The third quarter was “very volatile” for PVH Corp., but the company’s retail business rebounded in November as more seasonal weather and heightened promotional activity attracted customers, Emanuel Chirico, chairman and chief executive officer, said on a conference call Thursday morning.
On Wednesday, the company reported that net income in the quarter rose 14.7 percent to $225.7 million, or $2.71 a diluted share, from $196.7 million, or $2.37, a year earlier. Revenues for the quarter ended Nov. 2 slipped 1.2 percent to $2.23 billion from $2.26 billion. Revenues in the Calvin Klein business rose 2 percent to $816 million while the Tommy Hilfiger business grew by 1 percent to $930 million. Foreign currency translation took a roughly $30 million bite out of third-quarter revenues.
On the call, Chirico said that early in the quarter, sales were impacted by a slowdown in store traffic in Europe and North America, driven by warm weather and reduced promotional activity in its European stores.
For the Tommy Hilfiger brand, Chirico said November comparable-store sales in Europe were up in the low-single digits for the quarter, and the company’s wholesale business is up more than 5 percent compared with last year. Calvin Klein’s North American retail stores posted a 5 percent comp gain in the quarter, but international stores were down 2 percent due to “continued softness in Europe” and “weakness in Korea” — a trend that continued into November. In Asia as a whole, he said, comps are running down 2 to 3 percent.
One bright spot for the company is its in-store shop concept. Chirico said PVH added more than 180 shops for Calvin Klein underwear and jeans in the third quarter: 115 men’s and 74 women’s. “Since we have installed these shops, we experienced a 40 percent sales increase over last year. Season-to-date, our AURs [average unit retail sales] are up between 10 percent and 15 percent over the prior year. We are scheduled to open an additional 25 new shops in January and are targeting 150 new jean shop installations for fiscal 2015.”
In Europe, Chirico said the company is experiencing a “turnaround in jeans. We’ve installed over 80 new jeans shops throughout Europe. We have significantly improved the quality level of our European jean lines with better fabrics and trims. We have begun to see an improvement in AURs. And our spring-summer 2015 order book for Calvin Klein is up 10 percent over 2014 orders.”
He said men’s jeans are outperforming women’s, but both genders are experiencing better sales results, driven in part by an increase in the opening price offering to $69.50 from $49.50. “We’ve been able to put a better product on the floor that the consumer can really touch and feel and we’re getting paid for that as we go forward,” he said. “And we think that’s a much more appropriate price point for the Calvin Klein brand to open up with on the denim floor.”
In Europe, he said, Calvin Klein is “at best, a break-even business, with underwear being profitable, and $250 million of jeans and related apparel being sold into the market at operating margins that are negative. The opportunity there, over time, is to take that business, grow it substantially and over the next four years to get it to about a 10 percent operating margin.”
In North America, the hope for Calvin Klein jeans is to continue to increase AUR, which will result in less “markdown support” to retailers, he said, and to move the category to an operating margin in excess of 10 percent, similar to that of the men’s sportswear collection.
Turning to its Heritage Brands division, a “major area of underperformance” for the company, according to Chirico, PVH will continue to “contract and shrink” the number of outlet stores under the Izod and Van Heusen names.
In the quarter, Heritage revenues increased 3 percent with a 6 percent gain in wholesale sales and a 6 percent decline in comp-store retail sales. Earnings for the division were down 15 percent due in large part by “heightened promotional activity, particularly in our own retail stores,” he said.
Chirico said the Heritage retail stores represent about 4.5 percent of the company’s total volume and “as we go forward, we will continue to see more contraction in that business. The business model just doesn’t work any longer. The outlet channel in North America has become a designer showcase with the likes of Ralph Lauren, Tommy Hilfiger, Calvin Klein, Coach, Michael Kors — those are the big players there.” So the company will continue to shave the number of stores as leases expire over the next 24 to 36 months, he said.