Raf Simons’ high-concept overhaul of CK Jeans was a “fashion miss.”
And investments in his runway collection, dubbed 205W39NYC, will be cut as marketing budgets shift to influencers and more approachable messaging.
That’s the word from chairman and chief executive officer Emanuel Chirico of PVH Corp., which has owned Calvin Klein since 2002, as he laid bare his “disappointment” in its third quarter performance during a call with investors Friday morning.
He assured Wall Street that he’s taking swift action to correct the brand direction, which the Belgian designer skewed too fashion forward and too expensive for its core consumer since he took over the helm as chief creative officer in 2016.
“For holiday 2018 we are shifting more of our media spend from halo marketing to more commercial digital and social media advertising,” said Chirico. “We have upped the frequency of our posts on social platforms like Instagram and we are increasingly using micro influencers and hosting local activation to drive meaningful engagement particularly with Millennials and Gen Z. These changes are just the beginning of what you will see as we head into 2019.”
PVH’s move to shift the marketing strategy comes after WWD reported earlier this week that sources indicate Calvin Klein might be making a change in its photographers, hiring Glen Luchford to photograph the spring campaign, rather than Willy Vanderperre, who has worked closely with Simons since he joined the brand.
Chirico’s negative take on Simons’ tenure marks an about turn from as recently as May when he told investors: “We couldn’t be happier with Raf’s contributions to the brand and how it’s really benefited not just the 205 business, but clearly has benefited what’s gone on in our jeans and underwear business, in particular, where we’ve put a real focus on the marketing investment. As you go into spring, but really into fall 2018, you’re going to see that black thread that starts with the 205 collection. You’re really going to see that carry through our jeans, our sportswear and even our underwear business.”
The troubles at the brand raise questions over Simons’ future at Calvin Klein given that his contract is up for renewal in August. He currently has direct oversight of the underperforming 205W39NYC collection and jeans, as well as a raft of other categories, global marketing and communications, visual creative services and store design.
Michael Binnetti, a retail analyst at Credit Suisse, said: “I think the kind of product that they put out that didn’t work seems like the kind of product that he is really enthusiastic about. It might be a little bit out there and a little bit too fashion forward for the true core Calvin Klein premium customer.”
He added that if the designer is unwilling to change some of the products, “he might be better off elsewhere.”
When asked if he thinks Simons will stay on after August, Steven Marotta, analyst at CL King & Associates, said he had “no reason to believe otherwise.”
Diving into the detail of what went wrong on Calvin Klein Jeans, which makes up about 16 percent of its business, Chirico explained that some elements of the relaunch were “too elevated and too fashion-forward for our core consumer.” That resulted in earlier and deeper markdowns than previously planned.
“From a product perspective we went too far, too fast on both fashion and price,” he said. “We’re working on fixing this fashion miss and we believe that our CK Jeans offering will be much more commercial and fashion-right beginning in 2019 especially for the fall 2019 season.”
His mission going forward is “to get back to what is Calvin and the core DNA of the brand”, adjusting the spring buys, while for next fall the product has been “completely reengineered.”
As for the 205W39NYC collection, PVH has invested between $60 million and $70 million in it, but has not seen returns that it had hoped for.
“We don’t think that we’re getting the full payback on some of those investments,” he said. “We’re taking a really hard look on the planned investment spending that we had as we look into 2019 and taking a hard look at that and whether those are necessary.”
Chirico told investors to watch gross margins going forward.
“On a personal level, for me, this is a credibility issue,” he said. “And I really feel strongly about what needs to be done and the actions that need to be taken as we go forward. So we will reposition the expense structure.”
The disconnect between spending and sales was clear to see in Calvin Klein numbers for the third quarter. Earnings before interest and taxes decreased to $121 million from $142 million a year earlier, which the company said was “primarily attributable to an approximately $10 million increase in creative and marketing expenditures compared to the prior-year period.”
The firm also cited gross margin pressure, principally due to more promotional selling in the Calvin Klein Jeans business, particularly in North America.
PVH revenues increased 2 percent to $963 million over the year. Within that, Calvin Klein International revenue rose 3 percent, while North America revenue edged up just 1 percent to $481 million, as growth in the wholesale business was partially offset by a 2 percent comparable-store sales decline.
Nevertheless, analysts were generally bullish that PVH could turn Calvin Klein’s fortunes around.
Alex Arnold of Odeon Capital said, “They’ve recognized and acknowledged where they have to make changes and they’re being very proactive about it.”
Binnetti added: “If it was another company that wasn’t as good at this I’d be more worried but I give them the benefit of the doubt that they’ll be able to fix this.”
As for the ongoing trade war between the U.S. and China, which may take another twist this weekend as the heads of the two superpowers meet at the G20 leaders summit in Buenos Aires, Chirico said he’s concerned about the impact it could have on “two great American brands” like Calvin Klein and Tommy Hilfiger if the situation worsens and anti-American sentiment rises.
PVH’s stock price took an dip right after it released results Thursday afternoon, but the price was up 0.1 percent at $109.94 in midday trading Friday.