Emanuel Chirico, chairman and chief executive officer of the New York-based apparel giant, told the Nomura Retail Conference Monday that the company would consider selling some of its Heritage Brands group if the right offers came long, although it is not actively shopping Van Heusen, Arrow, Izod or the Speedo and Olga brands picked up in the 2013 acquisition of The Warnaco Group Inc.
Chirico was speaking at the Nomura Retail Conference in New York, where other speakers included Eric Wiseman, chairman, president and ceo of VF Corp., and Karen Hoguet, chief financial officer of Macy’s Inc.
PVH sold its G.H. Bass & Co. footwear business to G-III Apparel Group Ltd. for $50 million last year and acknowledged at the time that the retail business attached to its Heritage Brands had struggled.
On Tuesday, Chirico noted, “The only business [in Heritage Brands] that’s really problematic for us is our retail business — Izod and Van Heusen. It’s about a $300 million business earning low-single-digit operating margins.”
The wholesale businesses in Heritage Brands “added together are all well over 10 percent operating margin businesses,” meaning operating income exceeds 10 percent of revenues, “with very low capital investment required. So 95 percent of the [earnings before interest, taxes, depreciation and amortization] really turns into cash flow for us to invest back into the high-growth Calvin [Klein] and Tommy [Hilfiger] businesses. And so, we like that business model,” said Chirico.
Still, he added, “we continue to look at that portfolio and think about what might be pruned as we go forward or significantly shrunk to maximize the returns on that business.”
Last year, Heritage Brands was responsible for $1.99 billion of PVH’s $8.19 billion in revenue, but, on an adjusted basis, $154.1 million of its $966.9 billion in earnings before interest and taxes. The retail component of Heritage Brands lost $24.4 million on a GAAP basis and $4.2 million on an adjusted basis on $547 million in revenues.
“When you have a business like that,” Chirico said of Heritage Brands, “you’re always looking at the components of that business and judging if they’re adding value or not, are they strategic or not. So there are some assets in there that, if the right offer was made, then we could see ourselves getting out of some of those businesses.”
While the divestiture of existing businesses was characterized as a possibility, the PVH executive was more definitive in his discussion about picking up the rights to Tommy Hilfiger businesses outside North America and Europe, which are already operated directly by PVH. Chirico pointed out that there are opportunities to bring in-house Tommy Hilfiger businesses in South Korea and China and other locales in central and Southeast Asia as well as in Brazil that today are a “$500 million sales opportunity that’s being done by licensing partners” or through joint-venture partners.
“We have relatively short-term licenses or areas where we have an option to buy a licensing partner or a joint venture partner out of those arrangements over the next three to five years,” he said.
All told, conversion of Hilfiger and Calvin Klein licenses and joint-venture arrangements could translate into between $1.5 billion and $2.5 billion in sales beyond 2015 or 2016.
With the Warnaco acquisition, he said that PVH now has “control over all of the markets with just about all of the product categories that we would want for Calvin Klein.”
PVH continues to work towards rebuilding its Calvin Klein jeans business, acquired with the purchase of Warnaco, and Chirico said that PVH is seeing signs of progress, with many department stores committing to shops for the second half of the year as PVH puts more effort into the product, systems marketing and point-of-sale support. He noted that last year the Calvin Klein brand grew between 8 and 10 percent in U.S. department stores, “and that’s with the jeans business down double digits in both men’s and women’s.”
In Europe, the Calvin Klein Jeans business is about $500 million but not profitable and weak on representation outside its strongest markets, Spain and Italy, two of the nations hardest hit by the euro zone crisis.
Of the $7.8 billion in retail sales generated by the Calvin Klein brand worldwide, about 57 percent is in North America, or about $4.4 billion, and “a little over $1 billion,” mostly from jeans, underwear and fragrance, in Europe. He referred to Europe as “total white space” for the Calvin Klein brand, especially once the integration of the Warnaco business is successfully completed.
“No sportswear, no footwear, no meaningful accessories business,” he said. “There’s huge growth potential in Europe for the brand, similar to how the Tommy Hilfiger brand has been developed.”
Ideally, Calvin Klein could “mirror the product diversification and country diversification” that PVH has with its Tommy Hilfiger business.
As he has in numerous exchanges with analysts and the press, Chirico noted that the Calvin Klein underwear business remains “healthy” and “profitable.”
Wiseman focused his presentation on macroeconomic factors and how they are impacting VF. Among his key points were:
• “In general, we think the middle- and lower-income U.S. consumer is under a lot of pressure. They don’t have a lot of disposable income. When you come through a winter like this, when they’ve had to spend more to heat their homes…just something that takes discretionary income away from something else, and that’s not the kind of consumer spending that shows up in the store.…For us to grow, we have to be able to gain share with them.…And we’ve been able to grow because we have been able to speak to them in a way that is relevant to them.”
• “And we have seen the Chinese economy slow down, the consumer economy, a little bit, still leading as the fastest-growing consumer economy in the world. But it’s not growing superhigh single digits, it’s come off that a couple of points. Still a great place to do business if you have platforms and know how to make money. It’s hard to get started there, really hard.”
• “We said…when we announced our five-year plan last June that we were going to take [the e-commerce] business from $250 million to $750 million by growing it 25 percent a year.…We’re running slightly ahead of that growth rate, which doesn’t surprise us. But if there’s a channel of distribution that’s growing faster than all others, that’s the one, and we’re beginning to get good at it.”
Hoguet touched on a variety of points, including Amazon, Bloomingdale’s and Macy’s omnichannel efforts:
• “Amazon is coming. They’re trying, they’re working on it. Not having stores will be a disadvantage to them in the apparel world. The real fashion customers love to shop. They love the ability to return in store. We offer the ability to ship returns to distribution centers for free, but nobody is using it. When they do come into the store, that’s a reason to sell them something else.”
• “We started a Bloomingdale’s outlet strategy, opened 13 stores and then we paused. We wanted to make sure we learned where they did well and where they didn’t do well. Terry [Lundgren, chairman and ceo of Macy’s Inc.] is now ready to start looking at real estate and rolling out [outlets] for 2015. We’re actually quite bullish on the outlets for Bloomingdale’s. People ask, ‘Are you going to start an outlet strategy for Macy’s?’ I think it would be a bad idea because the prices aren’t that different than an outlet. We’re not talking about hundreds of stores, but a lot more than 13. It brings new customers to the base store.”
• “Single View of Inventory is when you have two buyers, but one set of eyes watching where you put the inventory. Dresses was one of first business where we began piloting this omnichannel collaboration. We’ve really improved the assortment. There were some dresses we didn’t have in some stores. Now, if an Internet sale comes back to the store, we have a full-size range of the dress so it wouldn’t be an automatic markdown. We’re going to roll this out and test it in other families of business, and Bloomingdale’s will be doing a similar test.”
• “We didn’t think buy online pickup in store was going to be important to our customers. We tested in the Washington area in 10 stores and we were wrong. Customers loved it. By July, we’ll have it in every single store. The technology we built has the ability to see real-time inventory by location. We don’t fully know how this is going to work, but we like what we saw. We built the technology to be able to get us to same-day delivery when we do that.”
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