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PVH Still Bullish on Second Half After Tough Q1

CEO Emanuel Chirico expects Calvin Klein initiatives to take hold.

PVH Corp. chief Emanuel Chirico on Thursday remained confident in the firm’s expectations for a stronger second half even though Wall Street registered its disapproval of the company’s first-quarter earnings miss and lowered full-year guidance.

Shares of the New York-based firm fell $10.59, or 8.1 percent, to close at $120.09 in trading Thursday following the company’s disclosure late Wednesday of adjusted earnings for the first quarter of $1.47, 2 cents below analysts’ consensus estimates.

But in a Thursday morning conference call with analysts, Chirico, chairman and chief executive officer of PVH, stressed that initiatives to improve the struggling Calvin Klein jeans business acquired when PVH purchased The Warnaco Group Inc. in early 2013 would produce dividends in the second half. The generally easier second-half comparisons facing the company and industry should also help.

“The guidance takedown is a reflection of the near-term sales and margin pressure in our North American businesses,” he said. “I strongly believe that our long-term growth strategies for our Calvin Klein and Tommy Hilfiger businesses remain intact and that the planned strategic investments we are making in our Calvin Klein business will accelerate sales and earnings in the second half of 2014.”

Profit guidance for the full year was lowered 10 cents to a range of $7.30 to $7.40 a diluted share on an adjusted basis.

Although it puts added pressure on the bottom line, Chirico noted the company is boosting its capital expenditures in the second half by $12 million in North America and between $5 million and $6 million in Europe to produce the best possible presentation of the redesigned, retooled Calvin Klein jeans and underwear businesses in its customers’ stores and its own. “It’s night and day from what it was,” he said, “and we believe that’s going to really drive the business back and get the Calvin Klein brand, reposition designer jeans back to where their heritage has been as the brand that started designer jeans around the world.”

After essentially putting the Klein jeans business on hold with wholesale customers as PVH worked to integrate Warnaco and sought to make the brand less dependent on off-price distribution, PVH now expects to increase Klein’s retail square footage in North America 50 percent on the men’s side and 35 percent on the women’s side in the second half.

“And most of that is in top doors,” Chirico boasted of the men’s effort. “I think it’s an endorsement that, on the product itself, that the retailers are getting behind it. Now, clearly, the consumers get a vote and we have to see those sell-throughs.”

The ceo noted improvement in PVH’s retail businesses since the arrival of better weather in April. The Heritage Brands business stores saw an 11 percent decline in same-store sales during the first quarter, a figure that has moderated to a low-single-digit drop since the second quarter began on May 5. The Calvin Klein and Tommy Hilfiger retail businesses in North America are “on plan,” Chirico said, with gains of between 2 and 3 percent.

The ceo noted that most of the housecleaning in Europe for Calvin Klein is now behind the firm. He also pointed out that Tommy Hilfiger has resumed growth in Spain after more than three years of contraction but that conditions in the Italian market haven’t markedly improved.

Asked to update the status of PVH’s e-commerce business, he pointed out that Tommy Hilfiger profitably brings in about $85 million a year in the channel and that the business is growing at a rate of about 20 percent. PVH is now in a position to centralize management of Calvin Klein’s e-commerce activities and will be launching sites in Europe and Asia for the brand.

Previously, e-commerce for the name had generated about $20 million and “lost a couple of million dollars” on the bottom line under the old model, Chirico noted.