PVH Corp (PVH) Q3 2021 Earnings Call Transcript

PVH Corp (NYSE: PVH) Q3 2021 earnings call dated Dec. 02, 2021

Corporate Participants:

Dana Perlman — Chief Strategy Officer, Treasurer

Stefan Larsson — Chief Executive Officer

James W. Holmes — Executive Vice President, Interim Chief Financial Officer, Controller

Analysts:

Bob Drbul — Guggenheim Securities — Analyst

Michael Binetti — Credit Suisse — Analyst

Erinn Murphy — Piper Sandler — Analyst

Jay Sole — UBS — Analyst

Brooke Roach — Goldman Sachs — Analyst

Kimberly Greenberger — Morgan Stanley — Analyst

Omar Saad — Evercore — Analyst

Matthew Boss — J.P. Morgan — Analyst

Tracy Kogan — Citigroup — Analyst

Presentation:

Operator

Good day, and welcome to the PVH’s Q3 2021 Earnings Call. Today’s conference is being recorded.

At this time, I would like to turn the conference over to Dana Perlman. Please go ahead, ma’am.

Dana Perlman — Chief Strategy Officer, Treasurer

Thank you, operator. Good morning, everyone, and welcome to the PVH Corp third quarter 2021 earnings conference call. Leading the call today will be Stefan Larsson, PVH’s Chief Executive Officer; and Jim homes, EVP, Interim Chief Financial Officer and Corporate Controller. 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 December 1, 2021, of future events and financial performance. These statements are subject to risks and uncertainties indicated in the company’s SEC filings and the Safe Harbor statement included in the press release that is a subject of this call. These risks and uncertainties include PVH’s right to change it’s 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 these 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 third quarter 2021 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, Dana. Good morning, everyone, and thank you for joining our call today. For the third quarter, we delivered another strong quarter of high quality growth, driven by the disciplined execution of our accelerated recovery priorities across both Calvin Klein and Tommy Hilfiger, driving brand and product strength with increased pricing power, supercharging e-commerce to win in the digitally-led marketplace where we are on track for a 25% digital penetration of our total business for the full year, double pre-pandemic levels, all while increasing our discipline in driving cost efficiencies and investing in growth. All this has resulted in much better than expected EBIT margins and EPS. We significantly exceeded our guidance, with EBIT margins for the quarter above pre-pandemic levels and our gross margin rate up 300 basis points versus 2019.

Our international businesses continued to execute very well across brands with increased product strength and strong consumer engagement, both online and in stores. This resulted in strong sales growth, significantly increased pricing power and margin expansion compared to both last year and to pre-pandemic levels. In North America, despite worsening logistics disruptions, including U.S. port delays towards the very end of the quarter which shifted revenues from the third to the fourth quarter, the region is still on track to deliver against the full year plan. Without this shift of revenues to Q4, we would have exceeded our overall revenue guidance for the quarter. Looking ahead at the full year, despite the COVID related disruptions we are all currently navigating, based on the strength of our underlying performance trends and most recently through early positive reads of the start of our holiday season, we are affirming the upper end of our revenue guidance and are increasing our earnings guidance for the full year. We are raising our EBIT margin guidance to nearly 10%, which is above 2019 and pre-pandemic levels. Our guidance is based on the knowledge we have of the COVID situation today and how we have successfully navigated through previous COVID resurgences. Yet, we are carefully monitoring developments around the new COVID variant and its impact on the consumer.

Let me now turn to our regional update, starting with Europe. Our Europe team delivered another very strong quarter with continued market share gains. Both Tommy and Calvin generated strong double-digit revenue growth compared to pre-pandemic levels with gross margin expansion above 2019 levels, driven by strong full price sell-throughs, which combined with ongoing cost efficiencies drove significantly higher operating margins well above pre-pandemic levels. The regions strong results highlight how we are successfully meeting the consumer through a digitally-led omnichannel approach and continuously elevating the brand positioning through having the best hero products in the market for both Tommy and Calvin.

Continued demand for our brands and products drove higher conversion and seltzers with strong sales in both our owned and operated channels as well as our wholesale channels. We generated digital sales growth of 23%, which included double-digit growth for both our own and operated channels and third-party partners, especially with digital pure players. Our investments in building direct digital consumer connections through our own digital business continue to drive engagement and fuel high quality growth.

Our brick and mortar retail business significantly outperformed our plan and impressively delivered double-digit growth above pre-pandemic levels. Demand in our core replenishment business remains strong, on top of future order books for spring 2022 across brands, which as a reminder are up double-digit. I visited over 40 stores across four countries in Europe this past quarter and it was incredibly exciting to see the key drivers behind the region’s performance and to meet and learn from the teams that are directly driving these strong results. The way we focus on the consumer, drive brand elevation, product strength, pricing power and winning across the marketplace led by digital, all serve as a blueprint for the type of top tier execution and financial performance that we will over time be able to deliver for Calvin and Tommy across all our regions. While we are closely monitoring the recent COVID resurgences in multiple markets in Europe, our business there has demonstrated strong resilience during previous COVID resurgences, with our ability to pivot to where the consumer is going faster than most of our competitors by leveraging our connected retail capabilities.

