NEW YORK — Emanuel Chirico and his team at PVH Corp. think they’ve got the right prescription to reinvigorate the ailing Calvin Klein Jeans business — shrink it to grow it.
On a Thursday morning conference call to discuss the firm’s fourth-quarter results, Chirico, chairman and chief executive officer of PVH, provided analysts with a status report on the condition of the jeans and underwear businesses picked up in the $2.9 billion acquisition of Warnaco on Feb. 13. He also outlined the steps planned to fix the struggling jeans piece.
The cuts in the jeans business will take a variety of forms, from lower sales to secondary and off-price retail accounts and the closure of unprofitable stores, to the elimination of 900 to 1,000 jobs, disclosed last week, and an effort to quickly reduce excess inventory. The downsizing will be balanced against investments to improve management, infrastructure, marketing, retail presentation and overall operational efficiencies, some affecting underwear as well as jeans. Merchandising and design upgrades at Calvin Klein Jeans are already under way and date back to Warnaco’s stewardship of the business.
The problems with the jeans business vary by market.
In North America, jeans and underwear sales are “a little bit over $500 million with 10 percent operating margins,” according to Chirico, but a “very profitable underwear business” is offset by “an underperforming jeans business” that’s been “overly dependent on the off-price and [warehouse] club channel.” Because of this lopsided distribution, “Calvin Klein has lost its leadership position in jeans with all of its major department store customers.”
Jeans and underwear generate about $500 million in Europe, but operating margins — earnings before interest and taxes divided by sales — were below 4 percent last year, a third of their pre-2011 peak.
“Our plan is to fully integrate this business into our Tommy Hilfiger European operating platform over the next 12 months,” Chirico said, adding the European headquarters will move to Amsterdam from its current base in London. The business now will be supervised by Fred Gehring, ceo of Tommy Hilfiger and PVH International.
For 2013, the Klein business in Europe is expected to be down in the low- to midsingle digits as 15 to 20 unprofitable stores are closed and sales to off-pricers and what Chirico termed “unproductive small specialty accounts” will be scaled back.
Asia was a $530 million business under Warnaco that has enjoyed double-digit growth over the last five years, and Chirico noted the need for investment to “fully integrate this business into our systems and supply chain over the next 24 months.”
Asian sales for the Calvin Klein jeans and underwear business are expected to expand about 5 percent this year. The sole sore spot has been in Korea, where same-store sales are down more than 10 percent “in the context of a difficult consumer environment and a difficult denim landscape,” he said.
“We were surprised on the logistics side, on the infrastructure side, on the supply chain side,” he said of the condition of the Warnaco businesses upon completion of the acquisition. “But…as we fix those things, without a doubt those weaknesses today create more long-term opportunity for us as we go forward, as we hopefully improve that infrastructure and supply chain….”
The ceo’s preliminary diagnosis and anticipated remedies dominated the call after PVH said Wednesday that the Warnaco acquisition, originally expected to add 35 cents a share to earnings this year, would instead subtract 25 cents from them, leading PVH to project full-year earnings per share of $7 as opposed to the $7.46 earlier estimated by Wall Street.
The bearish guidance pushed PVH shares down in after-hours trading Wednesday, and they continued on that same trajectory Thursday, closing at $106.81, down $5.98, or 5.3 percent.
Chirico said that PVH hoped to move Warnaco’s Calvin Klein businesses to an operating margin of about 12 percent from a current level of 8.5 percent in the next three to four years.
He contrasted the Warnaco deal with the 2003 acquisition of Calvin Klein Inc., which essentially made Warnaco its licensee, and the 2010 purchase of Tommy Hilfiger.
“This is a major, complicated acquisition,” he told one analyst. “It’s over $2 billion in sales in four geographic regions. I’m not going to be Pollyanna about this — this is more complicated than other acquisitions we’ve done, and it’s required us to really dig in.”