PVH Corp (PVH) Q4 2022 Earnings Call Transcript

PVH Corp (NYSE:PVH) Q4 2022 Earnings Call dated Mar. 28, 2023.

Corporate Participants:

Sheryl Freeman — Senior Vice President of Investor Relations

Stefan Larsson — Chief Executive Officer

Zac Coughlin — Executive Vice President, Chief Financial Officer

Analysts:

Robert Drbul — Guggenheim — Analyst

Michael Binetti — Credit Suisse — Analyst

Jay Sole — UBS — Analyst

Dana Telsey — Telsey Advisory Group — Analyst

Christopher Nardone — Bank of America Merrill Lynch — Analyst

Ike Boruchow — Wells Fargo — Analyst

Presentation:

Operator

Good morning, everyone, and welcome to today’s PVH’s Fourth Quarter and Full-Year 2022 Earnings Conference call. [Operator Instructions] Later, you will have an opportunity to ask questions during the question-and-answer session. [Operator Instructions]

It is now my pleasure to turn today’s program over to Sheryl Freeman, Senior Vice President of Investor Relations.

Sheryl Freeman — Senior Vice President of Investor Relations

Thank you, operator. Good morning, everyone, and welcome to the PVH Corp. fourth quarter and full-year 2022 earnings conference call. Leading the call today will be Stefan Larsson, Chief Executive Officer; and Zac Coughlin, Chief Financial Officer. This webcast and conference call is being recorded on behalf of PVH and consists of copyrighted material. It may not be recorded, rebroadcast or otherwise transmitted without PVH’s written permission.

Your participation constitutes your consent 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 March 28, 2023 of future events and financial performance. These statements are subject to risks and uncertainties indicated in the Company’s SEC filings and the safe harbor statement included in the press release that is the subject of this call.

These include PVH’s right to change its strategies, objectives, expectations and intentions and the Company’s ability to realize anticipated benefits and savings from divestitures, restructurings and similar plans, such as the planned cost efficiency action announced in its second quarter earnings release and its 2021 sale of assets of and exit from its Heritage Brands business to focus on the Calvin Klein and Tommy Hilfiger businesses. Significantly, the COVID-19 pandemic, global inflationary pressures and the war in Ukraine continue to have impacts on PVH’s business, cash flow and results of operations. There is significant uncertainty about the duration and extent of these impacts.

As a result what is said on this call could change materially at any time. Therefore, the operation of the Company’s business and its future results of operations could differ materially from historical practices and results or current descriptions, estimates and suggestions. PVH does not undertake any obligation to update publicly any forward-looking statement, including without limitation, any estimates regarding revenue or earnings. Generally, the financial information and projections to be discussed will be on a non-GAAP basis as defined under SEC rules. Reconciliations to GAAP amounts are included in PVH’s fourth 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. We are pleased to report that we drove strong fourth quarter financial performance, ahead of expectations for both the top and bottom line led by strength in our direct-to-consumer businesses. Revenue exceeded our expectations on both a reported and constant currency basis. And underlying growth excluding the impact of currency and the Russia-Ukraine exit was plus 9% in the fourth quarter, driven by better-than-expected results for both Tommy Hilfiger and Calvin Klein. We are coming into 2023 with strong momentum and expect to continue to grow our top-line led by outsized D2C growth, while planning to deliver EBIT margin expansion and double-digit EPS growth.

The growth in 2022 was driven by strong consumer response to our product, marketing and marketplace execution across both brands and across all regions. We showed that we were able to compete to win in what proved to be a much more challenging macro environment than any of us expected going into the year. And I would like to highlight some of the proactive choices we made to make that happen. Last April, we shared our long-term vision and multi-year growth plan at our Investor Day. The PVH+ Plan is our brand focused direct-to-consumer and digitally-led growth plan that will over time build Calvin Klein and Tommy Hilfiger into the most desirable lifestyle brands in the world.

And in parallel, making PVH one of the highest performing brand groups in our sector. The clarity of our direction and plan have provided a very strong focus for everyone in the Company. We know where we’re going, we know how we will get there, and we’ve made great progress in the first year of execution. This stronger execution focus is gaining traction across the Company and we will continue into this year. In 2022, both Calvin and Tommy delivered increased strength in product with hero products across key categories. And in our consumer engagement, we’ve cut through campaigns, collaborations and world-class talent partnerships. This strength in product and consumer engagement is a big reason we drove high quality plus 9% underlying revenue growth with increased pricing power.

For 2022 from a regional perspective, Europe continued to grow from a position of strength in a challenging environment and delivered a very strong plus 10% growth in euros when adjusting for the Russia exit. In Asia, we are sending out to accelerate our growth. We were able to drive outstanding performance in the markets that were not in COVID lockdown driving plus 11% constant currency growth for the total region and plus 23% constant currency growth outside of China. And in North America, we were able to start to win more with our domestic consumer driving plus 9% growth for Tommy and Calvin together in a brand accretive way, recognizing that this is the beginning of a multi-year unlock.

From a supply chain perspective, we successfully navigated through the COVID-related challenges. Over the year, we increased our on-time deliveries from 60% to 95%, which have and will continue to deliver positive impact on both availability and cost. And we are now about to unleash the next steps in building our supply chain to become a real strategic value driver. We are creating a strong data-driven sourcing approach that will return not only efficiencies and cost reduction opportunities, but also enable us to invest back into great products. In addition, we are optimizing our SKU breadth to create higher productivity by cutting the unproductive assortment tail.