Moving on to Asia. I remain excited about the progress and the underlying performance in the region. Results were led by China, which outperformed our plan, while revenues for the region overall were in line with pre-pandemic levels and trends were consistent with the prior quarter. This is despite facing additional COVID resurgences across markets, which was particularly pronounced in Australia. For a significant portion of the quarter, over half of our stores in Australia were closed and we are now pleased that strong consumer demand has returned as the market has been able to open up again.

In Asia, we continue to invest in driving growth and building awareness for our brands, focusing on key consumer moments, strengthening product storytelling for key categories and hero products and enhancing the consumer experience in our stores. With our focus on driving brand and product relevance, our regional and local marketing campaigns are resonating with consumers as we saw strong performance of our fall and winter collections and we continue to build brand heat and strong engagement, particularly around key holidays. For example, China’s 11/11 Singles Day outperformed our plan with double-digit sales increases for both Tommy and Calvin, with strong full price selling, which followed some nice improvement of traffic in the market.

We also continue to further enhance the consumer experience, both online as well as offline through new concepts. Ahead of Singles Day, we hosted a CK Jeans House of Denim pop-up in Shanghai. This event showcased brand storytelling and featured interactive consumer engagement activities, driving significant social media exposure with over 300 million impressions. Online, our interactive experiences on Tmall and live streaming events are achieving high viewership and engagement and we are excited about the upcoming special product capsules and 360-digital activations in honor of the Chinese Lunar New Year. In addition, inventory levels continue to be very lean as we are buying inventory closer to demand.

Turning to North America. The region continue to face pressure from the lack of tourism, which pre-pandemic accounted for 30% to 40% of our total revenues in the market. In addition, towards the end of the quarter, as I mentioned earlier, we experienced worsening U.S. port delays in October, which pushed some of our revenues from Q3 to Q4. Inventory receipt delays have also impacted our retail businesses in this region, especially for Tommy Hilfiger, which has a higher penetration of seasonal product offerings. However, there are some early green shoots, and we saw start to reopen.

In the quarter, I had the opportunity to visit 30 stores in five regional markets in North America, and I remain very encouraged about the multi-year opportunity to unlock a sustainable, increasingly profitable business for both brands. Given the lack of tourism due to COVID, our teams are leaning in to our accelerated recovery priorities with a much increased focus on the domestic consumer, particularly with the Gen Z and millennials, and driving tourists and increased product strength with pricing power and supercharging e-commerce while winning in the whole marketplace in a balanced and sustainable way. Some proof points of our progress this quarter include; we continue to drive less discounting and higher AURs as domestic consumer responded well to newness in our full product, especially in our focus categories and iconic hero products, such as knits fleece, denim, underwear.

For example, ahead of the holiday season, Calvin partnered with Amazon Fashion, Amazon Live and Amazon Music to deliver a shoppable live stream holiday special with platinum selling hit wrappers swede the venture of the highest traffic day on the CK brand store on Amazon Fashion outside of Prime Day. Overall, as we have shared before, we know we have the most work to do in the North America region to unlock the multi-year opportunity ahead. This is something we are leaning into with full force and we’ll keep you updated along the way.

Next, I’ll share a few brief global brand highlights, beginning with Calvin Klein. Global brand health remains strong with a recent increase in purchase intent along with continued strong global awareness. This past quarter was great globally for hero products in our key focus categories with double-digit growth in sales and much higher AURs. Our Global fall campaign, the language Calvin Klein, resonated very well with our consumers, featuring regionally relevant ambassadors, including jennie kim, Damson Idris and Kaia Gerber, and focus on hero products in support of key seasonal categories like underwear and jeans.

We also continued to connect our iconic Calvin Klein brand to people who shape culture by launching the second chapter of the brand’s collaboration with designer Heron Preston. The response has been very positive and as we saw with the first drop, many style sold out very quickly. Celebrities and influencers, including squid game star, Hoyeon Jung, continue to wear and organically post our products. The collection continues to deliver higher AURs, higher sell-throughs, high conversion and highlighting the strength and relevance of our collaborations when we connect our brand to culture and the younger consumer. We’re looking forward to the upcoming holiday season and we have a strong social media based campaign planned for this key selling period.

Moving on to Tommy Hilfiger. Consumer connection, brand awareness and brand relevance remains strong with a unique DNA of Tommy as a key growth engine for our business globally. Consumers responded very positively to our seasonal collections. For menswear, the expansion of hero product programs such as the 1985 menswear essentials collection continue to drive strong results. Our recent collaboration with Timberland has been very well received. This unique iconic collaboration drove brand heat and exceeded expectations in traffic and sell-through with an authentic focus on sustainability and inclusivity.

