Calvin Klein RTW Fall 2018

Could the grand Raf Simons experiment at Calvin Klein Inc. be in jeopardy?

Emanuel Chirico, chairman and chief executive officer of PVH Corp., parent company of Calvin Klein, last week stated for the first time — and in unusually blunt terms, even for an executive known for being a straight-shooter — that the reimagined Calvin Klein isn’t clicking.

“While many of the product categories performed well, we are disappointed by the lack of return on our investments in our Calvin Klein 205W39NYC halo business and believe that some of the Calvin Klein Jeans’ relaunched product was too elevated and did not sell through as well as we planned,” Chirico said as the group released third-quarter results. He vowed to quickly implement a new, more commercial direction for the iconic American brand.

Describing Simons’ overhaul of Calvin Klein Jeans, Chirico said, “From a product perspective, we went too far, too fast on both fashion and price. We are 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.”

Chirico’s statements highlighted the gulf that often exists between critical acclaim and commercial realities, and the complex relationship between creative types and the business executives charged with executing their vision.

”On a personal level, for me, this is a credibility issue,” Chirico said. “And I really feel strongly about what has to be done and the actions that need to be taken as we go forward. So we will reposition the expense structure.”

Reports have been circulating in the market for the past two weeks that PVH and Simons, chief creative officer of Calvin Klein Inc., might not renew their contract when it expires in August. Simons is said to be equally disenchanted — and those both inside and outside the company speculated he could potentially walk even before his contract expires.

Emanuel Chirico

Emanuel Chirico  Courtesy Photo

When asked whether Simons’ contract was going to be renewed, a PVH spokeswoman said, “We aren’t commenting further than what Manny [Chirico] said on the call.”

Simons could not be reached for comment.

According to sources, relations between the designer and management soured long before Chirico’s public chastisement of Calvin Klein’s design direction last week. Simons is said to be frustrated by “mismanagement of resources” at the brand and  production and distribution support for the runway and jeans collections. According to the designer’s camp, the underwear division, led by Cheryl Abel-Hodges, and certain licensed products are thriving by properly exploiting the “halo” of his runway and effective deployment of the “trickle down” effect — translating ideas and design elements in approachable, commercial ways.

What’s more, Simons claims PVH has run afoul of his current contract regarding his purview over certain functions such as marketing, and other protocols.

Naomi Campbell, Raf SimonsCFDA Fashion Awards, Arrivals, New York, USA - 04 Jun 2018

Raf Simons and Naomi Campbell at the CFDA Fashion Awards in June 2018.  Andrew H. Walker/WWD

It is understood a renewal offer came to the designer in recent weeks, even though his current pact doesn’t expire until August. Sources indicated that when PVH presented Simons with the new contract, negotiations hit some roadblocks. When the designer signed his original contract he was given total creative control, and PVH was said to be trying to dial back some of that power, sources said. Simons is said to have rebuffed the new offer and is now considering his options, according to sources.

“How shameful for a company to attack its creative leader after all he’s done for them,” asserted one source. “Everyone’s assuming he’s leaving after this. He could walk out tomorrow and sue them.”

Despite Chirico’s comments, PVH is continuing with business as usual, and the company is planning to stage a runway show for Calvin’s 205W39NYC collection during New York Fashion Week in February.

To be sure, Chirico’s confidence in the Simons era at Calvin Klein dimmed sharply in a matter of months.

As recently as last May, the ceo was trumpeting the designer 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.”

In an interview in October when he received WWD’s Edward Nardoza Honor for Corporate Leadership, he said he was pleased with the hiring of Simons. “It was Steve’s recommendation,” he said referring to Calvin Klein ceo Steve Shiffman. “I met with Raf throughout the process. It was not only a big change and investment we were making, but the idea of bringing in someone of that skill level. Recognizing there would be a huge cultural change. So yes, I was intimately involved in that decision. It’s worked really well so I’ll take some credit for it. You make those decisions, you keep evaluating those decisions, and you hope that you stay on the strategic course.”

Shiffman’s compensation is tied to the performance of the brand under Simons’ design purview.