We also came into the year knowing that an important underlying driver of the PVH+ Plan is to become more cost competitive in a way that simplifies how we work, increase our speed in decision-making and empowers our team to execute and enables us to drive new growth by making strategic investment in areas such as marketing, supply chain and technology. I’m pleased to share that we’ve made significant progress here during the year. Perhaps the most important improvements we have made this past year was to continue to strengthen our management team with the capabilities needed to translate our PVH+ Plan to impact. From my experience, the strength of the leadership team is the single most important factor in successfully translating a value creating plan into action and impact.

I’m proud to share that we made significant progress in this critical area. Zac Coughlin joined as our CFO, David Savman as our Chief Supply Chain Officer, and Sara Bland as our Chief Strategy Officer. All three bring highly relevant experience, and we are already seeing the positive impact from their leadership. And then as of this month, Eva Serrano joined as Calvin Klein Global President, having spent 20 years as one of the key leaders behind the growth of Zara and Inditex.

And Donald Kohler joined as Calvin Klein Americas President, having spent a big part of his career on the team that turned around Burberry, both from global roles and as Head of North America for them. With these appointments complementing our strong existing leadership team, we have the capabilities, experiences and a competitive mindset needed to deliver on our long-term PVH+ growth commitments. Finally, I spent a big part of my time in 2022 traveling to experience our markets and stores from the consumers’ perspective, and I continue to be impressed by our people and teams around the world. I want to thank all of our associates for their hard work during 2022 and give a special recognition to our store managers. Their incredible work ethic, expertise and their passion to everyday go out there and win with the consumer is an inspiration to all of us.

Now turning to our regional performance and how we are connecting our brands and executing the PVH+ Plan across each region. Starting with Europe, our Europe team continued to drive very strong performance, reflecting the power our brands have with consumers in the region. Despite macro headwinds, we really leaned into the business that finished the year strong. We delivered double-digit year-over-year growth for the fourth quarter and had another record quarter, exceeding EUR1 billion in revenue. For the year, Europe also delivered double-digit underlying revenue growth, adjusted for FX and our Russia exit including growth in every quarter of 2022.

Growth in the fourth quarter was led by our retail stores, which generated very strong performance during the holiday selling period. We also saw strong early wholesale shipments of spring 2023 collections, which have been very well received by our partners. Growth was enabled by better product availability, increased operational efficiencies and faster product deliveries.

Our Tommy product strategy continues to be driven by product elevation, winning assortments and product stories true to the Tommy DNA, all with a focus on reaching the aspirational consumer. This was supported by our hero product strategy, which was a strong enabler of growth in 2022, and in 2023, we are further increasing our category offense and with that amplifying our iconic products. For Calvin, we continue to leverage our proven playbook from Tommy to further build out Calvin as a lifestyle brand across product categories.

We see strong growth momentum in footwear, accessories, next, our established Calvin Klein underwear and jeans businesses. We have seen favorable demand from consumers for our spring collection with on-plan early sell-through at wholesale. Looking ahead, adjusting for Russia and improved delivery performance compared to last year supply chain disruptions, our shipped order book for fall is expected to be up low single-digits. While our wholesale partners are taking a conservative approach, given the potential for macroeconomic volatility, we are well positioned to capitalize should stronger demand continue through our best-in-class operating model and strong Never Out of Stock program.

Moving onto Asia-Pacific. Our Asia team continued to deliver solid growth in constant currency in the fourth quarter outside of Greater China. In Greater China, we generated stronger-than-expected 11.11% [Phonetic] performance, which was offset by the widespread COVID impact. For the year, the region generated strong double-digit constant currency growth, and both Calvin and Tommy continued to increase their brand awareness. Our focus on key growth categories and hero products and ongoing efforts to refine the product assortment through regionally relevant products with SKU rationalization are driving results.

In the fourth quarter, our hero products outperformed with higher AURs and lower discounts. We continue to lean in and win key consumer moments such as Lunar New Year by driving engagement and performance above plan, fueled by successful product capsule launches and consumer activations. Both brands continue to move up the rankings on Tmall, underscoring the strength of our brands and product in the market and how well they are resonating with consumers. For the holiday, we launched the Tommy Miffy capsule collection, which feature the iconic cartoon character, Miffy. The omnichannel campaign and capsule launch was brought to life across retail, social media, influencer collaborations and e-commerce partnerships, fueling strong brand heat.

Calvin also launched a dedicated capsule and consumers have the opportunity to dress virtual avatars in the collection called Ready Player Me. As we look toward 2023, we are working to further expand the region’s digital capabilities and to enable a single consumer view across channels as well as faster digital execution. We continue to make investments in newer channels such as Douyin live-streaming and collaborations with the Tmall Innovation Center, which leverages big data and consumer insights to offer customized starts. We’re also laying the foundation for new and enhanced capabilities in our supply chain through Asia for Asia sourcing as well as improving our demand planning to focus increasingly on core replenishment and a read-and-react model to enable shorter lead times with higher in-season buying.

Looking ahead, our brands have a clear premium brand and product positioning with the opportunity to grow further in all markets. We continue to lean into further increasing overall brand awareness, especially in China, where both Calvin and Tommy are underpenetrated. Lastly, shifting gears to our business in North America. Step by step, we are getting early traction in growing the business in a brand accretive way, underpinned by a clear category and product focus to deliver sustainable profitable growth with an increased focus on the domestic consumer. Our Tommy and Calvin businesses delivered mid-single-digit growth in the fourth quarter, led by our D2C stores. We delivered strong performance despite a very promotional holiday period, given elevated inventory levels across the market. For the year, our Tommy and Calvin businesses increased high single-digits.

