NEW YORK — PVH Corp. believes it can move the Calvin Klein Jeans business back to profitability next year despite continuing softness in southern Europe.
During a conference call Tuesday morning to discuss second-quarter financial results, Emanuel Chirico, chairman and chief executive officer of the apparel giant, sidestepped an analyst’s questions about other plans for Calvin Klein apparel in Europe momentarily to discuss the critical importance of righting the jeans business acquired as part of the purchase of Warnaco Group for $2.9 billion earlier this year.
“It’s critical for us, first and foremost, to really to try to get our arms around the jeans business, have that repositioned, get some traction in that business, improve the distribution of that business in Europe and take a business that’s actually losing money and start to bring it to a breakeven, to a small profit in 2014 and then move it forward,” he said.
The task won’t be easy. Earlier he said Calvin Klein jeans in North America and Europe “continues to be the only difficult business in the Calvin Klein portfolio. We have planned those businesses down mid-single digits and are anticipating continued pressure on margins in order to move through goods for the third and fourth quarter of this year.”
He pointed out that the two Calvin Klein jeans and underwear businesses in Europe, both previously operated by Warnaco, account for $500 million in annual sales and currently generate an operating margin of about 3 percent, a figure the company wants to more than triple.
“I know that everyone is going to comment that Tommy [Hilfiger’s operating margin in Europe] is at 14 percent, but I think 10 percent at this moment in time for the next three years would be a great goal for us, to improve the 3 percent to 10 percent. And I think that clearly is the opportunity ahead.”
The effort has been further inhibited by the difficult macroeconomic conditions in southern Europe, which accounts for between 75 and 80 percent of the jeans unit’s business on the continent. Complicating top-line expectations are PVH’s efforts to clean up distribution and steer it away from the off-price channel in Europe. Commenting on prospects for spring 2014, Chirico noted that open-to-buy among many Italian accounts is down more than 20 percent, and PVH has been cautious about selling to many specialty stores “where we have significant credit collection issues.”
Meanwhile, the Calvin Klein business overall during the second quarter was strongest in South America, with 10 percent sales growth in Brazil highlighted by the strength of the brand’s jeans.
“In North America, our business continues to perform strongly across all categories, with the exception of men’s and women’s jeans,” the ceo said. “We have seen very strong performance in our wholesale men’s sportswear and our men’s and women’s underwear business. In addition, our North American retail business posted a 6 percent [comparable-store] sales increase and higher margins due to better sell-throughs at higher average unit retails.”
Furthermore, the integration of Warnaco’s operations is “on track” for completion in 2015. “And that’s the same timeline where we started the fiscal year,” Chirico said.
PVH shares pulled back $7.49, or 5.7 percent, to $124.62 in trading Tuesday as investors were disappointed with the company’s conservative guidance for the third quarter and its failure to raise full-year guidance despite beating second-quarter analysts’ estimates.
Late Monday, the company reported a net loss of $16 million as revenues grew 47 percent to $1.96 billion, with the top line raised and the bottom line lowered by the addition of the Warnaco businesses. On an adjusted basis, earnings per share were $1.39, above Wall Street and company estimates.
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