After PVH Corp. reported third-quarter results that were better than expected, Emanuel Chirico, chairman and chief executive officer, told investors on a conference call this morning that the challenging conditions experienced in the third quarter will continue into the fourth — especially a difficult U.S. retail environment.
Investors were wary and traded the stock down 11.1 percent to $83.02 on Wall Street Thursday.
Sales in New York and Europe, though, are poised for continued growth.
For the third quarter, retail sales on a comparable-store basis were flat for the company. “In North America, the U.S. market in particular, was plagued by further deterioration of traffic and consumer spending trends in the company’s U.S. stores,” Chirico explained. “These stores are highly penetrated in international tourist locations and were affected by the unseasonable warm weather. Margins in the U.S. Tommy [Hilfiger] business were under pressure throughout the quarter as we were forced to be much more promotional in order to manage inventory levels.”
The ceo said for the fourth quarter, “we expect these trends to continue and are anticipating a highly promotional holiday selling season.”
Europe is also performing well, even following the terrorist attacks in Paris. “As we move in the fourth quarter, we continue to see strong comp-store sales performance at both of our European businesses,” Chirico said. “The trend of plus midsingle-digit count continues despite of a slowdown due to the Paris attacks. We have seen improving trends in all major European markets including Spain and Italy, which had been under pressure, and those markets seem to have significantly turned around. We expect these positive trends to continue throughout the fourth quarter.”
On a brand basis, the company said Calvin Klein and Tommy Hilfiger experienced strong sales in the quarter. With Calvin Klein, Chirico told investors the company continues to “see great momentum with the brand and our business more broadly.”
“Calvin Klein revenues increased 7 percent on a constant currency basis for the quarter,” Chirico said. “We have seen great progress across our businesses as we continue to expand our directly operated businesses across jeans, underwear, sportswear and accessories.”
He said Calvin Klein royalties grew 10 percent in the quarter, “further demonstrating the overall strength of the brand. We are seeing strong growth in women’s apparel and accessories. Women’s and men’s footwear and men’s tailored clothing.”
For the company’s Heritage brands, which have been repositioned in the market, Chirico said he expects sales growth to return to the “low-single digit range, moving our profitability close to 10 percent.”
“And I think that from an earnings point of view for at least the next 12 to 15 months, we’d anticipate that the Heritage business would be a contributor to our earnings growth,” he added.
For Tommy Hilfiger, Chirico sees short-term pressure on sales. “I think the pressure will come…much more from the U.S. business, which is feeling it more dramatically, [and from] the strengthening dollar and the impact it has on tourism in the United States,” he said.
But long term, Chirico said he expects the Hilfiger business to “continue to grow in the mid- to high-single digits. I think that growth will be driven more substantially from outside the United States, particularly Asia, South America and Latin America where we hope to be adding new businesses to our portfolio that are either joint ventures or a license businesses today.”
By region, Chirico said Asia continues to post “healthy sales gain from Calvin and Tommy in the third quarter driven by our China business.”
The ceo said he expects these trends to repeat in the fourth quarter “as China continues to demonstrate strong results. However, we anticipate continued weakness in Korea driven more by the border market environment and softness in Hong Kong in large part due to lack of Mainland Chinese tourists coming to the island.”
In Brazil and Latin America, business is difficult, Chirico said. Despite being volatile, he described business there as “very profitable for us.”
“We expect this business to continue to be under pressure and volatile,” Chirico said. “We believe we are gaining share from our peers and the business continues to be highly profitable. However, growth levels are significantly lower than we would have anticipated at the beginning of the year given the volatility that’s going on, particularly in Brazil.”
In a research note, Eric Beder, equities analyst at Wunderlich Securities Inc., reiterated a “buy” rating on the stock and pegged it with a $125 price target.
“In some ways the tragedy of PVH has been that in a year where it has made material operating progress and positioned the company for continued success and market share gains, [foreign exchange rate costs] has been the ‘Grinch’ that stole PVH’s comeback,” Beder noted. “That said, we believe the company’s shifts are both enduring, and will become obvious when [foreign exchange] issues wane in intensity.”