Our D2C stores delivered high single-digit positive comps in the fourth quarter, driven by improved product assortments and in-stock levels. Most importantly, we continue to drive improved domestic consumer comps. Our assortment and product improvements continue to yield results. For Tommy, our global bestseller initiative, which focuses on combining global winning design, scaled quickly to 70% of our D2C business. This initiative is generating higher AURs, stronger sell-throughs and higher gross margins compared to the balance of the assortment.

One great example that we shared with you last quarter pertain to our expanding Polo business. Building on the prior quarter success in this key category, in the fourth quarter, our three biggest Polo product franchises were up plus 21% versus 2019. We also saw significant progress with on-time deliveries in the region with over 90% of our spring season on time compared to a year ago where we were just 32% on time at the start of the year. This improvement is a direct result of our improved supply chain leadership.

Looking ahead to 2023, we are focused on applying our learnings from 2022 and further scale our growth initiatives in North America. We are doubling down on the performance drivers in our D2C stores through rigorous assortment building and editing, even better matched to demand with a focus on in-stock improvements in key categories. For Tommy, we’re expanding the Tommy global bestseller initiative to the wholesale channel. And for Calvin, we’re building market share in CK Underwear by improving replenishment execution and in-stock levels across all channels coupled with our impactful marketing execution. At the same time, we are making investments in store upgrades to ensure our stores deliver an elevated consumer experience.

Next, I’ll share a few global brand highlights and how we are bringing both brands to life for the consumer, beginning with Calvin Klein. Jonathan Bottomley, our Global Calvin Klein CMO and our Calvin marketing team have done a fantastic job in going back to the iconic DNA of Calvin Klein and made it highly relevant to today. During the past few months, we have been able to see this work come to life under the campaign umbrella of Calvins or nothing. In January, the campaign launched with global tennis star, Carlos Alcaraz, in our signature cotton underwear styles wearing our classic straight jeans and it drove strong results.

More recently, the spring chapter of the campaign was launched globally starring ambassadors and friends of the brand, including Michael B. Jordan, Jennie Kim, Kendall Jenner, FKA Twigs and the Aaron Taylor-Johnson. Dressed in the latest underwear and jeans, the full cast introduced a wide range of new styles for the season. The campaign launched with Michael B. Jordan timed to the release of his highly anticipated film, Creed III. The campaign images quickly went viral across social media and generated very high engagement. The Collab post between Calvin and Michael B. Jordan is now one of our highest performing post to date with a total reach of 8 million on own social. We saw incredibly strong organic broadcast and digital coverage across entertainment, pop culture and fashion outlets, including on Jimmy Kimmel Live! for a total reach of 1.3 billion in the 24 hours after launch.

And the campaign pickup didn’t stop there. The brand’s Collab post with Kendall Jenner is now the highest reaching post of the year with 13.4 million in reach, again, a testament to the power of the right imagery and the right talent to cut through. Also launching this week, Jungkook, a member of the extremely popular South Korean boy band, BTS, will join the brand as global ambassador for Calvin Klein jeans and Calvin Klein underwear.

Moving on to Tommy Hilfiger. Tommy, with its unique classic American cool DNA, continued to drive strong brand visibility and relevance among our target consumers. The brand generated approximately 4 billion impressions from November to January. Tapping into a moment of strong consumer relevance, the brand’s Miffy collaboration, which I just spoke to, although developed for the Lunar New Year celebrations, was leveraged globally, and it was one of our strongest performing capsules. Looking ahead, our Tommy Spring Campaign, Classics Reborn with Shawn Mendes recently launched globally. And as part of that, Tommy and Shawn just hosted a tour of immersive events in London, Berlin, Milan and Mexico City.

Selected flagship stores held in-store activations. Sustainability stands at the heart of this collaboration with the collection incorporating a broad range of recycled and other sustainable materials. The TOMMY JEANS label is also fostering new consumer connections through the upcoming Tommy Aries collaboration, which features a bold and creative play on all things TOMMY JEANS. The collection is inspired by archival Tommy Pieces and will in the coming days be available for early access online in our own stores and in key streetwear retailers globally. For both brands, we are looking forward to an exciting 2023. It will be a year to take another big step forward in delivering on our PVH+ commitments towards our long-term vision of building Tommy and Calvin into the most desirable lifestyle brands in the world, all while becoming one of the highest performing brand groups in our sector.

I recognize the macroeconomic environment will likely continue to be tough. So we will be relentless in executing our five PVH+ growth drivers across both brands and all regions. In winning with product, we will advance our category offense and create the best hero products in the market. In winning with consumer engagement, we will deliver seasonal cut-through campaigns charged by an increasingly strong network of aspirational talent. You will also see us improve the aspirational presence of all consumer touch points ranging from social media, e-commerce to in-store. We’re also investing more into marketing as a share of sales to make sure we continue to cut through with our initiatives.

In winning in the digital marketplace, we will continue to drive D2C offense across both the e-commerce and stores with improved productivity, all while we strengthen our partnership and business with our key wholesale partners and increasing our full price penetration. We are continuing to drive e-commerce strength, both owned and operated and with key partners. We are only in the beginning of developing our demand-driven supply chain. And this year, we will make progress in cost of goods, delivery accuracy and leveraging our scale across both brands, all while we take big steps to become cost competitive going after efficiencies while investing behind our growth drivers.

I look forward to building on the strong momentum we started in 2022 to win in 2023 and beyond. We are starting to get real traction around the vision, the plan, the execution and most importantly, the team and the mindset needed to get it up. Over time, there is enormous power in the compounded effect on being consistent in direction and value-creating focus through the PVH+ Plan.

