PVH Corp (PVH) Q2 2022 Earnings Call Transcript

PVH Corp  (NYSE: PVH) Q2 2022 earnings call dated Aug. 31, 2022

Corporate Participants:

Sheryl Freeman — Senior Vice President of Investor Relations

Stefan Larsson — Chief Executive Officer

Zac Coughlin — Executive Vice President and Chief Financial Officer

Analysts:

Robert Drbul — Guggenheim — Analyst

Jay Sole — UBS — Analyst

Michael Binetti — Credit Suisse — Analyst

Chris Nardone — Bank of America — Analyst

Brooke Roach — Goldman Sachs — Analyst

Presentation:

Operator

Good day, and welcome to the PVH Second Quarter 2022 Earnings Call. [Operator Instructions]

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

Sheryl Freeman — Senior Vice President of Investor Relations

Thank you, operator. Good morning, everyone, and welcome to the PVH Corp. second quarter 2022 earnings conference call. Leading the call today will be Stefan Larsson, PVH’s Chief Executive Officer; and Zac Coughlin, Chief Financial Officer. This webcast and conference call is being recorded on behalf of PVH and consists of copyrighted material, and 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 reflects PVH’s view as of August 30, 2022 of future events and financial performance. These statements are subject to risks and uncertainties indicated in the Company’s SEC filings and the Safe Harbor statement included in the press release that is 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, global inflationary pressures and the war in Ukraine continue to have impacts on the Company’s business, cash flow and results of operations.

There is significant uncertainty about the duration and extent of the impacts of these events. 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 2022 earnings release, which can be found on www.pvh.com and in the Company’s current report on Form 8-K furnished to the SEC in connection with the release.

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

Stefan Larsson — Chief Executive Officer

Thank you, Sheryl, and good morning, everyone, and thank you for joining our call today. I want to start by saying that despite the macro challenges we’re all facing, we have many strong proof points on the progress we are making in executing the PVH+ Plan. Starting with the underlying strength of our business, in the second quarter on an underlying basis, we delivered solid revenue growth of 6% compared to last year, excluding the impact of currency, Russia, and the Heritage Brands divestiture. The underlying growth speaks to the effectiveness of our strategy and resilience of our two brands, which are two of the strongest most iconic brands in our sector globally.

We also had solid profitability with non-GAAP EPS for the quarter above guidance. This quarter started strong with the trends we experienced in the first quarter continuing through May. The macroeconomic environment then softened in June as high gas prices and other inflationary pressures began to affect consumer discretionary spending. It was most pronounced for us in the middle income and value consumer in North America, but we also experienced some pullback in certain European markets. Consumer demand has stabilized in July, although at the reduced levels we experienced in June. And we’re now planning prudently for demand to remain at these lower levels for at least the remainder of the year, and we have revised our outlook accordingly.

Importantly, we are still projecting underlying high single-digit revenue growth for the full-year, driven by continued strength in our direct-to-consumer business led by the international regions. As a management team, we continue to intensify the execution of our PVH+ Plan, where we are in the early days of a multi-year journey to unlock Calvin Klein’s and Tommy Hilfiger’s full potential. We developed the PVH+ Plan to compete to win in the new normal because there is no such thing as normal operating conditions anymore. Our plan is about operating in a way that helps us compete and win long-term regardless of macro challenges.

I want to start by thanking our teams around the world for their hard work and dedication. It’s through our extraordinary talent that we bring the PVH+ Plan to life step by step for the consumer and in our financial performance. As we navigate the current business conditions, we have not one but two of the most iconic global brands that resonate deeply with consumers around the world. We have the PVH+ Plan to deliver brand, D2C, and digitally-led sustainable growth over time. We are taking concrete steps to further strengthen our financial performance, particularly in North America. And we remain committed to achieving the 2025 targets we presented at our Investor Day four months ago.

More than ever across both our brands, the five key growth drivers of our PVH+ Plan provide a clear roadmap to execute profitable long-term growth and value creation. Our first growth driver is about winning with product, and it’s about intensifying our focus on the most important product categories for our consumers, where we have the right to play to win and where every season we will have stronger and more focused hero product offering with the best essential products in the market. During the quarter, we saw strong performance in key hero product categories in men’s polos at Tommy Hilfiger and our iconic underwear and denim categories at Calvin Klein.

We’re also continuing to see positive momentum in refined and smart casual categories like woven shirts, dresses and pants. As consumers are elevating their apparel, more people are returning to the workplace and attending events. And with both brands being true lifestyle brands, we are well positioned to deliver on consumer needs ranging from casual to refined. Our second growth driver is about winning with consumer engagement. The main way we drive increased customer engagement is by connecting our brands through our hero products with people who shape culture in a masspirational way and to big consumer moments throughout the year.

You can see the impact of this right now in Calvin Klein through our collaboration with Jennie Kim of the South Korean Group, Blackpink. She has 69 million followers on Instagram. She’s a big supporter of the brand, loves our iconic products and drive big engagement among consumers in Asia and increasingly globally. Tommy is doing the same type of work with Shawn Mendes with strong results. And for both brands, this is just a beginning of building a very strong influence capability that will leverage and multiply each brand’s iconic global strength. We’re also creating our own big brand moments, and I’m excited that Tommy Hilfiger is returning to the New York Fashion Week for the first time in three years with an experiential runway event that will unveil the latest See Now, Buy Now Fall 2022 collection while immersing audiences both physically and digitally in a refreshed brand world.

