PVH Corp. is decentralizing the design functions of Calvin Klein Jeans and cleaning up its distribution as the company seeks to return the division to acceptable levels of profitability in the U.S. and Europe.
In separate comments Thursday at the Piper Jaffray Annual Consumer Conference in New York and on a call to discuss first-quarter results reported late Wednesday, Emanuel Chirico, chairman and chief executive officer of PVH, noted that jeanswear was “the only difficult business” within the Calvin Klein brand.
On the call, he said Calvin Klein Underwear, acquired along with the Klein jeans business as part of its purchase of Warnaco Group Inc. for $2.9 billion in February, is “profitable” and “working well.”
While the Calvin Klein business overall exceeded sales and profit expectations in the first quarter, the jeans business under the designer brand has been unprofitable in North America and Europe, with sales continuing to trend downward. “We are not looking for any significant improvement in the trends of that business through…fiscal 2013,” he told analysts on the call.
While PVH takes a long look at Calvin Klein Jeans’ distribution in the U.S., which the group considers weighted too heavily toward off-price stores, it’s planning to downsize the retail footprint in Europe over the next 18 months by closing 25 to 35 Calvin Klein Jeans stores in Europe. Prior to its acquisition by PVH, Warnaco operated 100 stores under the Calvin Klein Jeans banner, 55 of which were classified as full-price and the remaining 45 as off-price.
Expanding on the jeanswear situation during his comments at the Piper conference, Chirico said the jeans businesses are currently operating “500 to 600 basis points” below the operating margins to be expected. “So in Europe it’s a business that’s losing money and in North America it’s profitable, but at lower rates,” he said.
He said that changes made since the Warnaco acquisition have been well received by PVH’s retail accounts but won’t have a substantial impact on the jeans unit’s performance this year. “The sales distribution mix is out of balance,” he said. “There is too much in the off-price channel or in the club channel compared to the regular-price channel with jeans only. On balance, the Calvin Klein brand is very well distributed to department stores throughout the world, but in the jeans category, we’re overpenetrated in the off-price channel and we need to bring that into balance over time.”
As that balance is sought, PVH will establish regional design hubs to tailor jeanswear products to local markets. “We’re just trying to bring the Warnaco jeans — the Calvin Klein Jeans business — into a model that’s consistent with the way we’ve operated” in other elements of PVH’s owned and licensed Calvin Klein businesses, he said.
One element of the challenge is that Calvin Klein Jeans generally sell at $100 and above in Europe and Asia, versus $50 to $90 in North America. “So it can’t be the same product,” Chirico said.
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PVH shares surged Thursday, rising $11.32, or 10.2 percent, to close at $122.60 after it comfortably beat first-quarter earnings expectations. Its net loss for the three months ended May 5 was $20.1 million, or 25 cents a share. Excluding acquisition- and integration-related costs, adjusted earnings per share were $1.91, 56 cents above analysts’ expectations. Revenues rose 33.8 percent, to $1.91 billion, and were essentially flat when contributions from the Warnaco acquisition were excluded.
Also at Piper Jaffray, Michael Koppel, executive vice president and chief financial officer of Nordstrom Inc., said the company had used its Fashion Rewards loyalty program, tied to its private label debit or credit card and a co-branded Visa card, to build its customer base.
The firm lowered the spending levels needed to qualify for certain benefits and last year gave Fashion Rewards members early access to the stores’ legendary anniversary sales, which resulted in the opening of over one million new accounts.
The company also began providing Fashion Rewards membership to customers of its Rack operation last year, something it hadn’t done previously.
“Rack has been such a great growth vehicle for us, and it also is a channel that tends to attract a younger customer,” Koppel said.
The company is currently testing a loyalty program in the cosmetics area, the cfo added.