PVH Corp. will be on the sidelines of the acquisitions arena for at least the next two years as it completes its unexpectedly bumpy integration of The Warnaco Group Inc., emphasized PVH chairman and chief executive officer Emanuel Chirico at the company’s annual meeting on Thursday in New York.
“They are all off the table,” he said of potential deals, during an interview following the meeting. “The only things you will see are a continual process on Tommy [Hilfiger] and Calvin [Klein], investing in those businesses. Some of those investments might be taking back geographic regions, product categories, franchises, distributors — those will be the type of very small acquisitions we’d be thinking of. But no brands for the next 24 months. We have enough to focus on, and there’s plenty of room for growth.”
PVH closed its acquisition of Warnaco in February for $2.9 billion, bringing the latter’s Calvin Klein underwear and jeans businesses into the PVH portfolio, which includes ownership of the Calvin Klein and Tommy Hilfiger brands. In March, PVH said investments needed to upgrade the Warnaco business would be higher than initially anticipated and those costs would dilute its 2013 adjusted earnings by 25 cents a share, rather than add 35 cents as it originally forecast last October.
“This year we’ve really characterized, from a financial point of view, 2013 as a transition year. We are stabilizing the Warnaco businesses, integrating those Warnaco businesses, beginning to put them on our systems and operating platform,” said Chirico to shareholders. “We are investing in those brands and those product categories — jeans and Calvin Klein underwear — and at the same time looking to make investments in some of [Warnaco’s] heritage businesses, particularly Speedo and Warner’s, as we go forward.”
The combined companies generate revenue of $8.1 billion, behind only VF Corp.’s $10.9 billion in revenue among the largest U.S. branded apparel companies.
Warnaco’s underwear business is healthy, but turning around the troubled Calvin Klein Jeans unit is a key priority for PVH. The business is unprofitable in Europe, where PVH plans to close 25 to 35 underperforming Calvin Klein Jeans stores. In North America, the business is underperforming operating profit target levels by 500 to 600 basis points, with distribution overweighted to the off-price channel and total sales declining in the high single digits last year. Asia and Latin America are brighter spots for the jeans business.
“In its two more mature markets of Europe and North America, it’s a real struggle in jeans and it doesn’t make a lot of sense to us,” Chirico told WWD. “It’s an iconic category for the brand, and to have it underperform is something that we really need to turn around in the next 12 months.”
Calvin Klein’s total retail sales hit $7.6 billion last year, with 52 percent in North America, 23 percent in Europe, 19 percent in Asia and 6 percent in Latin America. About half those sales are from licensed product, with fragrance maker Coty accounting for $1.4 billion and G-III, which makes Calvin Klein outerwear, women’s sportswear, dresses and handbags, among other categories, comprising $1 billion in retail sales.
Calvin Klein is sold in nearly 2,800 branded retail locations, including 2,000 company-owned doors, as well as more than 20,000 wholesale doors as of May. Total Calvin Klein retail sales are forecast to grow 8 to 10 percent annually through 2016, hitting $10 billion.
Europe, which accounts for 20 percent of total Calvin Klein sales, has been a drag on the brand across categories. About 70 percent of its sales in the region are concentrated in economically deflated Spain and Italy, resulting in anemic operating margins that hover in the low-single-digit range.
The company plans to reposition the brand across much of the market, exiting wholesale doors that do not fit into the brand criteria, improving the design and quality of jeans and bridge product and investing in supply chain, shops-in-shop and retail stores.
“We see 2013 as an opportunity to stabilize the business and position it for growth in 2014,” said Tom Murry, ceo of Calvin Klein Inc.
In contrast, 70 percent of Tommy Hilfiger’s European sales are in Northern and Central Europe, and spring bookings were up 4 percent and fall bookings up 10 percent for the brand. “In a difficult retail environment, retailers like to go a little safe and go with proven brands and we’ve benefited from that,” said Fred Gehring, ceo of Tommy Hilfiger and PVH’s international operations.
Tommy Hilfiger has global retail sales of about $6 billion, with 42 percent in Europe, 37 percent in North America, 12 percent in Asia and 9 percent in Latin America. The brand is present in 1,250 branded stores globally, including 590 company-owned stores, and more than 10,000 total points of sale as of last month.
In its own stores, Tommy Hilfiger same-store sales were up 4 percent in the first quarter of this year in Europe, and up 5 percent in North America.
Tommy Hilfiger forecasts $3.4 billion in total revenue this year and an EBIT margin of about 14 percent. Calvin Klein revenue will reach $2.75 billion this year, with an EBIT margin of 15.5 percent.
In PVH’s heritage division — which includes Izod, Arrow, Van Heusen, G.H. Bass & Co. and now Warner’s, Olga and Speedo — total revenues this year are expected to reach $2.05 billion, with 69 percent in wholesale and 31 percent in retail. “Sometimes I get up here and feel like I’m between two supermodels, Heidi Klum and Cindy Crawford,” said Ken Duane, ceo of wholesale, of the intramural rivalry with the more glamorous Calvin Klein and Tommy Hilfiger divisions at PVH.
The heritage division has long trumpeted its dominance of the furnishings categories in department and chain stores, where its owned and licensed brands ring up a 50 percent unit share of all neckwear in the U.S. and 45 percent of dress shirts. PVH also sells 19 percent of woven sport shirts and 11 percent of knits shirts in the channels.
The heritage brands’ retail stores are undergoing a long turnaround process, with soft sales and EBIT margins of only 2 percent this year. The goal is to bring that up to the high single digits by improving product quality, elevating the in-store experience, closing poorly performing doors and optimizing the real estate portfolio, said Duane.
PVH was a key player on the brand side of Ron Johnson’s ill-fated attempt to give J.C. Penney Co. Inc. an upscale makeover, with its Izod brand selected to open prominent in-store shops within the department store. Chirico said those units, which showcase the sportswear label “in its full grandeur,” have been strong performers and that PVH is upbeat about J.C. Penney’s new strategy under Myron “Mike” Ullman, who returned to the ceo role in April, in connection to Johnson’s ouster. Izod is on track to double sales at J.C. Penney over the next few years, and more than 40 of its shops will increase in size from 600 square feet to more than 1,100 square feet.
“We believe in the J.C. Penney management team and how they are positioning the company,” said Chirico, who was optimistic that the retailer’s U-turn back to aggressive value pricing and marketing would boost its sinking sales. “We think that will go a long way not only in bringing our categories back, dress shirts and neckwear, but also a lot of what’s going on in their other core categories — big areas like underwear and socks and hosiery, where they really suffered [under Johnson] and where Penney’s was [previously] very profitable.”
At the same time, Chirico cautioned, “From a financial balance-sheet point of view, [Penney’s] is not the same company it was 24 months ago. There is a higher level of risk and we manage the risk and we’ll react to the market trends. There are no guarantees in life, but it is a $15 billion retailer with a huge market share, and our brands need to be there because the American consumer shops there.”
Ullman has twice visited PVH headquarters in New York over the past several months to talk up its new merchandising and pricing strategies as well as its financial restructuring, in an effort to revive confidence among its partners. “He’s been in the market pretty significantly, visiting suppliers and vendors. It’s been a big part of the initiative,” said Chirico.