Our third growth driver is to win in the digitally-led marketplace, where we continue to align our channel mix to where the consumer wants to shop our brands. We delivered solid underlying growth in our digital channel led by our own and operated business. In addition, our third-party partnerships continue to provide important platforms for our brands globally. This was important to mention is that this year’s performance will reflect consumers coming back to brick-and-mortar shopping in most regions after a multi-year absence including lockdowns during the height of the COVID. However, we still expect that the digital channel has the strongest long-term trajectory of growth over the coming years across both owned and operated and third-party e-commerce channels, and digital continues to represent approximately 25% of our revenue.

Our fourth growth driver is about developing a demand and data-driven operating model to enhance the speed and agility of our supply chain. Even though we are early days in this initiative, we already have some significant international proof points. A major portion of our European best sellers are on core replenishment with short lead times to match demand. In Asia for the first time this season, we were able to keep 15% open-to-buy. These are just a few important first steps that we will scale and enhance globally over the coming years. In North America, we are continuing to work through inventory issues driven by both external factors and internal execution challenges. We’ve previously shared with you that residual pandemic related supply chain issues were the primary driver of inventory shortages in our North American D2C business, particularly in our stores.

We are still working through those issues, and they’re still pressuring retail inventory levels. While we are still experiencing inventory shortages in our North America retail channel, we ended the quarter with excess inventory in certain categories within our wholesale business as consumer spending softened. We have a clear strategy to strategically manage inventory through the remainder of the year and Zac will give you more details around that. Our business in North America has also been over-reliant on the international consumer and has not sufficiently prioritized the domestic consumer.

These issues have also made crystal clear the need to simplify our execution, especially in North America within our supply chain globally. As such, we are evolving our leadership team to the needs of the execution of the PVH+ Plan and the changing environment. And we have made two significant leadership announcements. As we recently announced, David Savman will be joining us as Global Chief Supply Chain Officer. David joins PVH from H&M, where he served as Head of Global Supply Chain and brings a wealth of knowledge and experience in managing best-in-class global supply chains. We are excited that David is joining the team later this year, and we look forward to have him hit the ground running in helping us make our supply chain a competitive advantage.

We have just announced that Trish Donnelly, CEO of PVH Americas and Calvin Klein Global will be leaving the Company to pursue other opportunities. She will remain in an advisory role through November 30 to assist with the transition. We’re deeply grateful to Trish for her commitment, hard work and dedication leading Americas and Calvin Klein. We believe it’s critical to strengthen our ability to execute our PVH+ Plan for the Americas and continue growing the Calvin Klein brand globally. We therefore plan to separate Trish’s responsibilities and hire two leaders with different skill sets who will be able to devote their full attention to each of these key roles. In the Americas, we need a very strong leader who can help us unlock the full potential of both Calvin and Tommy in the North American market and especially when it comes to winning more with the domestic consumer.

At the same time, we are continuing to expand the Calvin Klein brand around the world. This requires a brand visionary whose singular focus is realizing the brand’s significant global growth opportunity. We have launched a global search process to identify the right leaders for these roles. In the interim, I will lead PVH Americas and the global Calvin Klein business, working very closely with leadership and teams from both organizations. Lastly, our fifth growth driver is about driving efficiencies and investing in growth. As we are proactively managing what’s within our control, managing the cost base is critical. At Investor Day, we spoke about how we will work differently and more efficiently manage our expenses. This effort includes reducing our people costs in our global offices by approximately 10% on a net basis by the end of 2023 in order to streamline our corporate organization, drive efficiencies and fuel strategic investments in line with the PVH+ Plan.

I want to emphasize that our focus on managing expenses is to simplify how we work, stop doing work that doesn’t align with the PVH+ Plan and better leverage our global scale. As we generate those savings, we’re committed to reinvest a portion of them in PVH+ growth drivers, such as product, consumer engagement, digital and supply chain capabilities.

Now turning to our regional performance and how we are connecting our PVH+ Plan across each region. I want to start with Europe. We continue to experience positive brand momentum. Even as the European consumer is showing some signs of softening, our business across both our brands in Europe remains strong and growing. Our European business is now 25% larger than pre-COVID levels in local currency with significantly higher profitability. During the second quarter, we continue to achieve healthy year-over-year growth on an underlying basis, adjusting for the impact of our exit from the Russian market and FX, which have been headwinds to our business. For the quarter, we generated mid single-digit growth versus last year adjusting for these impacts.

We’re seeing continued momentum in consumers returning to stores with traffic up meaningfully compared to last year. There is some bifurcation in the strength of our business between Northern and Southern Europe. Our Southern European markets continue to show solid business performance while Germany, our largest market in Europe has been most impacted by macro factors. However, we continue to see underlying growth for the region, as I mentioned earlier. Brand relevance for both Tommy and Calvin remains very high among European consumers.

Tommy Hilfiger ranks number two across global lifestyle brands spontaneously mentioned in Europe for both men and women. And Calvin Klein continues to be the runaway leader in underwear, a category that brings huge visibility and constantly engages new consumers into the brand. In addition, we are seeing a positive impact on AURs and gross margins from premium positioning through product elevation. This will remain a key priority for both brands. And demand in future order books across brands remains solid, with the spring 2023 season planned up high single-digits on top of double-digits growth this past year.