In Europe, we saw strong double-digit increases in traffic in activated stores and on tommy.com, and we achieved a 100% sell-through within two weeks. The collaboration is attracting new audiences with 40% of site visits being made by new users, and we experienced a significant increase in average spend.

In North America, the capsule is gaining momentum. Over 200 million consumer impressions were generated across media in two weeks and significant pass was generated at [Indecipherable] through a dedicated brand activation during the event. Lastly, the brand recently kicked off this world of Hilfiger holiday campaign, which welcomes the holiday spirit, embracing traditions, fresh beginnings and the brands New York City routes.

In closing, as I have shared previously, when the pandemic hit, we first set out to successfully navigate through the initial phase of the COVID crisis, which we did. And to do that in a way that sets us up to drive an accelerated recovery, which we are now driving, all while positioning us to win in the new normal coming out of it. We look forward to sharing more of how we will win in the new normal when we present our multi-year growth plan at our upcoming Investor Day in mid-April. It will be the first Investor Day for PVH in over 10 years, and it will be an important moment for us to take you through our strategy and long-term performance targets as we look ahead to tapping into more of our full potential, focusing in on our core strengths, connecting them closer to where the consumer is going than any time before, all with the goal to win with the consumer, drive long-term profitable growth, while driving fashion forward for good. On Investor Day, I look forward to introducing you to our regional and brand leaders who are key drivers on this journey.

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

And with that, I would like to hand the call over to Jim.

James W. Holmes — Executive Vice President, Interim Chief Financial Officer, Controller

Thanks, Stefan. The comments I’m about to make are based on non-GAAP results and are reconciled in our press release. Overall, revenues for the third quarter were up 10% compared to the prior year, but below our previous guidance due to worsening logistics disruptions in October, including significant U.S. port delays, which resulted in a 4% negative impact from an unplanned shift in the timing of U.S. wholesale shipments from the third quarter into the fourth quarter. Absent this shift, our revenues for the third quarter would have exceeded our guidance.

Third quarter revenue also reflects a 4% reduction from the sale of the Heritage Brands business, which closed on the first day of the third quarter and also the exit from the Heritage Brands Retail business that was substantially completed in the second quarter of 2021. Our retail stores face continued pressure during the third quarter with the majority of stores temporarily closed in Australia for most of this year’s quarter. Owned and operated digital commerce increased 21% in our overall revenue through our digital channels grew approximately 15% on top of exceptionally strong growth in the prior year. The impact of foreign currency translation on our revenues was immaterial for the quarter.

Looking at our segments. Tommy Hilfiger revenues were up 12% with international up 11% and North America up 13% versus third quarter of 2020. Calvin Klein revenue was up 22%, with international up 19% and North America up 27%. Our Heritage revenues were down 36%, which included a 40% decline from the Heritage Brands transaction and the exit from the Heritage Brands Retail business. Gross margin was very strong at 57.7% for the quarter as compared to 52% in the prior year and an increase of over 300 basis points compared to 2019 pre-pandemic levels, which drove operating margin expansion. The improvement was primarily due to increased full price sales and a favorable shift in regional sales mix, which more than offset higher freight costs, including an increase in air freight.

Inventory was down 7% at the end of the quarter compared to the prior year, primarily due to the Heritage Brands sale and the exit from the Heritage Brands Retail business. However, within our total inventory, our on-hand levels were down mid-teens versus last year, while our in-transit inventory levels increased over 50% due to extended lead times from supply chain and logistics disruptions, including U.S. port delays, which drove the shift in timing of U.S. wholesale shipments from the third to fourth quarter that I mentioned earlier. Despite the unplanned shift of timing of U.S. wholesale shipments, we significantly exceeded our earnings guidance for the third quarter. Notably, the shifted shipments were lower margin, seasonless goods that we did not use air freight to transport it.

Earnings per share was $2.67 compared to $1.32 in the prior-year period, beating the top end of our previous guidance by $0.67. The beat was primarily due to business outperformance for approximately $0.50, driven by gross margin and expense improvements. Also included in beat is an approximately $0.17 favorable impact from taxes due to our mix of earnings. Notably, our EBIT margin continued to be very strong at 11.4% for the quarter, exceeding 2019 pre-pandemic levels, driven by continued strength in our international business. Additionally, we made over $100 million of voluntary term loan payments in the third quarter, bringing voluntary payments to over $800 million for the first nine months of 2021, and we repurchased approximately 149 million of common stock and reinstated our cash dividend.

