumer versus last year. That’s a better number than we've heard elsewhere, so I just want to make sure that I'm reading that correctly, if you feel that underlying strength of the domestic consumer?

Manny Chirico

The short answer is, yes. The numbers you calculated are right in the ballpark and I think it's a testament to the strength of the brands and how they resonate with the U.S. consumer. So what you’re seeing with that domestic consumer, it’s always hard with the cash component of it, trying to factor that and that's not a big deal. It’s kind of flattish to down slightly, what we're seeing now in stores with the consumer.

Michael Binetti

Okay.

Manny Chirico

[Cross Talk] that component of it given the backdrop.

Michael Binetti

Okay, yes, it sounded like it. I just wanted to make sure the math was looking that way. So take some of the other retailers that are reported domestic all the consumers with a little lower sets, it’s nice to hear.

I guess then, I know the U.S. order books aren’t as strong as indications as they are for Europe, because there’s dynamics around cancellations and such. But, I guess it would be really helpful for us to hear how you're seeing the North America business, wholesale business rebuild you know the path from here and connecting maybe the second half of this year and into next Spring. You know just anecdotally what are the wholesale partners talking to you about?

Manny Chirico

So they are both I guess fundamental, and maybe Stefan with give a little bit more color on this, but fundamentally we are being very cautious on the revenue to buy, and with the belief that inventory will be there if demand picks up as they go forward. So, you know we’re trying to be smart about taking positions in categories where we see it accelerating, even though they might not be buying, as back-up and we're also not looking to get ourselves in trouble in categories that are softer in nature.

So, I think there is opportunity will be better, but we’ll have to – the consume will have to build it as a phase, and they are – we are being very cautious on the open to buying. I think you could even see, in a relatively short period of time, how you look at, some of my key customer’s inventory levels. They’ve done a good job of getting inventory levels down in a really short period of time relative to demand, as they’ve moved into the second half of the year. So I think there is opportunity to business as this backs up.

You know I just would want to remind everybody that for us, the U.S. wholesale, we have no account that represents close to 5% of our total sales as a company and our exposure in that department store segment that keeps coming up is about – in 2019 about 12% and I’d anticipate that this year it will be closer to 8% to 9%.

I guess maybe Stefan can give a bit more color on department stores and other wholesale partners volume.

Stefan Larsson

Yeah, just a bit on what Manny just shared Michael. The U.S. – our U.S. wholesale partners as Manny shared, they are taking a cautious approach; however, we see strong demand and a strong recovery in underwear, the big casual, essential product categories. So, we see stronger demand there and we see quite strong or very strong demand in their e-commerce business.

Michael Binetti

Thanks a lot Manny for the time. I appreciate it.

Stefan Larsson

Thank you.

Manny Chirico

Thanks.

Operator

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

Erinn Murphy

Great! Thanks, good morning. Maybe just to build on the digital agenda, I think in the prepared remarks you referenced the channel contributing favorably to profit over time. Maybe just walk through some of the initiatives to get there, and then specifically in North America, what did you see in terms of profitability for digital in the second quarter? Thank you.

Manny Chirico

Mike, will talk about it now.

Mike Shaffer

I guess a couple of things Erinn. I think we're seeing you know with the significant increase in revenues, we’re obviously getting a really great leverage on fixed expenses. We’re also focused on the variable and just really keeping that expense base under control. We're also seeing some improvement in AURs as the product is in such demand, so it's been selling with great performance on gross margins.

In addition to that, we continue to focus on it for the balance of the year. There's been a lot of discussion about you know freight rates and whatnot. That’s all in process at this point, but overall it’s – we’re definitely starting to see improvement and as it moves towards profitability in that business.

Manny Chirico

Yeah, again that’s North America. The rest of the world is high in profitability.

Mike Shaffer

Yeah, I was just going to say that too, that internationally our e-commerce business is profitable and it’s also in [inaudible].

Erinn Murphy

Thank you.