Moving on to Asia. We continue to be encouraged by the underlying momentum in our brands across the region, and we are pleased with the progress we made in Asia against the PVH+ Plan. Excluding China, the region demonstrated a 25% year-over-year growth in the second quarter, and this included a 12% headwind for foreign currency. The resurgence of COVID has continued to pressure sales in Greater China, but we are gaining momentum in other markets across the regions, such as Australia, New Zealand and Southeast Asia.

Also in Japan and South Korea, we grew at healthy rates compared to last year. Across the region, we build on the strong underlying performance we have achieved and remain focused on driving the PVH+ Plan execution with a very strong focus on regionally relevant hero products, talent and focus on the biggest consumer moments. Our hero product strategy continues to yield strong results, with sales up over 300% on like-for-like categories with sales outpacing inventory. During 618 [Phonetic], the largest selling period of the quarter in China, sales increased nearly 40% year-over-year, with strength in both Calvin and Tommy.

Hero product activations, including underwear, tees, polos were key features of our sale events and include a strong marketing support, further elevation of interactive content and supplemental live streaming from stores. In addition, e-commerce for Asia grew strong double-digits, with notable strength in China and Korea, driven by key volume driving platforms, such as Tmall, JD, and in addition to rapidly expanding Douyin. E-commerce also remains significantly underpenetrated relative to the sizable growth opportunity we have, which is a big reason for optimism and a key factor in our strategy.

We also increased our investment in our supply chain, including Asia for Asia product and sourcing, getting us closer to the market and closer to the consumer. By leaning into the initiatives and core tenants of the PVH+ Plan in Asia, we continue to have a long runway ahead to grow both our brands in the region. Lastly for North America, as I mentioned earlier, we’re seeing the effects of the weaker macroeconomic environment in North America, which is pressuring consumer discretionary spending. And we felt the softening consumer environment most prominently in our wholesale channel, where performance was below our expectations, and our partners have taken a more cautious approach to orders. And while there are some signs of improvements in foreign tourism, the absence of most international tourists from Asia remains a headwind.

We remain in the early phase of our multi-year journey to unlock the significant opportunity we have in this market. However, our focus on winning more with the domestic consumer is already starting to deliver some positive proof points. In our D2C channels, we have driven improvements and positive comps for domestic consumers that continue to improve sequentially. We grew our own and operated stores across both Calvin and Tommy by 8% in the quarter, and traffic trends for our factory stores outpaced the market in July. Improved inventory levels of hero products and enhanced store experience and stronger execution will translate into an even stronger performance over time. As we focus on improving our product offering, we’re seeing encouraging results in stores where we have a full assortment of the most important product essentials for our consumers, our hero products.

In Tommy Hilfiger stores, we have been strategically repositioning inventory to high volume test stores, ensuring our best stores have appropriate inventory of the right hero products. And as we pursue this strategy, sales in these stores have shown a 20 percentage point positive improvement compared to the rest of chain and control doors. This shows how our brands and product strategies resonate with consumers when we play in the right product categories with the right hero products in the right stores in the right inventory levels in front of the consumers, then we’ll drive profitable sustainable growth. This also provides a roadmap for driving future growth as we resolve supply chain challenges.

Headed into fall and holiday, we’re working to scale the most impactful initiatives we have tested. It’s important that over time we start to accelerate these green shoots we are growing and build them into how we win with the domestic consumer in North America across both brands and all businesses. Next, I’ll share a few key global brand highlights on how we are bringing both brands to life for the consumer beginning with Calvin Klein. Global brand aided awareness remains incredibly high with ongoing strength in consolidation [Phonetic] and high visibility in key markets. From a product perspective for fall, we are building out our hero product franchises in key categories, starting with underwear, where we are expanding our Hero Modern Cotton program with new silhouettes, seasonal colors and sustainable fibers.

We are doing the same with denim and a number of other key categories where we make sure we have the best essentials in the market. As we move into fall, we have structured a multi-month program to strategically strengthen our brand positioning. Just last week, fall ’22 images of Jennie Kim were revealed on Instagram, e-commerce and high visibility placements, including Houston Street in New York City. Time to Blackpink’s release of their new single, the activation created excitement for the fall campaign and further tapped into the brand’s connection to culture. Additional images starring Jennie as well as actor Dominic Fike, actor and activist, Susan Sarandon, models, Lila Moss and Precious Lee and more we launched today, all executed in an iconic unmistakably Calvin way.

In addition, the brand announced Son Heung-Min as brand ambassador for Calvin Klein Underwear in South Korea. Heung-Min will be featured in an exclusive campaign in South Korea for this fall season, wearing one of Calvin Klein’s underwear’s newest styles, Embossed Icon. The announcement generated significant excitement on own social with Son’s post driving higher reach, engagement and comment volume. This is an early example of how we are building out Calvin’s talent collaborations across regions and countries.

Moving on to Tommy Hilfiger. We continue to drive enhanced brand equity with consumers, demonstrated by continued strength in brand visibility and relevance across markets. We are driving brand heat and momentum through connections with pop culture. Collaborations with Shawn Mendes, the NBA and the anticipation for our upcoming return to New York Fashion Week have all increased the visibility of Tommy Hilfiger. Our collaboration with Shawn Mendes generated a record-breaking 1.5 billion impressions and the highest global growth in new followers since 2019.

