That’s what we are working. So, we’ve build assortment from that, then we make sure we have the appropriate newness and then we can continue to cut the unproductive assortment tail. So, what you see is really a multitude of efforts that are starting to gain traction. But it’s been faster than what we expected. And you will see us just continue to deliver sequential improvements.
Zac Coughlin: Yes. And Michael, on the 4Q operating margin, we’re expecting around 12% operating margin for the quarter compared to 8.6% last year, like you said, sort of high single digits. That’s up, let’s just say, 350 basis points, just to give us some composition of that. 125 basis points of that is really the full realization of the freight improvements, both rate and because of great availability, lower reliance on air freight. So that sort of booked. 125 basis points is tied to improvements in product costs. And I think as Stefan said, one, yes, macros are moving from negative to positive as raw materials are coming down. But also, David and the team are consistently now beating macros, and that will be trends that carry forward into ’24 as well.
And the last major driver of that is really the full impact, about 125 basis points of the headcount reductions we’ve taken on SG&A. So, as we look forward into 2024. Obviously, we’re not providing guidance there. But I think you can look at the composition of that gross margin improvement, those are all factors that are now in place, either structurally or from an external marketplace perspective. And so, we do expect to see those to carry forward fully into 2024. And to your question on the targets, as I stood on the stage shorter to Stefan on the leadership team, those are my commitments as well as anyone else. And I think that we’ve talked about the 15% being that bar that we’re going to set for ourselves regardless of what’s happening in the macro environment.
I think this 12% for the third — for the fourth quarter is a clear view of that because as Stefan to talk about, there’s some choppy macros now and still driving to that. And we expect to continue to drive that through to 2024 as well as that next step towards the 2025 targets.
Stefan Larsson: Yes. And coming back, Michael, one more thing when it comes to the inventory, better inventory demand-driven supply chain, what I see happening that I want to share as well is that having Eva Serrano come in and build the strength in the global product engine in Calvin, and now coming in for Tommy, both highly experienced brand builders and very strong in product, you have that David Salmon and his team’s work upfront with them on leveraging that strength in products. So, it’s the connection between the increased strength we are driving in our two global brands, with the supply chain expertise that David brings in, plus the regional execution. So, we are putting — the supply chain is at the core, working with the global brands and the regions.
And that’s — when you see — again, it feels like Eva has been here for a long time, but she has only been here since the first half of this year. And you can see the spring assortment 2024 slightly improved by slightly affected by you will see improvements coming in by Eva fall much more improvement and then it just keeps going from there. So, I’m very pleased by seeing how the team is coming together and breaking this old-school sequential handover way over and breaking it down and starting up front working together cross-functionally. And that’s whether it’s the early days of building H&M or the Old Navy turnaround or the repositioning of RAP, that’s always when I’ve seen that happening, that’s where the value over time will increase.
Operator: Our next question will come from Matthew Boss with JPMorgan. Please go ahead.
Matthew Boss : Great. Thanks. So, two-part question. Stefan, could you just elaborate on underlying demand trends for Tommy and Calvin in Europe? Maybe if we parse through some of this near-term noise, which sounds like it was weather-related? And then for Zac, just maybe on sensitivity, could you just help lay out given all of the self-help drivers and the uncertain backdrop from a revenue perspective? Could you see operating margin expansion next year in a scenario of maybe flat revenues? Or just what would that picture look like?
Stefan Larsson: Yes. Thanks, Matt. Let me start. So, if we look at Europe and the underlying demand trends for Calvin and Tommy is still being strong. Look at Q3, so when we look at Q3, we continue to grow on a record quarter in Europe last year, low single-digit growth on a record quarter last year. And that growth was on a very strong base. So, 25% up versus pre-pandemic. And then you see another to the demand growth in Europe is the strong D2C growth despite a tough macro. And then what happened in the macro was in September, we had the warmest start of the fall since the — no, 1,800 — 1,880 or something like that. So of course, impacting September. We came back and the market came back in October from a demand trend perspective, but driving — given the importance of September, an increasingly promotional environment in the market.
And we see over the Q3, we see an increasingly cautious macro backdrop in Europe and with the biggest impact on the wholesale channel. So, what we are doing there, we’re not sitting still. We are leaning into the PVH+ execution in two ways — two main ways. First, with a macro, my experience is when the macro gets tougher, it’s really important to focus on quality of sales. So, we are increasing the focus on quality of sales, even to Zac’s point, if that means selling less into the wholesale channel, but securing a strong sell-out margin, and avoiding too much inventory in the market. So that’s the first action we take. The second is really leaning into the next level of PVH+ execution. PVH+ execution makes a big difference, independently on macro, but especially in tough macro.
So, a few examples I gave in terms of the product strength that we are driving in 2024, product innovation, whether it’s technical components, fabrics, whether it’s more choice of our premium essentials, more transitional products. We see that. It seems like every season now seems to start with an unusual weather situation. We can we can sit back and say, okay, or we lean in the way we do, which is say, okay, clear. We have to do more transitional products. And that you will see already in 2024. Then in consumer engagement, having in a tough macro having market-leading brands, is a huge advantage. And the way we take advantage of that consumer engagement wise is twofold, just shot two very strong marketing campaigns for spring 2024, with mega talent amplifying the improved product strength.
So — and then in the marketplace, what’s also going to be important is to continue to invest in the consumer experience. So, you will see that in investment in our stores, investments in shop-in-shop in the digital experience. So overall, we are in a tough macro in Europe leveraging better the strength, the market-leading strength we have for Tommy in particularly in Europe, and then we have the strength of having one of the biggest growth brands in Europe in Calvin.
Zac Coughlin: Yes. And I think just to add some color to Stefan’s comments about just how disruptive the September heat wave was in Europe, we can look at our own DTC sales. We don’t typically provide intra-quarter numbers, but I think it’s really important context. Coming out of summer, our August DTC revenue was up 10% in Europe. Then the heat wave hit in September, right as us and all of our competitors were setting fall season and sales were down 7% in September. Then in October, things have recovered to being up 10%, but in a significantly more promotional environment. So, in our DTC channels, we can move more quickly. The economics of our wholesalers more difficult. And so, we see that coming through with regard to a more cautious sell-in outlook that they’re putting into place, and we’re preparing for that potential to carry forward in 2024.
