Emanuel Chirico

Uncertainty over the China disputes and the company’s proven ability to integrate acquisitions were two of the main topics discussed Thursday at PVH Corp.’s annual shareholders’ meeting.

Held at the Graduate Center at the City University of New York, the 33-minute event was chaired by Emanuel Chirico, chairman and chief executive officer of PVH, the $9.7 billion New York-based apparel firm.

There was no talk about the abrupt departure late last year of Raf Simons, as chief creative officer of Calvin Klein Inc., a division of PVH, and little mention about the ensuing changes and the $150 million restructuring that occurred as a result, such as the closing of Calvin Klein 205W39NYC (formerly Calvin Klein Collection) and the Madison Avenue flagship, severance fees, contract termination fees and inventory markdowns, as well as the licensing of Calvin Klein women’s jeans in North America to G-III Apparel Corp. or the departure of Steve Shiffman, ceo of Calvin Klein Inc. and the naming of Cheryl Abel-Hodges as his successor.

Chirico used the opportunity to introduce Stefan Larsson, the new president of PVH Corp., who was most recently ceo of Ralph Lauren Corp. and earlier was group president of Old Navy. “Stefan’s talent and operational track record make him a strong addition to the PVH senior management,” said Chirico.

Chirico gave a brief presentation of the businesses that make up PVH, the second largest apparel company in the world. He explained that the three distinct business — Tommy Hilfiger, Calvin Klein and Heritage Brands “are all positioned well for global growth.”

Hilfiger has global retail sales just under $9 billion, and revenues of the businesses they operate directly are more than $4 billion. “The business there has been very strong,” said Chirico.

The Calvin Klein business, which is the company’s largest global brand, had global retail sales just under $10 billion. PVH’s revenues for the Calvin Klein business they operate directly is just under $4 billion.

“This business has gone through some changes and restructuring. We clearly believe there are about 200 basis points of improvement that will be garnered in this business over the next two to three years, as well as continued growth on the top line, particularly driven from our international businesses,” said Chirico. And that was about it for Calvin Klein.

The Heritage businesses, including such brand names as Van Heusen, Izod, Arrow and DKNY in men’s sportswear, as well as Speedo, Warner’s, Olga, and True & Co., had overall revenues of $3.5 billion. He said these are predominately North America-led brands that are more moderately positioned have strong positions in the market. “This business generates a significant amount of cash flow and has enabled us to make the key acquisitions and the re-investments in our global platform as we go forward,” said Chirico.

“Our Heritage businesses continue to be managed from a real cash flow point of view and return on investments, and we’re constantly pruning that portfolio as we move forward to look for opportunities to become more efficient. It gives us significant scale from a global supply chain point of view and from an operations point of view, particularly here in North America,” said Chirico.

Chirico said that over the past 15 years the company has had a strong history of delivering strong top-line growth, on average, compounded annual revenue growth approaching 13 percent, and earnings per share over the same period of time of about 16 percent.

“Clearly, we’ve demonstrated an ability as a company to acquire businesses, integrate them efficiently, to be able to get the returns that we anticipated at the time of the acquisitions, promised to deliver to our shareholders, and we’ve been able to deliver those results consistently,” said Chirico.

In the last two years, the company has seen double-digit earnings growth and high-single-digit constant currency revenue growth “and we’ve been able to navigate through a challenging environment,” said Chirico.  In the current year, he said, the company had a strong first quarter “in a very volatile, uncertain, macro-environment.

“We’re clearly starting to feel more pressure in the macro-environment from a retail perspective, here in North America, and the pressures we’re seeing in China particularly around the trade disputes that we see,” he said. Chirico added that the tariff situation in China “has some impact and we’ll need to manage through that.

“To even a greater respect, the dispute has created a level of uncertainty,” he said. Chirico noted that the Chinese business for Tommy Hilfiger and Calvin Klein represent about 10 percent of its global revenue.