Our Summer 2022 Classics Reborn Campaign featuring Shawn wearing a collection fully made from more sustainable materials drove a meaningful uplift in sales of our full price 1985 Essential business across all regions. We applaud Shawn’s courage to speak openly about mental health and his efforts towards healing and recovery. Speaking up is an inspiring act that sets a positive example for his 100 plus million followers. Following his recovery, we look forward to the next exciting phase of our collaboration.

Turning to Tommy Jeans, the brand launched a global capsule collection with the NBA, continuing our focus on creating unique capsules. The collection drove hype and quickly sold out, supported by strong media placement in key outlets, coupled with a successful influencer push with more than 22 million impressions. Looking ahead, in September through the brand’s return to New York Fashion Week, we kick off an exciting global brand activation campaign featuring Kate Moss, legendary drummer and producer, Travis Barker, and Grammy-winning artist and Golden Globe and Emmy-nominated actor, Anthony Ramos.

In closing, we are early into the execution of our PVH+ Plan to achieve the 2025 targets we shared at our Investor Day. While we are prudently navigating the current macro challenges, we remain laser-focused on executing our plan to set PVH up to win in the new normal and drive long-term sustainable growth. We already have proof points of our strong execution in Europe and Asia. And with the actions we are taking to strengthen North America and our global supply chain, how we drive efficiencies and invest in growth initiatives, with the current level of macro impact, we will still be well positioned to deliver underlying growth for the remainder of this year and deliver on our long-term commitments. With the power of our two iconic brands and quarter-by-quarter connecting them closer to where the consumer is going, driven by the execution of the five value-creating initiatives of the PVH+ Plan, we are confident in our ability to generate long-term sustainable growth and value for shareholders.

With that, I’ll turn the call over to Zac to discuss the financials in more detail.

Zac Coughlin — Executive Vice President and Chief Financial Officer

Thanks, Stefan, and good morning. My comments are based on non-GAAP results and are reconciled in our press release. Our commitment to simple, transparent and long-term focused communication and engaging with our investors is more important than ever as we continue to navigate a challenging and increasingly complex macroeconomic environment. We are focused on what is within our control and pleased that we delivered underlying revenue growth of 6% and EPS above our guidance for the second quarter, driven by disciplined management of expenses and a lower tax rate and despite a greater negative currency impact and a shortfall in revenue compared to expectations.

While we expect pressure on our results to continue in the second half of 2022, which is reflected in our revised outlook, the PVH+ Plan is a multi-year strategic growth plan, and we remain committed to our long-term financial objectives. We are moving ahead quickly to align every area of our Company with the PVH+ Plan, putting the consumer at the center of all we do as we execute our five key growth drivers. In line with the fifth growth driver of the PVH+ Plan, drive efficiencies and invest in growth, we are taking steps to simplify and streamline how we work, reducing spans and layers to shorten the path to the consumer and working more efficiently and collaboratively to leverage our resources and global scale. These actions will enable us to reduce people costs in our global offices by approximately 10% by the end of 2023 as we resize the organization around our streamlined model.

These reductions will be phased in over time and across all regions as we put our new ways of working in place, driving cost efficiencies and enabling continued strategic investments to fuel growth, including investing in global product excellence, creating customer excitement and engagement through impactful marketing campaigns, elevating our digital capabilities and continuing to streamline and upgrade our commercial enterprise platform globally. We expect these reductions will generate annual cost savings of over $100 million net of continued strategic people investments with a small benefit to 2022 and increased savings as we move through 2023.

I will now discuss our second quarter results in more detail, and then we will move on to our outlook for 2022. As mentioned previously, revenue for the second quarter was up 6% on an underlying basis, driven by a solid performance in our international businesses. Revenue was lower than planned primarily due to an increasingly challenging macro environment, which particularly affected our North America wholesale business as inflationary pressures weigh on consumer demand and our wholesale partners take a more cautious approach to their open-to-buy, as well as ongoing supply chain and logistics disruptions globally.

Overall reported revenue was down 8% and flat in constant currency compared to the prior year and reflected a 6% negative impact due to the Heritage Brands transaction, the exit from the Heritage Brands retail business and the war in Ukraine. We remain focused on driving performance in our direct-to-consumer business, the channel with the closest connection to our consumer, and DTC was up high single-digits on an underlying basis. On a reported basis, direct-to-consumer revenue was down 5% compared to the prior year, up 3% on a constant currency basis and reflected a 3% reduction from the exit of the Heritage Brands retail business and a 1% reduction due to the war in Ukraine. From a regional perspective, we saw solid underlying growth in nearly all international markets other than Greater China, which remains impacted by COVID restrictions.

Second quarter revenue for our international businesses was up 6% versus last year on a constant currency basis and significantly exceeded 2019 pre-pandemic levels. Within our international business, as Stefan mentioned, our European business is now approximately 25% larger than pre-pandemic levels in local currency. And our Asia-Pacific business, excluding China, grew approximately 25% compared to last year even with a negative impact of foreign currency translation of 12%. In North America, revenue in the second quarter was up 2% overall for Tommy Hilfiger and Calvin Klein, although still below 2019 pre-pandemic levels, impacted by the lack of international tourism from Asia.