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

Zac Coughlin — Executive Vice President, Chief Financial Officer

Thanks, Stefan, and good morning. My comments are based on non-GAAP results and are reconciled in our press release. As Stefan discussed, we are extremely pleased with our results for the fourth quarter and the full-year, which significantly exceeded both our top and bottom line guidance, driven by strength in our European business and continued cost discipline globally. 2022 was a year of unprecedented macroeconomic volatility. And in this tough environment, we fought hard to win by focusing on what is within our control. Our ability to drive underlying revenue growth of 9% for 2022 and earnings per share of $8.97, in line with our initial expectations at the start of the year approximately $9 per share is a testament to our disciplined execution of our strategic priorities and the power of our two global brands, Calvin Klein and Tommy Hilfiger.

We are encouraged by the positive momentum we drove in the fourth quarter and are confident that we can deliver solid top-line growth in 2023 while driving increasingly improved profitability. I will now discuss our 2022 results in more detail, and then we’ll move on to our outlook for 2023. Our strong fourth quarter results delivered underlying revenue growth of 9% versus last year, exceeding our top-line guidance by 4% on a constant currency basis. And we delivered earnings per share of $2.38, significantly exceeding our earnings guidance by $0.73. Our underlying revenue growth was driven by both our Tommy Hilfiger and Calvin Klein brands. We delivered strong revenue growth in Europe and continued growth in North America driven by the direct-to-consumer business.

We continue to experience negative impacts in China from the COVID pandemic, but the rest of Asia-Pacific continued to drive growth in constant currency. On a reported basis, fourth quarter revenue was up 2%, which reflected a 6% negative impact from exchange and a 1% negative impact from the war in Ukraine. We continue to focus on driving performance in our direct-to-consumer business, where we have the closest connection to our consumer. And DTC was up double-digits on an underlying basis driven by strong high single-digit growth in North America and mid-teens growth in Europe in euros.

On a reported basis, DTC revenue was up 4% compared to last year, which reflected a 6% negative impact from exchange and a 1% negative impact from the war in Ukraine. From a regional perspective, fourth quarter revenue for our international business was up 11% versus last year on a constant currency basis, continuing to significantly exceed 2019 pre-pandemic levels. Within our international business, our European business had another record quarter following the first EUR1 billion quarter in the Company’s history in the third quarter. Our Asia-Pacific business was down 8% on a reported basis, including a 9% negative impact of exchange. Fourth quarter results in Asia-Pacific were severely impacted as COVID cases in China rose following the lifting of restrictions there, but saw improvement at the end of the quarter and into the first quarter of 2023.

In North America, revenue in the fourth quarter was up 5% overall for Tommy Hilfiger and Calvin Klein with our retail store business up high single-digits versus last year as we drove sequential improvement versus the third quarter in sales to domestic consumers. Our domestic comp sales are now up mid-single-digits compared to 2019 levels. Our global brands also continued strong underlying growth, balanced across both brands, with Tommy Hilfiger revenues up 10% on a constant currency basis, and Calvin Klein revenues up 8% on a constant currency basis. Reported revenues were up 3% for both Tommy Hilfiger and Calvin Klein.

In the fourth quarter, we delivered gross margin of 55.9%, up approximately 190 basis points compared to pre-pandemic levels, but down approximately 240 basis points compared to last year. Gross margin reflected favorable region and channel mix compared to last year as well as planned price increases. Those benefits were more than offset by higher product costs, elevated ocean freight rates and increased promotional selling compared to last year as inventory levels are elevated across the industry.

Later, I will discuss how some of these headwinds transition into tailwinds for 2023. SG&A expense as a percentage of revenue for the fourth quarter was 47.2%, down nearly 400 basis points from last year and better across all dimensions of the business. We continue to take a disciplined approach to managing expenses, driving cost efficiencies while making targeted investments in strategic areas to fuel growth, in line with the fifth growth driver of the PVH+ Plan.

In total, EBIT for the quarter was $215 million, exceeding our expectations due to strong revenue performance and lower expenses. Operating margin was 8.6% as reported and 9% excluding the negative impact of approximately 40 basis points due to exchange. Earnings per share was $2.38 compared to $2.84 in last year’s fourth quarter and exceeded our guidance by $0.73, almost entirely driven by the improvement in EBIT. Earnings per share for the quarter also included a $0.23 negative impact compared to the prior year related to exchange and a $0.13 negative impact due to the war in Ukraine. Excluding these two external factors, earnings per share was almost flat to prior year.

Our tax rate was approximately 22%. As a reminder, in last year’s fourth quarter, we benefited from non-cash tax rate relief tied to our purchase of the Calvin Klein brand back in 2003. This benefit ran out in 2021. As a result, our tax rate in the fourth quarter of last year was a benefit of approximately 33%. Inventory was up 34% at the end of the quarter compared to the prior year period due to a combination of factors. As we’ve discussed, inventory levels were abnormally low in 2021 due to supply chain and logistics disruptions, which intensified in the second half of 2021. We have seen steady progress over the course of 2022 towards pre-pandemic production capacity and significantly improved delivery times.

And in the fourth quarter this year, we experienced much earlier receipts of inventory as these supply chain and logistics disruptions have eased. This enabled us to capitalize on incremental top-line opportunities in wholesale for the quarter but also contributed to the higher ending inventory levels. Absent the elevation due to timing of receipts, we have normalized back to inventory levels that support our planned growth. We also felt the full impact this quarter of higher product costs compared to last year.