Operator

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

Jay Sole

Great! Thanks so much. I just had a question about FX and how you are thinking about hedging right now. I mean it potentially changed how the company has traditionally thought about hedging foreign exchange and if so, if the dollar continues to be weak, how might the timing of when that impacts the P&L would be different based on you know whatever we might be doing different based on the pandemic. Thank you.

A - Manny Chirico

So, I guess first things Jay, when we think about hedging, we really don't place bets. We try to keep a consistent policy of this called 80% of our inventory purchases being hedged at any point in time. So we keep moving that forward and always have that 80% on the books. So that is where we are today, and look, if the dollar continues, that will be a benefit on purchases as we – if the weakening of the dollar continues, we would see a benefit next year on those currencies that appreciated against the dollar, you know 2021 inventory purchases and gross margin.

Jay Sole

Got it. Thank you.

Operator

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

Dana Telsey

Good morning everyone, nice to see the progress. How are you thinking about the marketing budget in the second half of the year compared to last year and especially given it tapered throughout the conversation so far, has been a big focus on new customers, sounds like in all regions. What are you seeing from those new customers? What are they buying? And what are they informing you about the product going forward by each brand? Thank you.

Stefan Larsson

Hi Dana, good morning. From a consumer facing perspective, what we have done from the get-go when we got into the COVID crisis to pivot all resources towards e-commerce and that has really paid-off for us and that's what we will – we will continue to follow where the consumer is going and what the consumer’s behavior is informing us about is that they, from a product perspective, that we come back to the casual essential products, the athleisure product performing very strongly across all regions.

And Dana, the only add to that I would make is that in the second – no, in the first half when the pandemic is in each of the regions, we did pull back on marketing. We never docked, but we did pull back and as we move into the second half, we will be accelerating the spend back to more normal levels, so you will see an increase on a percent of sales basis for the second half.

And what we're doing there, that is a connection. We are strengthening the connection between the product offering with the distribution channel that the consumer is shopping at with the engagement that we're driving. So we're connecting those three stronger and stronger.

Manny Chirico

As Stefan rightly said, the focus is really on seeing more product that’s driving the business, because that’s where the connections with the consumer is happening in those key categories that we’ve talked about on this call, that are working so well.

Dana Telsey

Thank you.

Manny Chirico

Thank you, Dana.

Operator

And we’ll take our next question from Jamie Merriman with Bernstein.

Jamie Merriman

Thanks very much. Stefan, in your prepared remarks you made a comment super charging the digital and e-commerce efforts and I was wondering if you can just give us a little bit more color in terms of you know what that means either from an investment perspective, capabilities that you're trying to deeply or is it really focused on marketing? Thank you.

Stefan Larsson

Yeah, so let me start with – it starts with following where the consumer is going. So we see the demand, we see the consumer during the COVID time increasing the shopping in e-commerce. So what we are driving, what we have been driving and we continue to drive is growth in owned and operated and third-party e-commerce and the key drivers there is, the key product categories, the casual categories and then within those categories its to Manny’s point, is to hero [ph] products. And then it's all the different components relating – from products relating to the experience, all the way to fulfillment and logistics. So what’s really exciting to see is that the pivot that we made is really paying off.

Manny Chirico

All I would add is, obviously the marketing budget spend type is really – it continues to shift greater and greater to digital marketing. A lot of them are traditional areas and the investments from the back end on logistics which are all in the numbers that Mike has shared with all of you is also there.

Where we're not spending as much capital is in our own stores and in fixture in those areas, because we are really spending where the consumers is shopping and where we can have the most impact to make those investments.

Mike Shaffer

And I would just add, you know it’s not just on the logistic side, we are also spending on the IT side. So we've implemented a consumer data platform that gives us better understanding of our customer, access to our customer, and the ability to communicate with that customer, which we've never been able to do to this level before.

Jamie Merriman

Okay, thank you.

Manny Chirico

And we drive the, its – we are trying to get the flywheel more and more going from product strength to showing up in the e-commerce channels that the consumer wants to shop and engage with our brands and then adding on the marketing strengthens to that. So it’s the product, e-commerce channel with the marketing strength. It’s that flywheel we are working to get going more and more.