Our North America retail store business continues to demonstrate growth in line with our plans, up high single-digits from the prior year. Our wholesale business was challenged for the reasons I mentioned, which had an outsized effect on our Calvin Klein business, which has a much larger wholesale component. We also demonstrated continued underlying growth across global brands, the Tommy Hilfiger revenues up 4% on a constant currency basis and Calvin Klein revenues up 6% on a constant currency basis.

Reported revenues were down 5% for Tommy Hilfiger and down 1% for Calvin Klein. In the second quarter, we delivered gross margin of 57.2%, up approximately 200 basis points compared to pre-pandemic levels and nearly in line with the prior year’s 57.7%, excluding the 40 basis point impact of foreign currency translation. SG&A expense as a percentage of revenue for the second quarter was better than planned at 47.3% as we prudently manage expenses while still making targeted investments in areas like marketing and digital to fuel growth.

SG&A expense as a percentage of revenue was approximately 240 basis points higher than last year. In the second quarter of the prior year, we benefited from lower expenses as stores were reopening and we were receiving COVID relief. In total, our EBIT for the quarter was in line with our guidance despite the tougher macroeconomic conditions and increased negative impact of foreign currency as we work to offset lower revenue with more controlled spending. Operating margin was 9.9% as reported.

Operating margin was 10.4% for the quarter, excluding the negative impact of approximately 50 basis points due to foreign currency translation. Earnings per share of $2.08 compared to $2.72 in the prior year period and exceeded our previous guidance by $0.08, driven by disciplined management of expenses and a lower tax rate. Earnings per share for the quarter included a $0.35 negative impact compared to the prior year related to foreign currency translation and a $0.17 negative impact due to the war in Ukraine. Inventory was up 19% at the end of the quarter compared to the prior year period but still remains below pre-pandemic levels.

Inventory levels at the start of the second quarter were too lean, particularly in North America, where delayed receipts of inventory due to supply chain delays negatively impacted revenue. The increase in ending inventory was due to a combination of three factors. First, inventory levels were abnormally low last year in all regions. Normalizing those inventory levels this year to historical levels was worth about half of the overall inventory increase. Second, as we discussed previously, we continue to increase our inventory investment in core product to mitigate ongoing supply chain and logistics disruptions and ensure that we have the right product at the right time, which was worth about another quarter of the increase.

And lastly, the balance of the increase, approximately $65 million was due to elevated inventory levels in North America wholesale due to lower-than-expected demand. We are executing a plan to mitigate this amount by reducing future purchases and redirecting products through our own stores. In-transit inventory levels were up over 50% versus last year and reflect the extended lead times we continue to experience. Additionally, we delivered on our commitment under the PVH+ Plan to return excess cash to shareholders, returning over $125 million to shareholders through the repurchase of 2 million PVH shares and our dividend.

Moving on to our outlook. We have updated our full-year 2022 revenue and EPS outlook to reflect our current expectations for the second half of 2022. Our outlook reflects the challenging macroeconomic environment and trends within the retail industry, including lower consumer demand as a result of inflationary pressures as consumers reduce discretionary spend and certain wholesale customers take a more cautious approach. These trends are particularly noticeable in North America, where there has been a change in how our U.S. consumer is spending due to inflationary pressures. And we anticipate a more promotional environment in our wholesale channel in the back half of 2022 as a result of elevated inventory levels industry-wide.

To a lesser extent, inflationary pressures are also impacting consumers in Europe, particularly in Northern Europe, where inflation rates have been the highest. Despite these pressures, our business in Europe is strong, and our revised outlook continues to reflect the underlying revenue growth in the high single-digits for our Europe business for the second half of the year. In Asia-Pacific, we continue to see strength in markets that are not currently impacted by COVID. Our full-year outlook also reflects an increased negative impact of foreign currency translation, along with an improvement in our effective income tax rate as a result of a favorable change in the mix of earnings between tax jurisdictions and recognition of certain tax credits. For the full-year, we are projecting underlying high single-digit revenue growth, driven by our continued strength in our DTC business.

Our international businesses continued to demonstrate strength, and we expect to continue to build on strong growth from 2021 through systemic execution of our strategic priorities. In North America, while we are working our way back to pre-pandemic revenue levels, we are still facing a lack of international tourism, particularly from Asia, and ongoing supply chain pressures along with pressures in our wholesale business, which are expected to negatively impact the second half.

Our overall revenue is predicted to be up 3% to 4% on a constant currency basis and down 3% to 4% as reported compared to 2021 and reflects a 4% reduction resulting from the Heritage Brands transaction, the exit from Heritage Brands retail business and the war in Ukraine. We expect digital penetration as a percentage of revenue to be approximately 25%. We expect our full-year gross margin rate to remain above pre-pandemic levels though approximately 70 basis points below record levels in 2021, which includes the negative impact of foreign currency translation of approximately 25 basis points.

We expect that gross margin in our international business will hold, while in North America, we expect that elevated inventory levels industry-wide will create a more promotional environment. With higher inventory levels in North America wholesale, we are also lowering inventory purchases and redirecting on-hand inventory to our outlet stores. SG&A expense as a percent of revenue for the full-year is expected to be approximately 100 basis points higher compared to 2021. While we continue to prudently invest in the core pillars of the PVH+ Plan, we have accelerated cost efficiencies across the business in light of increased macro pressures.