Moving on to our outlook, we are providing our 2021 outlook despite the continued significant uncertainty due to the pandemic, including the Omicron variant and related supply chain and logistics disruptions globally. We continue to be encouraged by our international businesses, which are expected to continue to exceed pre-pandemic levels in the fourth quarter. We expect North America to continue to face the ongoing challenge of reduced international tourism, which was the source of approximately 30% to 40% of pre-pandemic revenue from the region and higher for Tommy Hilfiger than for Calvin Klein. We are not planning for international tourism to return to any significant levels in the fourth quarter. In addition, North America has been and continues to be the region most challenged by supply chain disruptions, including higher air freight costs and lower than optimal inventory levels on hand in stores.

For the full year, we are reaffirming the top end of our revenue guidance range and are projecting revenue to grow approximately 27% to 28% as reported and approximately 25% to 26% on a constant currency basis compared to 2020. We expect gross margin will continue to show significant improvement for the remainder of the year due to more full price selling and a favorable shift in regional sales mix compared to the prior year, with our higher margin international businesses making up a larger portion of total revenue. We expect our fourth quarter gross margin rate will be relatively in line with the prior two quarters.

We now expect our full year EBIT margin will exceed our 2019 pre-pandemic level and will reach nearly 10%. However, our EBIT margin in the fourth quarter is expected to be below 2019 levels and also to the first nine months of 2021, as the fourth quarter is more heavily impacted by incremental air freight as well as planned increases in marketing and other investors. We expect our interest expense to decrease in 2021 to approximately $105 million compared to $116 million in 2020. Our tax rate for the year is estimated at 16% to 17%. For the full year in 2021, we are projecting non-GAAP earnings per share to be approximately $9.25, which is an increase compared to our previous guidance of $8.50 and compares to a loss per share of $1.97 in 2020. The increase versus previous guidance was primarily due to better than anticipated gross margin expansion and operating expense efficiencies worth approximately $0.60, along with an improvement in taxes of approximately $0.15.

For the fourth quarter, our revenue is projected to increase 11% to 14% as reported and 16% to 19% on a constant currency basis compared to the prior year. Compared to our fourth quarter previously implied revenue guidance, this reflects the positive impact of the shift that U.S. wholesale shipments from the third quarter into the fourth quarter and a 2% negative impact of foreign currency translation, primarily due to the recent strengthening of the U.S. dollar compared to the euro. The underlying business performance has not changed compared to our previously implied guidance. Fourth quarter non-GAAP earnings per share is expected to be approximately $1.94 compared to a loss per share of $0.38 in the prior year period. Our fourth quarter guidance reflects an incremental $0.10 of expected air freight costs versus our prior expectation.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] We’ll take our first question from Bob Drbul of Guggenheim. Please go ahead, sir. Your line is open.

Bob Drbul — Guggenheim Securities — Analyst

Hi, good morning. Two questions from me, if I could. The first one is, I don’t know if this is for Jim or Stefan. But can you talk a little bit about — you mentioned price increases, really what you’ve seen so far from a consumer receptivity or your wholesale partners on either prices that you have taken higher at this point or plans that you have sort of in the — in the coming months and quarters?

Stefan Larsson — Chief Executive Officer

Yeah, so good morning, Bob. We definitely are moving into an inflationary period and coming back to our accelerated recovery priorities where we have leaned in since the beginning of the pandemic on brand relevance, product strength, and we really see the result of that coming through in pricing power. So we see increased AURs, we see increased gross margin rate. So looking forward, Jim can give you a little bit more of the details of what we expect in terms of AUC increases, but we are confident from a product strength perspective that we will continue to drive a AUR increases. And then overall looking at the inflationary environment we are moving into, we are looking at both pricing power, sourcing mitigation and we are looking at cost efficiencies overall. So, Jim.

James W. Holmes — Executive Vice President, Interim Chief Financial Officer, Controller

Yeah, Bob, just to add to what Stefan alluded to, you know. As we head into spring 2022, some of the cost increases we’re starting to see is about mid-single digits, yeah, but we do see great strength in our products, so we’ll be looking to mitigate that through different supply chain initiatives, but also through increasing pricing, particularly in key categories where we see a lot of strength in the business.

Bob Drbul — Guggenheim Securities — Analyst

Great, thank you. And, I guess the other question I have is, can you talk a little bit about denim trends that you’re seeing within the brands and how you feel your positioned in some of the — the denim cycle commentary that we see out there?

Stefan Larsson — Chief Executive Officer

Yes, definitely. So we see denim — so we see denim trending up in the market with the consumer. We are excited by that because we have strength in denim in both Tommy and Calvin, it’s in the DNA of the brand. It’s one of those power categories that we are leaning into it. So it’s an exciting consumer trend that we are leaning into and you will see that increasingly going forward.

Bob Drbul — Guggenheim Securities — Analyst

Thank you very much.

Stefan Larsson — Chief Executive Officer

Thanks, Bob.