Looking into 2023, we expect cost to improve as we move through the year, particularly in the second half. We ended the full-year 2022 with revenue of $9 billion and underlying revenue growth of high single-digits aligned to our long-term financial algorithm and driven by growth in all regions and in both our Tommy Hilfiger and Calvin Klein brands. Our full-year reported revenue was down 1% versus prior year and reflected a negative impact of 7% from exchange and 3% from the exit of Heritage Brands and the war in Ukraine. Operating margin was 9.5%, and our tax rate for the year was 23.3%.

Overall, we delivered earnings per share of $8.97, delivering our initial start-of-year guidance of approximately $9 per share. Additionally, we delivered on our commitment under the PVH+ Plan to return excess cash to shareholders returning over $400 million to shareholders during the year through the repurchase of 6.2 million PVH shares in our dividend, including approximately $73 million for the repurchase of 1.1 million shares in the fourth quarter.

Moving on to our outlook. In 2023, we expect to continue to execute our strategic priorities to unlock the full potential of our two global brands, Tommy Hilfiger and Calvin Klein, and as a result, drive strong financial performance across all regions. We ended 2022 strongly and are entering 2023 with momentum behind the PVH+ Plan. With that said, we acknowledge that macroeconomic uncertainties still exist with consumer sentiment tempered by inflationary concerns, particularly in North America and to a lesser extent in Europe and retailers planning cautiously due to elevated inventory levels industry-wide. As such, we’ve approached our plans for 2023 with a healthy balance of optimism and prudence.

We are projecting revenue growth in all regions with operating margin expanding to approximately 10% and earnings growing 11% to approximately $10 per share. For the full-year, our overall revenue is projected to grow approximately 3% to 4% as reported and approximately 2% to 3% on a constant currency basis compared to 2022. This reflects a benefit of less than 1% from the 53rd week of 2023. Europe and North America are planned to grow low single-digits with strong growth in our direct-to-consumer channel, tempered by wholesale as retailers remain cautious on buys. And Asia-Pacific planned to grow by low double-digits as China has eased COVID restrictions. We expect our full-year gross margin rate to increase over 100 basis points compared to 2022 despite approximately 100 basis points of higher cost due to exchange, which we have previously discussed.

The improvement in our gross margin is supported by a favorable shift in channel and regional mix compared to 2022 as we accelerate growth in our higher-margin DTC business in line with our PVH+ strategies. And our DTC and international businesses make up a larger portion of total revenue. Additionally, we are seeing ocean freight rates coming down rapidly. We are using significantly less airfreight, and abnormally high raw material costs will ease as we move through 2023, particularly in the second half of the year. SG&A expense as a percentage of revenue for the full-year is expected to increase approximately 70 basis points compared to 2022. We continue to drive cost efficiencies across the business while targeting our investment focus on key areas that drive growth, especially marketing.

We expect to generate increasing savings as we move through the year related to our plan to reduce people costs in our global offices by approximately 10% by the end of 2023, but these benefits are more than offset by the impact of regional and channel mix, which although favorable to our gross margin carry higher expenses. We expect our full-year operating margin will increase to approximately 10%, reflecting high single-digit EBIT growth. Interest expense is projected to be approximately $100 million, and our tax rate for the year is estimated at approximately 24%. For the full-year 2023, we are projecting earnings per share to be approximately $10, up 11% versus 2022.

Looking at the balance sheet, we expect to build cash with a significant increase in cash from operations, reflecting an improvement in working capital due to lower inventories compared to 2022 as receipt flow normalizes. We are projecting capital spending of $350 million, which is approximately 4% of sales as we invest in our stores, supply chain and technology and in line with our PVH+ Plan priorities. We are also currently planning at least $200 million of share repurchases, and we’ll continue to review opportunities for capital deployment as we move through 2023.

To zero in on the first quarter specifically, we expect to continue to be challenged by residual inflationary pressures and lingering macroeconomic uncertainties. Our overall revenue is projected to be relatively flat as reported and to increase by approximately 3% on a constant currency basis compared to the prior year. First quarter earnings per share are projected to be approximately $1.90, which reflects a negative impact of approximately $0.10 due to exchange translation. Our tax rate for the first quarter is estimated at approximately 24%, and interest expense is projected to be approximately $23 million.

Before I open up for questions, I just want to reiterate that we remain confident in our ability to win in a tough environment as evidenced by our performance in 2022. And while we expect the macro environment will continue to be volatile in 2023, we are continuing to focus on executing our strategies to drive top-line growth, improve profitability and strong double-digit EPS growth in 2023.

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

Questions and Answers:

Operator

Yes, sir. [Operator Instructions] Our first question will come from Bob Drbul with Guggenheim. Your line is open.

Robert Drbul — Guggenheim — Analyst

Hi, good morning. A couple of questions I have actually. On the first one, can you just talk about what surprised you the most in the fourth quarter? And I mean, the results were just well ahead of what we expected. And then the second piece of it is when you think about the PVH+ Plan, what elements do you think you got the most traction on that give you the confidence that you portrayed for FY ’23? Thanks.

Stefan Larsson — Chief Executive Officer

Well, thank you, and good morning, Bob. Let me — it’s — so first of all, from the surprises in Q4, I would say what — it’s the lack of surprises because we set out the PVH+ Plan almost a year ago. And we started leaning into our iconic brands and said those are absolutely unique. Perhaps there are a handful of those brands globally, and we have two of them, Calvin and Tommy. And the PVH+ Plan is about leaning into each of these iconic brands’ main product categories, and we were able to get traction on that. There are lead times. So we set out to do that a year ago. And what you can see in the fourth quarter was that we were starting to get traction. So starting to get early traction on the product category focus, starting to get traction in Q4 on developing some of the best hero products in the market, the most important products in the consumers’ wardrobe.