Our full-year operating margin is now projected at approximately 9%. This reflects a negative impact compared to prior year of approximately 50 basis points due to foreign currency translation. We expect our interest expense to decrease in 2022 to approximately $85 million compared to $104 million in 2021. We also have continued the important work to reduce our corporate tax rate versus previous guidance. With the finalization of the Inflation Reduction Act in the United States, we now have improved clarity on future legislation, and combined with adjustments in our global tax planning, we are more able to take advantage of foreign tax credits than previously assumed.

Additionally, we continue to evolve our transfer pricing structure to better align with our PVH+ Plan value drivers. The result is an outlook for 2022 of 24% for our corporate tax rate, which we believe is sustainable over the medium-term. For the full-year in 2022, we project earnings per share of approximately $8, which now reflects a negative impact of foreign currency translation of approximately $1.25 per share. Our planned stock repurchases in 2022 remain at approximately $400 million. For the third quarter, we are projecting our overall revenue to increase by 4% to 5% on a constant currency basis compared to the prior year and to decrease by 4% to 5% as reported. This reflects mid to high single-digit revenue growth in our underlying business and a 2% reduction from the war in Ukraine.

Third quarter earnings per share is expected to be in the range of $2.10 to $2.15, which reflects negative impacts of approximately $0.35 due to foreign currency translation and approximately $0.18 from the war in Ukraine compared to the prior year. We expect our interest expense for the third quarter to be approximately $20 million and our tax rate to be approximately 18%.

Before we open it up for questions, I want to reiterate that despite the increasing macro pressures, we remain focused on driving our strategic priorities and are committed to delivering strong financial performance over time. With the PVH+ Plan, our global brands and businesses are well positioned to drive long-term value creation and deliver sustainable profitable growth and shareholder returns.

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

Questions and Answers:

Operator

Thank you, sir. [Operator Instructions] Our first question comes from Bob Drbul from Guggenheim. Please go ahead.

Robert Drbul — Guggenheim — Analyst

Hi. Good morning. Just had two questions for you. I guess the first one is, when you look at the underlying performance of the business, just wondered if you could just help us tie the underlying performance with what you’ve now stated as the second half expectations are with a lot of the macro issues that you are facing, foreign exchange, etc.? And then the second question is, can you just talk more broadly about digital as a channel and the growth opportunities that you have invested in and that you are seeing as part of the PVH+ Plan? Thanks.

Stefan Larsson — Chief Executive Officer

Thank you, Bob. Yeah, this is an unprecedented amount of exchange rate and macro impact we see this quarter and the difference between reported and the underlying growth of the business, I’ve been leading over 20 years and I haven’t seen this kind of exchange rate macro difference. What’s important here is that underneath of all that, we are laser-focused on the execution of our PVH+ Plan. And what’s exciting to share is, to your point, the difference between reported and underlying this quarter, we have an underlying growth of the business with 6%. And for the — for the full-year, we are projecting an underlying growth of 8%.

So strong underlying growth and even though we are navigating through this more tougher macro challenges. So breaking that down to the PVH+ Plan focus, which is continue to build out and accelerate the strength in Europe and Asia. So when we look at Europe, we drove a 6% underlying growth in euros. We are 25% bigger, as I mentioned — 25% bigger than pre-pandemic, significantly more profitable. So we are building a real strength in Europe. In Asia, we drove 15% underlying growth despite COVID shutdowns.

And if we look at Asia outside of Greater China because we have so much COVID restrictions to navigate through, we drove — as Zac mentioned, we drove — on a constant currency, drove a 37% growth. So very well executed PVH+ driving strong underlying growth in international, both Europe and Asia. And even if we have much work to do in North America, what’s exciting this quarter is that we are starting to gain traction with the domestic consumer in both Calvin and Tommy in our own stores.

So in our D2C channel, which we control the outcome the most, we are driving an 8% growth in the quarter. And we see — for Calvin stores, we see that we are starting to come up and beat 2019 levels when it comes to the domestic consumer. So when you add all that up, I’m very encouraged by our ability across the Company to execute on the PVH+ Plan. Switching gears to your digital question, it’s the third growth driver in our five — of our five growth drivers of the PVH+ Plan, digital is the third, winning in the digitally-led marketplace. We continue to do that. As I mentioned in my prepared remarks, Bob, we see the consumer coming back to brick-and-mortar very much from a COVID-disturbed globally for the last 2 years. So we see consumer really coming strongly back to brick-and-mortar.

We are still able to hold the digital penetration of 25%. More importantly, medium to long-term, we see digital continue to grow the fastest. So that’s where we are investing in our own and operated e-commerce, making those the flagship across the world, but also in third-party e-commerce. So China, good example there. Even though we navigated really tough COVID impact in China, we were able to execute 618 [Phonetic] digitally led with 40% growth across all platforms. So very encouraged by the investment and the focus our teams have on digital. And over time, you will see that channel grow the most.

Robert Drbul — Guggenheim — Analyst

Great. Thank you.

Operator

Jay Sole of — from UBS. Please go ahead.