Operator

We will now move onto our next question from Michael Binetti of Credit Suisse. Please go ahead. Your line is open.

Michael Binetti — Credit Suisse — Analyst

Hey, good morning, guys. Thanks for all the detail here and thanks for taking our questions. Just a quick one on the near term. I think we had a — before coming into today, we had a fourth quarter implied guidance and you had talked about stepping up marketing in the back half, so we knew about that, but then excluding the wholesale shift in the FX changes it looked like the underlying sales for fourth quarter pretty much where you thought they’d be, but the SG&A looks like it stepped up a little bit more for fourth quarter. Maybe help us think about, if that’s right, when it stepped up?

And then Stefan as we — as we spoke through this year, we talked a little bit about how much opportunity you see to realign work streams and accelerate product lead times with different brands, has the shift moves away from just navigating COVID here globally? Maybe you could just help us think about the size of the opportunity you see there, where the company’s ad on some of those processes and what are the biggest initiatives that you think we’ll see as we talk over the next year or so that you will start working out as far as like the biggest opportunity for the financials as you start to kind of put some of those changes into play? Thanks.

James W. Holmes — Executive Vice President, Interim Chief Financial Officer, Controller

Yeah, Michael, I’ll start, I’ll take your Q4 question and turn it over to Stefan. Really in Q4, just start with the revenues. First thing we did is we — we narrowed the revenue guidance and really we increased it at the bottom end of the range and we reaffirmed at the top end. In Q4, with the revenues, the business — the underlying business is pretty much held and we were able to cover some weakening of the euro. The euro did weaken against the U.S. dollar, particularly we saw that in the last month. As far as when you get below revenue, really the main changes we had a current additional $0.10, $10 million, $0.10 of air freight costs in Q4. But really everything underlying, we’re still — we’re still generating very strong gross margins just like in Q3, continuing to gain expense efficiencies. The marketing that I alluded to was always planned to always be very heavily weighted to the second half of the year, particularly to Q4. We really wanted to connect those — that spending to some of the consumer moments that we have, particularly Black Friday and Singles Day.

Stefan Larsson — Chief Executive Officer

Yeah, thanks, Jim. And when it comes — Michael when it comes to your product question and — there are multiple, multiple components that we drive coming back to our accelerated recovery priorities, which will lead into our long-term strategy, which is about focusing in on the key categories where we have the right to play to win with the consumer within that and develop an increased focus on hero products, the most essential products in the consumers’ wardrobe. Every single product has to have an intent, then cutting the assortment tail. So we have done a good first job on that. We will looking ahead, coming back to your question, we see opportunities to continue to cut unproductive assortment tail and then there is a big value unlock over time in planning and buyer closer to demand.

Michael Binetti — Credit Suisse — Analyst

Okay, thanks, and appreciate it guys.

Operator

We will now move on to our next question from Erinn Murphy of Piper Sandler. Please go ahead. Your line is open.

Erinn Murphy — Piper Sandler — Analyst

Great, thank you. Good morning. My first question is for Stefan. I would love if you could share a little bit more about your outlook for China? And then specifically what’s the current dynamic on the ground there between global versus national brands?

Stefan Larsson — Chief Executive Officer

Yes, good morning, Erinn, and thanks for your question. When it comes to Asia, we had another strong quarter in Asia. We see it more than what you see because of the COVID resurgence that we keep going in and out of in different countries in Asia. When it comes to China, this quarter we outperformed our plan. It’s very much driven by leaning into Calvin and Tommy and connecting them even closer to the consumer and digital is a key part there. So when we look at 11/11 as an example, the Singles’ Day that’s now way beyond the day, we performed really, really strongly. And then, so digital is an important component leaning into the different consumer moments like 11/11, and then is the product focus on making sure that we play into the right big categories that matters the most and then we see that the hero products that we have been developing over the last year is really resonating in China with the Chinese consumer and leading to a higher sell-throughs and higher AURs.

Erinn Murphy — Piper Sandler — Analyst

That’s great to hear. And then maybe just one for Jim, and following up on Binetti’s question. If you were to see upside in the fourth quarter relative to your plan, would that come more from sales or the margin front? Thank you so much.

James W. Holmes — Executive Vice President, Interim Chief Financial Officer, Controller

Yeah, Erinn, we see great strength right now in the gross margins. We had — we started the fourth quarter pretty strong. We’re very pleased with our performance in Singles’ Day and Black Friday on the topline. But our inventories are leaner than we would ultimately like. So we’re seeing real continued strength in AURs, that pricing power that we’re seeing flow-through in gross margin. So I think the opportunity is even more so in gross margin than they have been in the past.

Erinn Murphy — Piper Sandler — Analyst

Great, thank you so much, and happy holidays to you all.

Stefan Larsson — Chief Executive Officer

You too, Erinn, thank you.