“We’re seeing some pressure in that business the last six to nine months. We are working our way through that and hopefully cooler heads prevail in the negotiations surrounding tariffs and the trade disputes,” he said. Since the acquisition of Warnaco in 2013, the company has seen strong, high-single digit revenue growth in China and strong, high single to double-digit profitability growth in China, he said. “We continue to believe our position is China is enviable and gives us a competitive advantage, but at this moment in time, is creating some uncertainty and volatility in the business as we manage through,” he admitted.

Turning to acquisitions, Chirico said the company has a history of making acquisitions and allocating capital when they make them. They do lever their balance sheet around 4x, and the company has a history of paying down that debt to make those investments over a three- to four-year period.

In the question-and-answer period, a shareholder asked about the United States-Mexico-Canada agreement and its potential ratification, and how that will impact the company, since PVH has a joint venture in Mexico. He also asked about the impact on the company of the potential Chinese tariffs, and who will eat the costs if the tariffs from China are expanded to 25 percent?

Chirico first turned to the USMCA. “We’re very supportive of that agreement going forward. Given the fact that Mexico is not a major supplier for our U.S.-Canada businesses, it will have a minor impact as we move forward economically. The ratification of that agreement will bring a level of certainty that doesn’t exist today,” he said. “The politicking around this agreement really needs to be settled and that agreement needs to be ratified. From a total trade point of view, it’s a tremendous win for the U.S. the way the agreement is being set up,” said Chirico, adding that it would result in stabilization and consumer confidence.

As far as potential Chinese tariffs, he said PVH goods imported from China four to five years ago were approaching 35 percent of its sourcing base. By midyear 2019, it’s down to 15 percent. As they move through 2019, it will be reduced to 10 to 12 percent. “We are ahead of most of our competitive set with the strategic decision to start the move away from China,” he said.

“The challenge we face is dealing with the uncertainty because there’s a potential in 45 days that we will have tariffs of 25 percent on that portion of the goods,” said Chirico. “I don’t know what the cost of my goods will be in 45 days…It could be as much…$35 million to $40 million in additional tariffs and costs of products.”

He said there are three ways to deal with it: more efficiency on supply chain, the retailers have to work on shorter margin, and the consumer will ultimately over time have to pay higher prices. “We are looking at all three of those buckets with our partners to manage through it,” said Chirico.

He said there is no window to address the issues. “The uncertainty, we’re not sure what the price of the goods should be as we go forward. Changing tickets in the middle of the back-to-school season, with 500 million units coming in, over the next six months, is an impossibility to do for all goods coming…we’re going to have to work it through. As we get to 2020, and things become more balanced, I think there’s clearly the opportunity to mitigate a significant amount of those tariff increases. But we just need the time to react.

“If this is going to happen and is necessary from a total nation point of view to be in this position, I think there would be more notice and defined period of time to give us a chance to react to it. That’s what we’ve been talking to Congress about. We’ve also talked about other alternatives, so clearly we think there are better ways than to just use tariffs….,” said Chirico.

“The uncertainty around this goes up and down, and we’ll see how the next 45 days play out. Competitively, we’re as well-positioned as anyone in the industry,” he said.

Chirico also spoke about the company’s priorities, transparency and core values. He noted that independent entities have put PVH on lists such as “Best Employers for Women,” and “Best Places to Work.” In the first quarter, the company unveiled its Fashion Forward for Good. “We recognize we have more stakeholders than just our stockholders, our primary stakeholders, but we also have to be responsible to our associates, to our partners around the world, the way we conduct business, the impacts we have on the environment, and the impacts we have on people’s lives within our supply chain…,” said Chirico. He pointed to 15 priorities with key targets, such as end waste, eliminate carbon emissions, eliminate hazardous chemicals and microfibers, develop talent, empower workers, and advance living wages. “We’re trying to not only move ourselves forward, but move the industry forward in these areas,” said Chirico.

In other news, the election of all 12 nominees to the board to serve a one-year term was approved.