A May regulatory filing from the company noted, “Mr. Shiffman received an upward adjustment of his bonus of  $120,000 [13 percent of his base salary] for his efforts, including the execution of his initiative to create a unified global vision for our Calvin Klein brand under one chief creative officer, Raf Simons, and his management of the business and creative organizations to facilitate Mr. Simons’ success and the business’ growth.”

The realignment of Calvin Klein under Simons has been a major enterprise for PVH, seen as key to the brand’s future growth. Prior to joining Calvin Klein, Simons was artistic director of Christian Dior for women’s haute couture, ready-to-wear and accessory collections for three years. Earlier he was creative director of Jil Sander for both women’s wear and men’s wear. He also continues to have his own eponymous men’s wear brand.

Simons has been the chief creative officer at Calvin since August 2016 when he was basically handed the keys to the Klein kingdom, given the kind of complete creative control that had not been seen since the days when Calvin Klein himself, and his partner Barry Schwartz, were running the business. Upon joining the company, Simons immediately set out to rethink the collections, change the teams, change the ad campaigns and basically reinvent the business, which was generating some $8 billion in sales but had lost its momentum in some respects. Chirico has repeatedly said he believes Calvin Klein will become a $10 billion business.

Simons has oversight for all the brand’s categories, from the signature collection, which he renamed 205W39NYC shortly after arriving to lower-price apparel and accessories, including jeans, underwear and fragrances — the cash cows of the brand — as well as home goods. In addition, Simons oversees all aspects of global marketing and communications, visual creative services and store design.

His inner circle that he brought with him to Calvin Klein includes Pieter Mulier, his longtime number two and now the creative director of Calvin Klein, and Mulier’s boyfriend, Matthieu Blazy, the design director of women’s rtw.

While Chirico expressed disappointment in the performance of the signature 205W39NYC collection, Simons has been winning a slew of awards for his work at Calvin. For the second year running, he won the CFDA Award for Womenswear Designer of the Year, and the year before, he scooped up both the women’s and men’s prizes — a feat that had never been done before. His directional, often disquieting fashion shows have brought the company a lot of buzz, taking the brand in a different direction from the clean, modern, minimalist roots planted by its renowned founder and strengthened by Simons’ predecessor, Francisco Costa. Over the last two years, Simons has explored the dark side of the American pop landscape, the immigrant “outsider” experience, cowboy culture, the high school years, horror movies and the actual apocalypse with models walking the runway in hazmat suits, firefighter coats and Mylar accessories.

”It’s not a balance of art and commerce. There’s too much art and not enough commerce,” said one industry source about the collections.

The brand’s ad campaigns, which had futuristic and artistic overtones, have featured androgynous and otherworldly looking models, as well as the Kardashian-Jenner clan, and was another shift from the highly sexualized and controversial campaigns for which the brand has been known.

As reported, sources indicate Klein might be making a change in its photographers, hiring Glen Luchford to shoot the spring campaign rather than Simons’ longtime collaborator, Willy Vanderperre, who has shot the campaigns since the designer’s arrival.

Chirico told analysts over the last three years the group has invested between $60 million and $70 million in 205W39NYC — and it hasn’t seen a return on the investment.

“First of all, we’ve been disappointed that our investments in the 205 collection business have not delivered the results we expected. We will cut back on a number of these planned investments in the 205 collection business, and we — as we move forward, will be taking a more returns-oriented commercial approach to this important business,” Chirico said. Throughout the hourlong earnings call, Simons’ name didn’t come up once.

In addition, Chirico said he would shift the focus of the brand’s marketing campaigns, as they have been too skewed toward the higher-end 205 line and the fashion-forward consumer. Klein now plans to take a digital-first approach to marketing. For holiday 2018, it is shifting more of its media spend from “halo marketing” to more commercial, digital and social media advertising — a strategy that had been somewhat followed prior to Simons’ arrival. The company plans to increase frequency on social platforms, like Instagram, use micro influencers and host local activations to drive meaningful engagement, especially with Millennials and Gen Z, Chirico said.

This suggests a trimming of Simons’ control over the brand’s marketing and a strengthening of the hand of Klein’s chief marketing officer Marie Gulin-Merle, who joined from L’Oréal in February.