Jay Sole — UBS — Analyst

Great. Thank you so much. My question is just on foreign exchange. Just wondering how should we think about next year? I know you are not giving guidance for next year yet, but how might gross margin next year be impacted if foreign exchange rates don’t change and the hedges reset? Thank you.

Stefan Larsson — Chief Executive Officer

Yeah. Thank you, Jay. It’s — again, our main focus when it comes to leading with the management team through these, again, unprecedented exchange rate fluctuations is on the underlying strength of the business. And in parallel with that, Zac, do you want to share more?

Zac Coughlin — Executive Vice President and Chief Financial Officer

Yeah. Yeah, good morning, Jay. In general, as we take a look moving forward to next year, we see a gross impact of around 100 basis points of that transaction effect for exchange based on where we are sitting in now and using, say, euro at about parity as an example. I think the focus of the teams, as Stefan had mentioned, is controlling what is it that we can control. So, first off, things like adjusting our sourcing footprint to better match sales and buying currencies.

So, for example, taking a look in Europe about leveraging Turkey and the euro-based cost there as an example and timing our fall ’23 buy to be as late as possible to take advantage of decreasing raw materials prices in the markets there. Obviously, we will continue to watch to be able to take advantage of anywhere that there are pricing opportunities as we would expect that the competitive set as well to face similar pressures. But for right now, our eyes are laser-focused on what we can control, which is driving those mitigation actions against AUC.

Jay Sole — UBS — Analyst

Got it. Thank you so much.

Operator

Michael Binetti of Credit Suisse. Please go ahead.

Michael Binetti — Credit Suisse — Analyst

Hey guys. Thanks for all the detail here and help with the questions. I guess maybe as we look out multi-year for the Analyst Day targets, I think the plan was for high single-digit to low double-digit growth CAGR through ’25. As we — obviously, you’ve got a lot of non-operational headwinds this year. As we start thinking about the inputs that we can look at today to bridge to 2023, is that still a relevant range given the 8% underlying growth rate this year, excluding any impacts from currency next year? Is that still — I’m trying to look at what indicators you might be looking at to triangulate to a number for next year early on at this point admittedly?

And then the same question I guess on EPS growth rates. As you look at the operations and the analyst — and the algorithm from the Analyst Day, I’m wondering if given the inputs we know about today with currency, the cost savings, some of the freight cost recapture, the order books you pointed to, can the reported EPS number grow next year or do the big macros like FX, that are out of your control weigh on that ability?

Stefan Larsson — Chief Executive Officer

Yeah. Thank you, Michael. And as you mentioned, the PVH+ Plan is a multi-year plan. 2025 targets, we are very focused on making sure that we execute on the PVH+ drivers, the five-plus drivers on winning more with product, winning even more with consumer engagement, winning in the digitally-led marketplace and getting to that demand-driven supply chain and investing behind that growth and driving efficiencies. So when — the way we track that internally is based on what’s within our control, the underlying performance of the business. So as you see this year, we will drive in a tough macro, an 8% underlying growth. And then looking into next year, we just continue to unlock more and more value of those five drivers.

Zac Coughlin — Executive Vice President and Chief Financial Officer

Yeah. I think, Michael, to put some numbers around that, obviously, we are not giving specific guidance for next year at this point. But as Stefan mentioned, with macroeconomic headwinds we are facing this year, which as Stefan had started with, are almost unprecedented. And we are still driving underlying growth that’s in line with where our algorithm we had talked about is. And I think as we look forward, whether it’d be ’23 or beyond from there, I think that’s what gives us the confidence that as we keep our heads down and laser-focused on the PVH+ Plan deliverables that the ability to continue to drive growth and the things that we can control, we still remain confident about. So lots of work still to do on the plan for next year, but I think we still see significant opportunities to drive the business forward to each of the five pillars that we had discussed previously.

Stefan Larsson — Chief Executive Officer

And to give you some more texture, Michael, on the five growth drivers. So when we look at product, we see that the underlying growth that we are driving, strong underlying growth we are driving, especially in international and in D2C stores in North America is coming through the focus — the increased focus on playing in the big categories that matters the most to the consumer where we have the right to play to win, execute on those most essential products, silhouettes true to our brand DNA and creating those hero products and have them in stock.

So the demand-driven supply chain, it’s the fourth value driver, but it connects directly to the product focus. So we’ve seen Asia already this season that a very concrete way that they have managed their inventory situation in a very volatile market very well is that they were able to keep 15% open-to-buy. And in Europe, as an example, the — many of our best selling hero products are on core replenishment with short lead times. So there is — what I’m excited about is that I’m seeing that the underlying growth we are driving comes from the execution of these drivers, and yet, we as a management team see over time so much more value to unlock.

When it comes to the consumer engagement piece, we are starting to tap into masspirational talent that work as an amplifier to our brands. So when we put our brands together with masspirational talent, whether it’s Shawn Mendes or Jennie Kim, two really strong examples, and they wear our iconic hero products and we have them in stock in the channels that the consumer wants to engage and digitally-led, that’s where we, in Asia, as an example, drive the underlying 37% growth. So we are early, early days in unlocking what’s within our control. And it’s going to be what’s my focus with my team, with my management team, is to focus and lean in on the few drivers underneath the five growth drivers that really makes a difference and double down and execute. So that’s what we stay focused on.

Michael Binetti — Credit Suisse — Analyst

Thanks a lot, guys. Appreciate the detail.