Operator

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

Kimberly Greenberger

Great! Thank you so much. Manny I wanted to just follow-up on a point you made earlier. You indicated you're in an excellent position to deliver on sales opportunities, if they come your way here through the second half of the year. It sounded like you were taking some sort of selective inventory onboard where you feel really confident about the product.

I'm wondering if there's also an element here of supply chain agility where you think you might be able to shape the business. I'm just wondering if you can talk about the multi-pronged approach to maximizing the sales opportunity, particularly since it looks like many of your wholesale partners are coming into the back half and have a pretty lean inventory position. Thanks so much.

Manny Chirico

Yeah, this is really – this is where art and science come together. Trying to make a determination, you know seeing what’s working right now. Some of the key core categories where there is minimal inventory fashion risk and willing to take much more of a risk there. To continue to service that business and to keep our customers and our consumers satisfied. We are making those – I don’t want to call them debts, but we are making those investments as we go forward and continually adjust our supply chain as we move forward.

But I also don’t want to kid anyone. We’ve heard that disruptions that are going on in supply, the issues with China and the U.S. Either if we are not souring directly from China, getting raw materials out of China like cotton and other categories, you know it’s a bit of a puzzle, while I think you know given our – it's an area of expertise to PVH, it’s an area where we have great capabilities and I think our on the ground presence with the teams and our offices there allow us to really be on top of this, to react to the markets, stay in product categories and service those business.

So we are trying to do it thoughtfully, and to be in a position, you know if we're projecting and somewhat you know very mundane [ph] to say we’re projecting conservatively, especially in the fourth quarter. If that’s the case we want to be able to capture those incremental sales. And Stefan you want to add?

Stefan Larsson

And the focus on our core essentials, as we have mentioned, both Manny and I are also unlocking supply chain, sourcing capabilities. Because focusing on those essentials enables us to plan that capacity, to platform the fabric and to have much, much faster lead times on those. So that's an added benefit with following where the consumer is going.

Kimberly Greenberger

Alright, thank you so much.

Operator

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

Ike Boruchow

Hey, good morning. Manny, I wanted to ask about the trajectory of both brands in North America, Tommy and Calvin. Just at a high level, it seems like Calvin’s pace of recovery in North America should be much smoother than Tommy, just because it’s got a better product mix for what's working in the environment right now, they don’t have the tourism exposure. But I'd love to kind of hear your thoughts on the pace of recovery by brand in North American and how that could work out puts and takes?

Manny Chirico

Well, I think we don’t see much of a difference I guess I would say, and I think if you think about it, Calvin has a tremendous, as you know intimate underwear business, loungewear business, that just drives off of this and it also has a big performance component to it, and a big jeans business that really plays into the casual utilization.

But Tommy is probably as a brand much more of a casual brand, much more of an active brand. So our sportswear there really transcends that and works extremely well for us. Tommy’s always had a big jeans component to their sportswear business, almost a similar size to where Calvin is, so both brands I think are in a strong position.

Calvin’s goes by the nature of its brand, just having this huge designer underwear and woman’s intimate business. Tommy’s business is probably about a third of the size and still very substantial, but I think the two brands really are able to take advantage of – you know we talked to you about two of the probably top five brands by size in the world. So they have a very diversified product offering that plays across the spectrum, and I think if we can manage the inventory by component, we should be able to really do well with that.

Ike Boruchow

Got it, thank you.

Operator

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

Matthew Boss

Great, thanks. On gross margin in the back half and in your forecast year-over-year, just to get a sense, is that based on actual elevated promotional activity that you're seeing in the landscape today or that your anticipation of markdowns you think necessary to work through inventories. And then assuming you do exit the year clean on inventory, I'm just curious how you'd rank gross margin drivers multi-year.

