Fashion’s major players are hoping for the best, but girding themselves for the second half.
The European debt crisis has moved into a new and ominous stage — Spain said Tuesday it was being shut out of the capital markets — the U.S. job market continues to disappoint and growth in China, India and Brazil is slowing.
Investors haven’t recovered from word the U.S. added just 69,000 jobs in May and are stuck in a holding pattern ahead of Congressional testimony from Federal Reserve chairman Ben S. Bernanke on Thursday. Some are looking for hints that the central bank is ready to step in to help speed up growth. The U.S.-centric S&P Retail Index slipped 0.25 points to 592.97 Tuesday and is down 9.7 percent from its all-time high on May 2.
Despite the ominous economic stirrings, executives from VF Corp., PVH Corp., Coach Inc., Warnaco Group Inc., J.C. Penney Co. Inc. and others tried to strike a positive tone as they made their pitch to investors at the Piper Jaffray 32nd Annual Consumer Conference in New York.
In Penney’s case, Wall Street didn’t like the message, sending the retailer’s stock down 4 percent to $24.27 after chief executive officer Ron Johnson backtracked somewhat and said the chain would tweak its marketing message, once again appealing to shoppers with the word “sale.” On Feb. 1, the chain eliminated coupons and moved to a pricing program with monthlong deals on some goods and clearance sales on the first and third Fridays of each month.
“[We’re] moving away from the word ‘monthlong’ value — because no one really understood that — to calling it…a sale. We’ll run 12 a year, that’s a messaging change within our vision for how we want to compete,” Johnson said. “As the year goes on, the back half will be better, the customer will understand, and there will be a lot of [new] product, you’ll see.”
Johnson stood by his plan to reinvent the 1,100-door chain and said he liked the progress the company was making. “There will be one year of sales going down that sets the stage for a year of takeoff, because what really drove the volume was the couponing and once that’s out of the system, we believe that our products, our understanding of the pricing strategy, our flow is going to create very significant growth over time at a much better profit model,” he said.
Once Penney’s has its business model set, he said it can be a growth vehicle, opening more stores in the top metropolitan areas.
While investors were keen for the details of Penney’s turnaround efforts, the questions at the conference’s other sessions focused on broader economic issues. Most of the executives acknowledged they were feeling the pinch of macro-economic woes and were prepared for the market to weaken further, but each argued in their own way that they had sufficiently diversified their operations to continue to grow.
Emanuel Chirico, PVH’s chairman and ceo, is planning his business more conservatively than current trends would indicate given the uncertainty in Europe.
“This is, I would argue, similar to what happened to us in 2008 in some regard,” Chirico said, comparing Wall Street’s financial crisis with the situation in Europe. “This is really a financial debt issue that needs to be solved with the currency that’s not fully controlled by a corporate union….This one is potentially different than any other slowdown.”
About 70 percent of PVH’s European business is done through wholesale accounts and Chirico said the region’s sales are up about 13 percent for spring and summer, but that the order book is up 4 to 5 percent for fall and holiday.
“The nice thing about Europe is the visibility is much longer than in the States,” Chirico said. “In the United States, when you get an order from a department store, it’s worth about as much as the paper it’s written on, you know because if the business softens, the economics here are such that I’m guaranteeing the gross margin to department store.…In Europe, it’s much more gentlemanly. It’s much more of what the United States used to be 25 years ago. An order is an order, the retailer stands behind it.”
Even so, VF’s ceo Eric Wiseman said European retailers are waiting longer to place orders.
“Customers in Europe are committing much, much later,” he said. “Retailers are committing at the last possible date we’ve given them that we can make the product. They want to know as much as they possibly can about their inventory and the most recent trend before they commit.”
After expanding at a 16 percent clip in Europe last year, Wiseman said the region posted 13 percent growth in the first quarter and is expected to post “low-double-digit growth” going forward.
VF, like its global competitors, also faces headwinds in North America and Asia. “Our growth rates have slowed as a result of the economic conditions,” Wiseman said. “We’re not immune to this stuff, but we have so much momentum coming in. For us we’re still able to deliver solid growth.”
Southern Europe was singled out as particularly weak, which should come as no surprise given acute fiscal troubles in Greece and Spain and, to a lesser extent, Italy.
“Europe has been a struggle for us,” said Martha Olson, group president of intimate apparel and swimwear at Warnaco. “It’s probably been a little bit more of a struggle because of our concentration in Southern Europe. So Southern Europe still remains challenging, Northern Europe has been very encouraging for us. What we saw in May is that Europe itself was actually quite stabilizing, saw some pluses there that, hopefully, are a trend.”
In the U.S., David Jaffe, president and ceo, Ascena Retail Group Inc., described the economy as “squirrely.” “I’m not sure what else to call it,” Jaffe said. “I just doesn’t feel solid. It doesn’t feel like we have the strength that we had as recently as three months ago, four months ago, when we were coming out of a, at least for us, a very strong holiday season.”
Here’s a look at what other executives said on Day One of the two-day conference. Victor Luis, president international group, Coach Inc. • “For the moment, our plan is to stick with the 30 [new stores in China] and we see it as a wonderful opportunity to separate ourselves from the more traditional brands who may be more concerned about the macro environment. One of the reasons we’re less concerned has a lot to do with the fact that we are in an accessible luxury positioning which is priced at about half of the traditional luxury brands. We believe that that gives us, of course, a much broader consumer base to work with, especially in a very fast-growing middle class such as China.” Russell Bowers, vice president and chief financial officer, retail, Guess Inc. • “We made the decision roughly 15 months ago to stop playing the promotional markdown game in a mall environment that has been very competitive in that area for, really, the last three to four years….Despite the pressures on cotton costs, we were able to increase our profitability in the North American retail business throughout the last three quarters….Our traffic was down in the high-single digits during the first quarter. The primary place where that’s coming from is that markdown customer. The price-sensitive customer who used to come in has realized that we’re not in that business anymore and she’s not coming into the store.”
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