In elaborating on the problems the business is facing, Chirico said the 205W39NYC collection had commercial issues, as did Calvin Klein Jeans, which was redesigned as a more elevated product at price points that are some 20 to 25 percent higher. “The fall jeans relaunch didn’t sell through as planned,” Chirico told analysts. He said he thought the product attributes would warrant the higher prices, but the company wasn’t getting the weekly sell-throughs it had anticipated. “It was too fashion-forward and price positioning was too high,” he said. The company is taking the markdowns on the floor and providing for markdowns for the balance of 2018 “to get the pain behind us.”

Chirico said that by the end of January, “our inventories will be in the right position and priced appropriately on the floor, that for jeans, there will not be an issue of carryover inventory on the floor from a margin point of view.”

He did note that Calvin Klein businesses from underwear to men’s and women’s apparel, tailored clothing, footwear and accessories were performing very well, and global brand awareness “continues to be exceptional.” But he said the company’s tracking studies indicate there’s opportunity in terms of Klein’s consideration to purchase ranking, particularly for its collection and jeans businesses, “which suggest that we have work to do on the product and marketing side of the business.”

Calvin Klein Jeans represents about 15 percent or 16 percent of the Klein brand’s total retail sales globally. But for the Calvin Klein businesses that PVH operates directly, it represents just over 30 percent of the  business, Chirico said. The ceo pointed out that the Calvin Klein collection at G-III has been very strong and has had “outsized growth.”

Morris Goldfarb, ceo of G-III, which has the Calvin Klein sportswear license for North America, said Friday that his Calvin Klein business “has never been better.” The business, which has healthy distribution in major department stores, is reportedly on track to generate about $1.2 billion in wholesale volume by year-end, according to industry sources. Goldfarb said Simons is not involved in his Calvin Klein business. “We don’t need the halo. It [Calvin Klein] is our biggest trophy piece, and it continues to be that way,” said Goldfarb, noting it’s the strongest piece of the G-III portfolio.

PVH projects Calvin Klein revenues to grow 7 percent for the year.

The disconnect between spending and sales was clear to see in Calvin Klein’s 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 the greater promotional selling in the jeans business, particularly in North America, as the company moved to adjust inventories.

As for retail performance, sources close to the company claimed that the 205W39NYC collection was wholesaled at too many stores and sell-throughs have become a concern to management. Many of the items are marked down on retail web sites. Stores that carry the collection include Saks Fifth Avenue, Matchesfashion.com, Neiman Marcus, Nordstrom, Dover Street Market and Bergdorf Goodman.

Ken Downing, senior vice president, fashion director of Neiman’s, has had success with the collection.

“Customers have been very enthusiastic about the leopard pieces this season — the oversize leopard hair calf printed coat and the midi duster from fall runway. The full, circle skirt and leopard matching shirt have been popular as well. The check circle skirt has also been well received by customers,” Downing said. He also noted that the plaid Pendleton fringe trim coat has sold well. “The  Warhol white and silver dress, and jean have been items customers have embraced,” he said.

But while Calvin Klein vastly expanded its 205W39NYC distribution, it didn’t expand its own collection stores beyond the sole one on Madison Avenue. As part of his mandate, Simons set out to redo that store in a bright yellow interior with scaffolding — temporarily.

The troubles at Calvin Klein also are in stark contrast to the performance of PVH’s other marquee brand, Tommy Hilfiger, which delivered a very strong quarter. The brand continues to experience global momentum, with strength across all product lines and channels of distribution, Chirico said. Revenues at Hilfiger grew 11 percent and earnings rose 16 percent, primarily driven by strong revenue growth and expense leverage. International revenues increased 16 percent in the quarter and comps rose 13 percent.

As reported, PVH’s overall revenues increased 2 percent to $963 million in the third quarter. 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.

PVH’s stock price took a dip right after it released results Thursday afternoon, but inched up 0.7 percent to $110.51 on Friday.

While Chirico was blunt about Calvin’s performance, analysts were generally bullish that PVH could turn the brand’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.”

Michael Binnetti, a retail analyst at Credit Suisse, added, “I think the kind of product that they put out that didn’t work seems like the kind of product that he [Simons] 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.”

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.”

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.”

_ With contributions from Evan Clark

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