Speaking with WWD after the company’s annual meeting here Thursday, the chairman and chief executive officer noted that the Heritage unit has come under pressure from a changing factory outlet business and its own missteps in the dress shirt business. The division’s operating margin – operating profit as a percentage of sales – slipped to 6.2 percent last year from 7.8 percent in 2013.
The wholesale portion of the Heritage group, anchored by the Van Heusen brand, has generally enjoyed high-single to double-digit margins.
“I’ve been here for more than 20 years,” Chirico said. “Until last year, we’ve had one difficult year in dress shirts in that time. We believe that will be behind us when we get out of the second quarter of this year and we really start to show quarter-by-quarter, sequential improvement.”
A larger problem has been the composition and appeal of “the outlet world,” he said, “that has really become a designer label, luxury market and [mainstream brands] just can’t compete in that market any longer. We sold Bass and we’re closing Izod [retail operations] this year, and our Van Heusen business, which has always been the strongest, continues to operate but will continue to shrink.”
PVH said in January that it would shutter 100 Izod stores and convert another 20 to Calvin Klein or Tommy Hilfiger nameplates.
Asked if PVH was considering any alternative strategies for the stores moving to the Calvin Klein and Tommy Hilfiger formats, the ceo said that it might experiment with some category-specific stores under those brands, such as in accessories or children’s wear.
“We had about an $800 million retail business that eight years ago was able to compete in the outlet operating environment and earn 10 percent on that volume,” he said, “but the world has changed.”
More than 80 percent of PVH’s Heritage Brands business, which generated $1.78 billion in sales last year, is in wholesale. In response to a shareholder’s question about midtier retailers, Chirico said PVH had been fortunate to have had strong relations with J.C. Penney Co. Inc. “before, during and after” the tumultuous “Ron Johnson years” and its strength in the middle tier appeared to be sustaining itself.
He also indicated that, as the 20 units being converted to Calvin Klein and Tommy Hilfiger stores complete their transitions, “sales per square foot should be three times what they were. We should be doing three times the volume in the same stores.”
Even with is struggles, particularly in retail, PVH executives have always been quick to point out that the company was essentially built around the Heritage Brands consistency as a large generator of free cash flow that enabled the company to make the acquisitions that now dominate its business.
Calvin Klein was acquired in 2002, with the jeans and underwear businesses of the brand consolidated into PVH in 2013 with the acquisition of Warnaco. Tommy Hilfger was purchased in 2010. Both now dwarf the Heritage Brands business, with Calvin Klein responsible for $2.86 billion in revenues last year and Tommy Hilfiger adding $3.58 billion to the top line.
Calvin Klein’s 2014 operating margin was 14 percent and Tommy Hilfiger’s 14.2 percent, both more than twice the 6.2 percent registered at Heritage Brands.