Operator

We will now move on to our next question from Jay Sole of UBS. Please go ahead. Your line is open.

Jay Sole — UBS — Analyst

Great, thank you so much. I guess, just want to follow-up on the gross margin. I mean, is it within the guidance, I mean, do you have a sense of what — how you feel like the gross margin should land in 4Q? And within that, with the changes in the Heritage business in Q3, can you just talk about what impact that had on on gross margin and SG&A? Thank you.

James W. Holmes — Executive Vice President, Interim Chief Financial Officer, Controller

Yeah, so Jay, just — in my notes I alluded to — our gross margin percent in Q2 was 57.7%. Our gross margin in Q3 was 57.7%. And we’re right now anticipating Q4 to be about the same. So really about three quarters of that sustainable pretty, pretty high gross margins. So we feel, feel pretty good about that. If we talk about Heritage, yes, it has helped the gross margin somewhat, smaller — the Heritage business was a much smaller base, so it’s not moving the PVH needle that much, but it is a slight improvement. But also just maybe some of the offsets to that improvement in Q3, and particularly in Q4 is the air freight costs. So we pulled out about $45 million of additional air freight costs, which is all hitting in the second half. So we’ve been able to cover that as well, which would be more impactful than any benefit that we get from Heritage.

Stefan Larsson — Chief Executive Officer

And what’s exciting, Jay, what’s exciting from, this is Stefan. From my perspective, from a strategy perspective is that when we lean into Calvin and Tommy and into product strength and hero products, we see that we are able to drive higher AURs and that’s on — that’s a sustainable path and that drives a sustainable path towards increased gross margin rate. So that’s very exciting from my standpoint.

Jay Sole — UBS — Analyst

Got it, thank you for that. And if I can ask one more. The — you’re paying down some debt, buying back some stock. What’s the plan for the balance sheet going forward because the long-term debt levels are back down to near pre-pandemic levels and there’s still a lot of cash in the balance sheet, what’s the — what’s the outlook for that?

James W. Holmes — Executive Vice President, Interim Chief Financial Officer, Controller

Yeah, Jay, we’re really pleased with our liquidity position and the strength of our balance sheet. First and foremost, we’re going to use our cash to invest in ourselves. That’s always going to be our priority. Absent that, our debt pay down so far are more than the debt we took out during the pandemic, so now we’re able to — also we want to continue to pay down debt, but also we reinstated our share repurchases. So we’re pulling out about — we will have about $350 million of share repurchases for the year. We have also reinstated our cash dividends. So we feel really, really good about the strength of our balance sheet and how we’re really turning inventories and, and using our working capital turning it into cash.

Jay Sole — UBS — Analyst

Got it. Thank you so much.

Operator

We’ll now move on to our next question from Brooke Roach of Goldman Sachs. Please go ahead. Your line is open.

Brooke Roach — Goldman Sachs — Analyst

Great, thank you, and good morning.

Stefan Larsson — Chief Executive Officer

Good morning.

Brooke Roach — Goldman Sachs — Analyst

PVH has seen particularly strong profitability in both brands internationally. I was wondering if you could perhaps talk to the drivers of the increases that you’ve seen this year and your outlook for those margins, in a perhaps somewhat more inflationary environment where demand and supply are in better alignment going forward?

Stefan Larsson — Chief Executive Officer

Yes, thanks, Brooke. Absolutely. And this quarter I spent a lot of time on the road. I saw over 40 stores in four different countries in Europe, as I mentioned in my remarks. And what’s so exciting there is to see the consumer focus, the brand focus continuously elevating the brand position, driving very strong product execution and AUR coming out of that, and then having a multi-channel, omnichannel approach to winning with the consumers. So when we see European markets resurgence in COVID, we see that we have been better than most in the market to pivot to where the consumer than how the consumer acts, because the consumer is resilient and the consumer is strong. So even though we have a fourth wave now, we see that in countries where we have COVID restrictions coming in, we start to see a pattern from having navigated successfully through a number of waves. So we see brick and mortar foot traffic slightly come down, but we see conversion go up in brick and mortar, and then we see the consumer immediately pivot to digital because when I look at the consumer in Europe and overall is that the consumer is starting to get back to life as we knew it. So we are a year and a half, almost two years into COVID and so we see the consumer continue to shop. And in Europe, we are very good at meeting that consumer where the consumer shops. So those are some of the key drivers we see and those are also the key drivers for our accelerated recovery priorities across the regions.

Brooke Roach — Goldman Sachs — Analyst

Thank you. And it sounds like there’s a lot of momentum and confidence in the gross margin and AUR momentum of the brands, driven by your hero product strategy. Perhaps we can pivot a little bit to the SG&A cost structure as you look forward. Can you talk to the puts and takes a bit as you look ahead? Where do you see the most leverage on your cost base and where are the opportunities to optimize our expense structure as you continue to roll out the strategy?