Manny Chirico

Okay, it’s clearly in anticipation. We are not seeing anything in the business, and in fact we've been, as you could see in the second quarter, we've been really pleasantly surprised with the level of clearance and promotion that's gone on. We were anticipating much more of a clearance aspect when stores reopened, particularly in North America and we just haven’t had to be that promotional.

Nothing has changed in orders that we’ve – from that perspective. So it’s clearly just us anticipating that there will be a level of activity as potentially what we hear in the market and much more in the United States with back-to-school is not happening at the same level, for all the reasons that everyone can imagine, and the fact that the uncertainty around the holidays.

So I think it's partially with us being prudent in how we are projecting the business, so that’s the real opportunity as we go forward. There's nothing from a costing point of view of the product, the mix of the product. The only thing I would say in the second quarter the mix of international is probably skewed a little bit more than it will be for the balance of the year, but absolute that, there is no real difference.

Operator

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

Omar Saad

Good morning and thank you for taking my question. Great job executing through all this guys! Manny, I wanted to ask you know kind of a follow-up on the inventory and promotional environment for the second half you’re talking about. Help me reconcile your expectations, you have your promotions, but at the same time you're inventories are clean and then we are looking at how prices are down 20 to 30, department store inventories are down big.

Is it that – do you think that all these kind of the channels planning inventories to significantly ramp up in the back half, you know above demand or do you expect the demand levels to remain lower than even those reduced inventory levels. Just kind of help me piece together that framework for the landscape in the back half? Thanks.

Manny Chirico

Look, I don’t know how else to say this. It’s very – personally retailors are not buying extra inventory, they are not ramping up. I think they are open to buy as well as you can see. I think, if we are going to be faulted for anything, it’s that we are being too conservative on our gross margin expectations.

If that’s the case, then we’ll do better on the gross margin. I think that’s a potential big opportunity for the second half of the year. And the key will be how much goods are out there that need to be cleared from a fashion point of view or whatever. We don’t see any really buildup.

As Mike talked about, we were planning to carry out as much as $250 million of goods. That number’s already been cut in half and factored into all of our second quarter numbers and into third quarter numbers and I think we’ll continue to get that number down compared to where we originally thought.

So I think it’s really good for us. Gross margin is a big opportunity, but given all the uncertainty in the business, we are just trying to be cautious about how we think about margin going forward.

Omar Saad

I totally understand.

Manny Chirico

Okay. Operator, we’ll make this the last question please.

Operator

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

John Kernan

Alright, thanks for sneaking me in and congrats on managing the business through what’s a difficult time period. Just wanted to go back to the revenue guidance for the back half of the year and how we should think about the international piece of the business, which don’t seem to have momentum right now, both in Tommy and Calvin. If you just look at the run rate of decline in Q2 in both Calvin and Tommy, I’m wondering if that type of run rates should continue or things are going to be planning a little bit weaker trends internationally, and the balance between domestic and international in back half of the year.

Manny Chirico

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

So I think from that perspective, there is sales opportunities potentially in the fourth quarter, both internationally and potentially domestically as we move forward. And right now I think we talked about – I think both Stefan and Mike mentioned that our direct-to-consumer business globally is running about – it’s down 15%, which is running ahead of where we would have planned the business at this point. So we haven't seen anything that discourages us at all and actually creates a lot of opportunity.

Stefan Larsson

Now, there is just – on Q4 just a bit on what Manny is saying is – and we flagged it in our prepared remarks. It’s not going to look like any other Q4 in holiday season. So there is big shift from brick and mortar to e-commerce which – and there is this overhang from the resurgence of the virus risk.

Then in China, just to mention, we have the Chinese New Year moving out from this year to next year. So it's a different kind of holiday season with more risks.

John Kernan

Understood. Thanks everybody.

Manny Chirico

Thanks John.

Manny Chirico

Okay everyone, thank you very much. Everyone stay healthy and safe. Enjoy the – in the United States and North America, enjoy the holiday weekend is coming up in the end of the summer and we look forward to talking to you in our third quarter press release. Thank you.

Operator

And that does conclude today’s conference. Thank you for your participation. You may now disconnect.