And then we were able to really deliver cut-through campaigns with world-class talent. So we were able to tap into the iconic strength of the brand. We were able to increase the product strength and then bring that to market and compete to win in, as Zac mentioned, a much tougher macro with a cut-through campaign in Calvin and a cut-through campaign in Tommy, that’s — look at it as a campaign umbrella that will continue to go because it’s really combining the category, the hero products, the world-class talent, and that’s what we could see in Q4, consumer-facing.

Then on the underlying business engine side, we were able to drive better, much better supply chain execution. So we were 60% on-time delivery last year, heavily affected by the COVID disruptions. Today, we’re at 95%, close to 100% on-time. And then we were able to drive cost efficiencies while investing more in growth. So you will hear Zac take you through how we invest more in marketing. And then as the final part is the leadership team and getting the capabilities on the leadership team we needed to execute this. So this is some of the highlights of what I see drove fourth quarter and also how it will continue that this is just the beginning and that drives the confidence for the outlook this year.

Robert Drbul — Guggenheim — Analyst

Thank you.

Operator

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

Michael Binetti — Credit Suisse — Analyst

Hey guys, thanks for taking our questions. Let me add some congrats on a great quarter here. I guess I have two for the — on the finance side, Zac. Can you give a little more color on sizing the buckets you listed to drive the 200 basis points of underlying gross margin expansion? It would help us to get a little bit of an idea of the magnitude of the different buckets there to see how you’re seeing it.

And then you mentioned North America direct-to-consumer sales to domestic consumers are now, I think you said mid-single-digits above 2019. I know you talked previously about almost 30% of sales in those doors are from tourists before COVID. Can you offer any specific quantitative examples of where North America DTC stores are in terms of total productivity levels and profitability levels compared to pre-COVID? And what you think is the right pace investors can think about to recapture some of that opportunity?

Stefan Larsson — Chief Executive Officer

Well, thank you, Michael. It’s Stefan. So let me just start from the business side in terms of the gross margin strengthening in the outlook because I’m encouraged by a lot of what I see on the gross margin side. First, cost of goods are coming down. Freight is coming down and also the supply chain strengthening, so that we are getting better at leveraging our scale with vendors. So that’s all favorable versus last year. And then on the gross margin side, we also have a shift in the business, a regional and channel mix shift. So international grows faster, D2C grows faster. So that’s on the highest level from a business perspective. Zac, if you don’t mind going through more in detail.

Zac Coughlin — Executive Vice President, Chief Financial Officer

Yeah. Let me put some numbers around that for you, Michael. I think that, first of all, as we’ve said gross margin, we expect to grow by over 100 basis points this year versus last year. And keeping in mind that includes approximately 100 basis points of transactional exchange headwind that we’ve talked about previously. So to your question on the 200 basis points of underlying improvement, as Stefan mentioned, first, we are planning for a significant increase in DTC penetration aligned to the PVH+ Plan, and that drives almost 100 basis points of gross margin improvement.

And then second, we expect that several of the macro headwinds that we experienced will increasingly transition to tailwinds, but as we work through 2023. So included in that are significant reductions in ocean freight rates and a decrease in utilization of airfreight as the supply chains have normalized. Those two changes alone are worth approximately 100 basis points of gross margin improvement. So I think those are the two main drivers that we expect to see moving in our favor. And again, starting with both the exchange more of a first half story and then increasingly, these other measures taking a more powerful impact in the second half of the year.

And then you talked — you asked a little bit, I think about in terms of the international stores. At this point in time, our outlook does not count on a return to 2019 levels of international tourists. We’re still assuming a significant decrease versus 2019. We are seeing the beginnings of some of that start to come back this year. And as they’re coming back in, they’re buying strongly. But I think we’ve learned over the last couple of years to not count on that. The focus will remain on the — on really satisfying the domestic consumer, and that will be the area from there. And if international tourists come in, that will be a source of growth later in the year that’s not currently planned for.

Michael Binetti — Credit Suisse — Analyst

Thank you.

Zac Coughlin — Executive Vice President, Chief Financial Officer

Okay, thanks.

Stefan Larsson — Chief Executive Officer

And Michael, one part that was exciting in Q4 was to see the domestic consumer. The focus we have had over the last year on winning more with the domestic consumer in North America to really see that we started to get traction there. And that’s something that we will continue to lean into.

Michael Binetti — Credit Suisse — Analyst

Yeah. We haven’t heard many other North America outlets improving. So it was nice to hear. Thanks for the color, Stefan.

Stefan Larsson — Chief Executive Officer

Thank you, Mike.

Operator

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

Jay Sole — UBS — Analyst

Great. Thank you so much. I think you mentioned for the full-year guidance, you expect revenue growth in all regions. Maybe just elaborate a little bit and maybe give us an idea of how you’re thinking about growth in North America versus Europe versus Asia? Thank you.

Stefan Larsson — Chief Executive Officer

Yes, absolutely. Thank you, Jay. So in Europe, let me just take a step back to Q4 that we were able to drive a very strong holiday performance in a very tough macro in Europe, and we see the momentum continue. And we see D2C to Zac’s point, as he mentioned, we see D2C being the main driver. We see that being true for both Europe and North America and Asia. When we look at North America, it’s continuing to build strength with that domestic consumer in a brand accretive way. And then when it highlights on Asia is to come back of China and the Chinese consumer. And we are very encouraged by what we are seeing early days there coming out of COVID.