James W. Holmes — Executive Vice President, Interim Chief Financial Officer, Controller

Yeah, roughly, cost efficiencies and finding continued cost efficiencies is a — is one of the key priorities on our accelerated recovery priorities that Stefan had alluded to. Really we see opportunities everywhere, particularly as we — as our international revenues really are sort of — we we’re seeing outside [Indecipherable] and we may start to see some real leverage there to go along with those revenues, but the expense, actually efficiencies and be optimal and really play our investments to the growth vehicles are really across the board, across both brands and across all regions.

And it’s — to build on what Jim said Brooke, it’s about — the way we drive cost efficiencies is we start with what it takes to win with the consumer and the consumer has moved over the last few years. So we come — we need to make sure that we invest in where the consumer is going and driving our accelerated recovery priorities and then we have to divest to invest. So we are increasingly going to lean into cost efficiencies to make sure that we invest enough in where the consumer is going and that we free up cost efficiencies to do that and that we flow through some of that to the bottom line.

Brooke Roach — Goldman Sachs — Analyst

Thank you so much. I’ll pass it on.

Stefan Larsson — Chief Executive Officer

Thank you.

Operator

We will now move onto our next question from Kimberly Greenberger of Morgan Stanley. Please go ahead. Your line is open.

Kimberly Greenberger — Morgan Stanley — Analyst

Great, thank you so much. Good morning. Stefan, I wanted to ask you about the ways in which you’re changing how you work with your wholesale accounts to improve the full price sell-through of Calvin and Tommy? And can you just remind us how you’re augmenting your wholesale strategy both domestically and internationally to help your profit improvement initiatives? Thanks so much.

Stefan Larsson — Chief Executive Officer

Yes, thank you, Kimberly. Definitely. So it starts with assortment strength and it starts to inviting our wholesale partners on the journey for Calvin and Tommy and say here, here are the key category of secure of the hero products and here is how we bring those to life in the experience and e-commerce is an increasingly important component that we bring our brands to life through our wholesale partners, increasingly well in e-commerce, and then that we do it as well in brick and mortar and that we, just like we look through continuously to cut the unproductive assortment tail, we also look at the productivity, the dual productivity with wholesale partners. But overall it’s a partnership that builds on our core strength and focus areas around assortment and product and pricing power and then it’s tapping into their strengths, and we have deep experience of doing this over time and it’s just great to see, and the digital opportunity for us is big in terms of owned and operated and it’s equally big when it comes to our wholesale e-commerce opportunity.

Kimberly Greenberger — Morgan Stanley — Analyst

Okay, great, thanks so much. And just one follow-up on the gross margin, if I could. Could you just quantify for us, Jim, the amount of total air freight in basis points or dollars in gross margin here in the third quarter? And I know that the fourth quarter is coming in $0.10 more freight impact, but if you could just give us that total air freight impact also, either in basis points or dollars for the fourth quarter that’s embedded in your plan that would be helpful?

James W. Holmes — Executive Vice President, Interim Chief Financial Officer, Controller

Yeah, Kimberly, we will plan out in so in total this year and really all in the second half an additional $45 million of air freight and how you think about it by quarter, it’s pretty almost evenly split, 50.50, which is it [Speech Overlap] And just one thing just to add. During the last quarter, we had called out 35 [Phonetic] so we have an additional $10 million now than we thought we would have last quarter.

Kimberly Greenberger — Morgan Stanley — Analyst

Very clear. Thanks so much and good luck.

Stefan Larsson — Chief Executive Officer

Thank you.

Operator

We will now move on to our next question from Omar Saad of Evercore. Please go ahead. Your line is open.

Omar Saad — Evercore — Analyst

Good morning. Happy Holidays. I wanted to ask a question on the inventory situation. You mentioned plus 50 in transit, it obviously is an elevated number and you said your visibility into the timing of the shipments and the receipts and when these goods are going to flow-through to the retail or to the consumer or is there any chance that they’re going to come too late and may need markdowns to deal with after the season? Help us understand your visibility into the receipts and the timing of inventory flow?

James W. Holmes — Executive Vice President, Interim Chief Financial Officer, Controller

Yeah, Omar, so — so some of the challenges that we saw worsened in October, particularly due to the U.S. port delays, which caused a shift of shipments from Q3 into Q4. Those goods are out now. We got back in line with them, they went out in November. So we feel pretty good. Inventories are still generally pretty lean. But as we work through the year, it will start to get a little better, still a challenge. But as we move through, we should be in — get in better position. We don’t see if things where we would have to have heavy markdowns because in generally we’re lean to begin with and we feel pretty good. And also, that’s why we are deploying so much air freight. We want — we’re pretty much ensuring that the goods are getting here in time for the holidays.