Stefan Larsson — Chief Executive Officer

Thanks, Michael.

Operator

Chris Nardone from Bank of America. Please go ahead.

Chris Nardone — Bank of America — Analyst

Hey, good morning, guys. What are your underlying assumptions for your European wholesale business over the next several quarters? And can you talk about why you think this business can fare better relative to the headwinds you’re facing in your U.S. wholesale business in the back half of the year? Thank you.

Stefan Larsson — Chief Executive Officer

Yeah. So we have, in Europe, strong forward-looking order books. So low double-digits for the fall, and we continue for spring ’23 to have strong demand. So — and the reason we have that and the reason we have been able to execute so well in Europe and drive this kind of growth in the wholesale channel is the brand focus for both Tommy and Calvin and the product focus and staying really close to the consumer. So in a — even though we see macro challenges impact part of Europe, our ability to pivot with the consumer and work with our wholesale partners to make sure that we have the best hero products at the best perceived value, and that is very much the product value combination, and we are able to sell through with higher AURs. So the demand is there, and we see the forward-looking demand to continue to be there as well.

Zac Coughlin — Executive Vice President and Chief Financial Officer

Yeah. And I think just to give a bit more context, stretching our eyes out further now. We talked last quarter about that low double-digits for the fall, and that has firmed up and the team from there. And then looking a little further to pre-spring and spring, where, obviously, there’s a lot more news that the sort of our key partners have absorbed, and we’re still seeing high single-digit growth in the order book there as well and the early looks at that. So I think we see the strength that the European team has continued to build this year into the fall and then carrying onto the spring off of, quite honestly, a significantly larger base as well.

Chris Nardone — Bank of America — Analyst

Thank you.

Stefan Larsson — Chief Executive Officer

We have time for one more question.

Operator

Brooke Roach from Goldman Sachs. Please go ahead.

Brooke Roach — Goldman Sachs — Analyst

Good morning, and thank you so much for taking our question. I was wondering if you could dive a little bit deeper into the gross margin update and your outlook there and how that’s changed versus last quarter? Is the step-down all a function of North America wholesale? And Zac, perhaps you could give us an update on your forward thinking on AUCs and how that might be looking into 2023? Thank you.

Stefan Larsson — Chief Executive Officer

Thanks, Brooke. Let me just start by saying that the team is doing a really good job mitigating all the macro factors playing into the gross margin rate. So we are close to record-breaking gross margin rates still, even though we are navigating the disruption. So — and what gives me confidence from the underlying drivers of gross margin rate going forward is, again, the ability to execute on the PVH+ drivers in, being even more disciplined on connecting the right product categories to the consumer with increasing level of focus in the assortment of the hero products.

And then having David come in as our Global Head of Supply Chain on December 1, really bringing a best-in-class, demand-driven supply experience will unlock that further. So from a business-driving perspective, I see a lot of opportunities that we step by step over the coming years will continue to drive gross margin rate.

Zac Coughlin — Executive Vice President and Chief Financial Officer

Yeah. And to put some numbers around that, Brooke, maybe I’ll break it down into time periods. For the second quarter, largely speaking, our margins landed at expectations and at the record high levels from last year other than exchange translation. So through the second quarter, we’ve continued to hold well there with the progress the team has made. As we look forward into the second half, I think we — let me talk a little bit region by region. So our international markets have held up very well, through — thus far through this. And we expect them to be able to continue to hold at those margin levels that we’ve seen driven by the key business drivers as Stefan has mentioned earlier.

Beyond the exchange rate impact, we do see in our planning for the second half for the North America market to become more promotional, I think as we see not so much our inventory levels, but where the marketplace is, leading to higher competition from there. And so we do foresee some margin headwinds more than we had previously planned into the second half, and we’re planning down accordingly. And I would say that’s across both the wholesale and our own stores. We want to continue to drive the sales growth, as Stefan had talked about earlier, up 8% in the second quarter by being relevant in the market for our customer at this moment where the marketplace is. And so I think we see a slightly more headwinds than we had assumed previously.

As we look forward into 2023, again, we’re not giving more structured guidance from there. But I think, as Stefan had mentioned, by really managing pillar 4 of this demand-driven operating model is really the key to make sure that regardless of what we’re experiencing in the marketplace, we’re able to make sure that we’re staying close to the customer, inventory levels are staying in line. And we used an example, what Stefan mentioned earlier, around Asia for how they’ve managed inventory here throughout the year this year, leaving an open-to-buy open to adjust quickly and to make sure we can continue to hold for full-price selling as we had said.

Stefan Larsson — Chief Executive Officer

Yeah.

Brooke Roach — Goldman Sachs — Analyst

Thank you very much.

Stefan Larsson — Chief Executive Officer

Thanks, Brooke. And before we wrap up, just want to say that never — we have never been more focused on unlocking the full potential of Calvin and Tommy through the PVH+ Plan. I’m very proud of the team’s ability to drive this kind of underlying growth. We continue to build out on our strength in Europe and Asia. We lean in to unlock North America’s potential. We know we have really big potential there. And we continue to align the management team to increase our ability to execute, and we lean in to drive efficiencies and invest in these initiatives. So that’s where our focus is. So thank you for spending the time with us and looking forward to catching up soon again.

Operator

[Operator Closing Remarks]