Zac Coughlin — Executive Vice President, Chief Financial Officer

Yeah. And I think just to put some numbers behind that, we’ve talked about sort of that mid-single-digit range growth for the overall business. And that’s comprised of low single-digit expectations in both North America and Europe and then low double-digits in Asia. I think both in North America and Europe, we wanted to make sure with the uncertain consumer backdrop that we’re planning prudently for the year. And I think we see some of that in terms of the work we have with our accounts, a bit more of a cautious approach. And I think considering the volatility we’re experiencing, we think that, that is a prudent way to plan for the year, focus on those things in our control. And then depending on how the year evolves, if there’s stronger consumer demand of that, we’re ready to address that, both in the U.S. and Europe as that comes.

Jay Sole — UBS — Analyst

Okay, great. Thank you so much.

Zac Coughlin — Executive Vice President, Chief Financial Officer

Thanks, Jay.

Operator

Thank you. Our next question will come from Dana Telsey with TAG Advisors. Your line is open.

Dana Telsey — Telsey Advisory Group — Analyst

Good morning, everyone, and congratulations on the nice progress. As you think about Europe and the order book going forward and what you’re seeing in wholesale globally, what trends are you seeing? How are you seeing order books moving forward and the full expression of your new collection being distributed, balancing that, Stefan, with certainly DTC, how you’re thinking about the growth both for e-commerce and your own stores as we move through ’23? Thank you.

Stefan Larsson — Chief Executive Officer

Well, thank you, Dana. So when we look out for 2023 in Europe, we see strong consumer demand. So if we look at Q1, we see strong consumer demand continuing from Q4 last year. So start of the year, strong consumer demand in both D2C channels and in wholesale sell-throughs. So consumers’ response to our spring product is strong. For the back half of the year, our wholesale partners are taking a more cautious approach, and it comes back to the volatile macro.

What really makes us have a uniquely strong position in this situation is that in Europe, in particular, we have a very, very strong ability to react into and fulfill in-season demand, both in D2C and in wholesale. So continuing to see the consumer strength that we see now for the rest of the year, we will be able to react and fulfill into that beyond the pre-planned order books.

Zac Coughlin — Executive Vice President, Chief Financial Officer

Yeah. And I think just to sort of talk a bit more to put some numbers around that, Dana, around the European order books. Just as a reminder, for spring ’23, we had order books in at high single-digits. And we’re happy to say that, that is actualized fully as product — supply chains normalize and products that are showing up earlier than expected. Now keeping in mind that’s about in line with where pre-pandemic was, but earlier than us or the accounts were planning, the accounts have been very eager to take that product. So we’re able to ship partially in fourth quarter and the rest early here in the first quarter.

And we’re seeing from those floor sets as they’re setting a strong consumer response. I think we feel great about the spring order book. As Stefan mentioned, the fall order books have come in, and the numbers are low single-digits from a growth perspective, which is not aligned with what we’re seeing from consumer response today. So we believe they’re taking a cautious outlook, and we’re aligning our overall expectations for the year to that.

But I do think it’s important to highlight what Stefan had mentioned that, and we saw specifically through the COVID period and all that volatility, our European operating model the team has built, the Never Out of Stock fulfillment model, best-in-class, we’re able to chase quickly into demand that showed itself then. And I think as consumer trends stay where they are, we believe we’ll be well positioned to do that as well heading into the year.

Dana Telsey — Telsey Advisory Group — Analyst

Got it. And then just lastly, just on marketing, how do you see marketing progress through the year? And what percentage of sales do you see marketing be coming? Thank you.

Stefan Larsson — Chief Executive Officer

Yeah. Thanks, Dana. So on the marketing side, as I mentioned in my prepared remarks, Calvin — Jonathan and the Calvin team has done a fantastic job to start with Calvin, and Calvins or nothing is the campaign umbrella. So it’s very much connecting back to the iconic beloved DNA and making it super relevant for today, whether it’s Michael B. Jordan, Kendall Jenner, and most recently, Jungkook from BTS, the BTS star, who is now becoming a Calvin global ambassador. And it was remarkable yesterday. We teased it on Instagram.

Zac and I were following the reaction hour by hour. In a few hours, we got 1.5 million likes. We got 157,000 comments like from our customers, our consumers saying things like, our dream has come through. I’m dying. My life is complete. I’m ready to die. I’m crying right now. So it’s that — you can only do that if you have an iconic beloved brand like Calvin and Tommy and then connect that with incredible products and incredible talent. And then something I saw late last night, a team member sent through — Tommy and Shawn Mendes are doing the Classics Reborn Campaign, also focusing on the DNA, the classic American cool, the style icons and making them relevant for today, and fantastic response to that. And what I received last night was a video clip from one of the — it’s called the Artz, one of the premier shopping centers in Mexico City. Shawn Mendes were there and did an immersive appearance and thousands of people screaming, going wild.

So it’s this fantastic balance between the iconic timeless DNA of the brand and then making it current. So these campaign umbrellas will just continue. And it’s for us, it’s about systematically repeatedly executing better and better and better. So that’s from a marketing perspective. And then we — then as I mentioned, we are investing more in marketing. So Zac, will you be able to share more of the details of what that means in numbers?

Zac Coughlin — Executive Vice President, Chief Financial Officer

Yeah, we’re making a commitment this year to increase marketing spend, both in dollars and I think importantly as well in percentage of revenue. So the percentage of revenue will increase 30 basis points to 40 basis points this year to almost 6%. And that’s just the first step on the journey. The key investment priority for us as we work on delivering the PVH+ Plan. So a big step forward to almost 6% this year.