Omar Saad — Evercore — Analyst

Great, that’s super helpful. And then maybe, Stefan, could you talk about — little bit about this kind of demand for denim and fashion and broader the apparel. Are we have peak levels here? Do you think, given the early thoughts on demand levels into 2022, is there room for your consumers to spend more on Tommy Hilfiger and Calvin Klein?

Stefan Larsson — Chief Executive Officer

So thank you, Omar. Yes we are — we are confident in the strength of the consumer and the strength of our brands with that consumers, so. And back to the denim trend, we see that starting to grow and denim has always been important to the consumer and we see that trend continuing into 2022.

Omar Saad — Evercore — Analyst

Thanks. Good luck. Look forward to the Investor Day.

Stefan Larsson — Chief Executive Officer

Thank you very much, Omar.

Operator

[Operator Instructions] And we’ll move to our next question from Matthew Boss of J.P. Morgan. Please go ahead. Your line is open.

Matthew Boss — J.P. Morgan — Analyst

Great, thanks. Stefan, by region, so you mentioned work remaining in North America and you mentioned leaning into this with full force. Could you just elaborate on the unlock opportunity you see in the region, maybe across each brand, and how best to think about the timeline from here?

Stefan Larsson — Chief Executive Officer

Yes. So when it look — when we look at North America, first and foremost, we have the 30%, 40% of the business that used to be tourism, that’s for the last year and a half. We haven’t seen much of that tourism. Over time, that will come back. And this quarter, we were also hit by the shift from the U.S. port situation from Q3 to Q4, so that’s — that’s macro. We are focusing on what we can impact, which is to win more with the domestic consumer. So what the green shoots that I mentioned, that I’m excited about is that we are leaning into product strength, hero product strength, pricing power is up. So we see pricing power. We see North America right now driving up pricing power and discounts down and we see increasing strength in our focus categories and hero product execution, and then we are driving in, we are leaning into drive high quality e-commerce growth as well. So that’s — it’s the same accelerated recovery priorities. It’s just a tougher macro given the tourism and in Q3 given the port situation.

Matthew Boss — J.P. Morgan — Analyst

Great. And then, Jim, just multi-year on sustainability of gross margin as we think about next year. Are there any give backs at all to consider or should we think about this year’s gross margin as the new foundation to build on from here?

James W. Holmes — Executive Vice President, Interim Chief Financial Officer, Controller

Yeah, Matt, we’re projecting now even with Q4, we’re going to have three quarters in a row of sustainable gross margins at that very high 57% range, so we’re not — not necessarily giving guidance going out to next year, but we feel pretty good about so far the sustainability of our gross margins.

Stefan Larsson — Chief Executive Officer

And the reason just to build on what Jim just said now, the reason why we feel good about the sustainability of the gross margin is how — how we execute product strength and pricing power. That’s — we see that across both brands and across all regions.

And operator, we will have to ask for the next question to be the last question for this call. Thank you.

Operator

And our final question comes from Paul Lejuez of Citigroup. Please go ahead. Your line is open.

Tracy Kogan — Citigroup — Analyst

Thanks. Its Tracy Kogan filling in for Paul. I had a follow-up on the wholesale business. I was wondering how your partners are reacting to the delays? Have you seen any material increase in cancellations or are partners really just taking basically whatever inventory they can get at this point? And then I do have one follow-up. Thanks.

James W. Holmes — Executive Vice President, Interim Chief Financial Officer, Controller

Yeah, so I’ll take that Tracy. So, as far as, we are not seeing any cancels and one of the things with the delays we had in the shift of our shipments is it was — it was really seasonless goods that we would not deploy air freight and lower margin goods. So it got hung up in the ports. But since its seasonless, it’s at ready, we are not seeing cancels.

Stefan Larsson — Chief Executive Officer

And we are really in a situation, Tracy, where demand outpaced supply, which is a good place to be.

Tracy Kogan — Citigroup — Analyst

And then my second question was just looking at your business or your customers internationally versus the U.S., just wondering what the demographics are like of your customers internationally versus in the U.S., the local — the local customer obviously, not the tourists here?

Stefan Larsson — Chief Executive Officer

We have a similar consumer base for Tommy and Calvin across — across the world and it’s the strength. So when I was out in all these markets and saw all these stores in Europe and all these stores in North America, I just get so encouraged because having two of the most iconic brands in our sector and seeing the consumer we have, it’s all in our hands when it comes to executing, making sure that we execute those brands to the highest possible relevance through the product strength, through the consumer engagement, collaborations and through the disciplined channel execution.

Tracy Kogan — Citigroup — Analyst

Great, thanks very much.

Stefan Larsson — Chief Executive Officer

Well, thank you very much, Tracy, and thank you everyone for joining us for this call this morning, and I want to wish you all, and we want to wish you all a happy, healthy and safe holidays. Looking forward to catching up again in 2022.

Operator

[Operator Closing Remarks]