The brisk headwinds confronting PVH Corp.’s heritage brands business in the U.S. and its licensed Calvin Klein European business with Warnaco Group Inc. are expected to calm considerably by 2013.
In a wide-ranging conference call Thursday that touched on the company’s relationships with major accounts, including J.C. Penney Co. Inc. and Macy’s Inc., as well as Warnaco, the largest licensee for its Calvin Klein brand, Emanuel Chirico, PVH’s chairman and chief executive officer, said he expected “dramatic improvement” in the heritage business during the second half of the current year.
Additionally, he said changes being made to correct Warnaco’s difficulties with Calvin Klein should start to pay off next year.
PVH late Wednesday reported that first-quarter profits exceeded forecasts, rising 61.5 percent to $93.1 million, while revenues also beat expectations, growing 4.3 percent to $1.37 billion. Shares Thursday rose $5.02, or 6.5 percent, to $82.39.
Saying PVH is “very well positioned” in its heritage business, which includes brands such as Van Heusen and Izod, Chirico noted that second-half product costs will be down between 5 and 8 percent “and our in-store presentations are being enhanced and expanded with key customers.” He’s expecting the unit to outperform PVH’s cautious guidance for it in the remaining three quarters of fiscal 2012 “and to really see significant improvement in the second half of next year.”
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Izod’s business at Penney’s began to shrink when Penney’s embraced American Living as a “halo brand,” Chirico said of the now-abandoned Ralph Lauren Corp. program. With Penney’s ceo Ron Johnson and his team make sweeping changes to the store’s assortment and pricing and first-quarter business soft for the chain, Izod “is in the same number of doors but is getting stronger presentation and a deeper buy.” Izod, Van Heusen and Arrow’s businesses for the first quarter were “right on plan against our projections,” he added.
“Offsetting whatever chaos that Penney’s is creating in the market is just very strong business with Macy’s with our heritage brands, and very strong businesses at Kohl’s [Corp.] with our businesses there as well, both sportswear and dress shirts,” he said, adding that Macy’s Izod business is larger than that of Penney’s.
In its 2011 annual report, PVH identified Macy’s as its single biggest account, responsible for 9.4 percent of its 2011 revenues of $1.53 billion, or about $144 million. The four next largest accounts, none of which was identified, made up 10.1 percent of revenues.
Chirico characterized the heritage brands’ struggles as being “all about gross margin,” with higher costs and more aggressive promotions by stores driving down margins by 400 to 500 basis points in the heritage unit during the second half of 2011.
With prices easing and its inventories in better shape, Chirico said, “We are anticipating getting half of that back.”
On the call, Chirico noted that, based primarily on Warnaco’s struggles in Europe with Calvin Klein Jeans, PVH was pulling down its estimates for Calvin Klein royalty growth to between 3 and 4 percent on a constant currency basis, 1 point lower than its earlier guidance range.
“The primary driver of this reduction is the weakness we see in Europe, particularly in the Warnaco apparel business,” he told analysts. “In order to take the financial risk out of those businesses, we are currently projecting the European jeanswear and CK bridge businesses at contractual, guaranteed minimum royalties for fiscal 2012.”
That would translate into a decline in European royalties for the brand this year in the high-single digits. Chirico didn’t disclose the minimum royalty or royalty percentage.
Licenses for Calvin Klein jeans, underwear and swimwear last year accounted for 75.6 percent of Warnaco’s $2.51 billion in annual sales, or $1.9 billion. PVH said in March that its Calvin Klein Inc. unit next year will take the CK bridge apparel and accessories business in Europe in-house, ending Warnaco’s license for that subbrand.
PVH expects “high-single-digit growth” in Calvin Klein’s business with North American department stores, offset by a $30 million “planned reduction” in sales to the off-price channel, Chirico said.
To address recent declines in the Calvin Klein business, including a double-digit sales decrease in women’s jeans in the first quarter, Warnaco in March appointed Gap Inc. alumnus Karyn Hillman as chief merchandising officer for Calvin Klein Jeans and related accessories and promoted Mark Whyman to chief commercial officer for all aspects of the company’s Calvin Klein business. Both report to Helen McCluskey, president and ceo of Warnaco.
“We applaud all those initiatives,” Chirico said. “We think they’ll start to pay dividends in 2013. Probably, we’re not going to really be able to see that much in the business this year given lead times and cycles.”