Dana Telsey — Telsey Advisory Group — Analyst

Thank you.

Zac Coughlin — Executive Vice President, Chief Financial Officer

Thanks, Dana.

Operator

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

Christopher Nardone — Bank of America Merrill Lynch — Analyst

Hey guys, good morning. Can you discuss the underlying assumptions around your North America wholesale business? It’d be very helpful if you could discuss how sellout trends are faring for both brands, given your healthier inventory position? And then whether you think you’re in a position to chase if retailers begin to turn more positive as we move through the year? Thanks.

Stefan Larsson — Chief Executive Officer

Yeah. Thanks, Chris. So in North America, as we mentioned, the outperformance in North America was driven by, first of all, our D2C business. But there is an underlying driver of improvement in North America that I really want to mention, which is — and it connects to wholesale, which is how we strengthen our performance in the full price wholesale channel with Macy’s. So we are seeing improved sell-through trends for both Calvin and Tommy.

And we see tremendous potential here in working with Macy’s and expressing our full price presence in North America stronger. For both Calvin and Tommy, we are seeing so much potential there. And the exciting part in Q4 and start of this year is that we’re seeing it translate to high growth and improved sell-throughs. With that said, there is a cautious outlook in North America as well from all our wholesale partners coming back to the macroeconomic volatility.

Zac Coughlin — Executive Vice President, Chief Financial Officer

Yeah. I think we expect, as we’d said, DTC to be our big focus in North America. And then closely behind that, as Stefan mentioned, sort of our full price execution with our key partners like Macy’s. Beyond that, we do expect the broader wholesale environment to remain sort of, I would say, the accounts are cautious. And with our focus increasingly on those global bestsellers and that core set of products, I think when we see the improved sellout, we’re able to work closely with those partners. And they’re eager to follow back in with inventory as we’re building something closer towards a Never Out of Stock model with them as we go through. So I think we’re optimistic that should those trends continue what we’ve seen earlier in the year that we’ll be able to continue to fulfill that demand regardless of where the consumer demand goes.

Christopher Nardone — Bank of America Merrill Lynch — Analyst

Okay, great. And then just if I could squeeze one more in, just on China, can you just talk about how that reopening is going? And then what level of recovery are you assuming in the back half to get to your total sales guide?

Stefan Larsson — Chief Executive Officer

Yes, absolutely. So China, as I mentioned before as well, China as a market is a very important growth market for us, and seeing the reopening and seeing the consumers come back has been really strong positive trends. So that’s why we are planning Asia for 2023 as the highest growth region. So what we see is very encouraging. We have time for one more question.

Operator

Thank you. Our last question will come from Ike Boruchow with Wells Fargo. Your line is open.

Ike Boruchow — Wells Fargo — Analyst

Hey everyone, let me add my congrats. Maybe just looking out the next couple of years, Zac, it’s only — it’s been about a year since the Analyst Day and the PVH+ Plan targets were given. Your 15% margin goal for ’25 was laid out. You’re looking for 10% this year. How are you feeling a year later in your progress towards that 15%? And then I guess to that point, beyond ’25 when these licensing dynamics start to play in, I assume that’s dilutive to the margin. Is there some way we should think about margins past ’25 as the business model changes a bit more from owned away from license? Thanks.

Stefan Larsson — Chief Executive Officer

Yeah, thanks, Ike. It’s Stefan here. So if I start from just an overall business perspective and value-creating perspective, first year in now into the PVH+ Plan, there is significant growth opportunities both from a revenue and a margin expansion perspective in each of — through each of these five growth drivers, the product, the increased marketing, consumer engagement, the marketplace execution, the demand-driven supply chain that we are moving towards, the cost efficiencies and then investing behind these growth drivers.

So one year in when I look at this, I see that we are just in the beginning of unlocking this value. And it’s independently of macro because so much we have in our own hands. And what excites me the most is to see how we as a team has come together during this year and really locked into the direction we set out. And now it’s just about consistently delivering improvements. Zac?

Zac Coughlin — Executive Vice President, Chief Financial Officer

Now we built our PVH+ the financial model with flexibility. Over any multi-year period, it’d be safe to assume that we’d experience the full range of macroeconomic cycles, and we’ve seen that. So obviously, we’re going to drive growth when those opportunities are there just like we saw in 2022 with high single-digit underlying growth in all dimensions.

And we will also continue to manage the remainder of the P&L to drive profit efficiency. So the DTC channel mix and pricing power to drive gross margin improvement and all elements of cost, product cost, supply chain costs, we’ve talked about that already today and all elements of SG&A that we knew and we talked about, we had efficiencies to work our way through. So we knew the journey would not be linear. And obviously, it hasn’t been in that first year. But as Stefan said, we’re just as committed to delivering the targets as we laid out a year ago.

Stefan Larsson — Chief Executive Officer

And the more — just to build on what Zac is saying, the more we lean in as a team on these five growth drivers, we also see the specific opportunities, and then we unlock them step by step.

Ike Boruchow — Wells Fargo — Analyst

Great. Congrats.

Stefan Larsson — Chief Executive Officer

Thank you very much.

Zac Coughlin — Executive Vice President, Chief Financial Officer

Thank you very much. Appreciate it, Ike.

Stefan Larsson — Chief Executive Officer

So with that, we are ending our call and looking forward to reconnecting next quarter.

Zac Coughlin — Executive Vice President, Chief Financial Officer

Yeah.

Stefan Larsson — Chief Executive Officer

Thank you.

Operator

[Operator Closing Remarks]