PVH Corp. put the message out loud and clear this week that there are tentative signs that its quick work to fix the mistakes at Calvin Klein are beginning to take hold.
“I’m pleased to report that Calvin Klein’s performance in the fourth quarter exceeded our revised expectations,” said Emanuel Chirico, chairman and chief executive officer of PVH, on a call with investors Thursday morning. “Calvin Klein’s brand health remained very strong despite some of the business challenges we faced in 2018.”
The “business challenge” he was referring to was an unexpected fallout in its prized Calvin Klein business, the extent of which was revealed when third-quarter earnings were released in early December.
Call it a $190 million lesson.
The problem was designer Raf Simons’ high-concept overhaul of CK Jeans, which failed to connect with consumers, while his runway collection, dubbed 205W39NYC, was not returning on the tens of millions of dollars PVH had plowed into it.
Calvin Klein’s financial results said it all. Earnings before interest and taxes in the third quarter 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.”
That spending was meant to help reframe Calvin Klein, but fell short of the mark.
Ever since the shock announcement PVH has moved fast to remedy the situation. This included Simons’ departure, the end of the brand’s collection business, the exit of that business’ president Michelle Kessler-Sanders and the shuttering of Calvin Klein’s flagship on Madison Avenue in Manhattan.
All this, combined with a booming business at PVH’s other big brand, Tommy Hilfiger, made for a “healthier” fourth quarter, with the company beating Wall Street estimates on both sales and earnings. Chirico acknowledged this was just a first step and that it will take until fall to see a marked improvement in Calvin Klein product.
Indeed, there is still much room for improvement in Calvin Klein. While revenue in the Tommy Hilfiger business for the quarter increased 2 percent to $1.2 billion, revenue in the Calvin Klein business for the quarter slipped 2 percent to $953 million, dragged down by a 7 percent slide in North America sales.
Nevertheless, PVH’s efforts appeared to have calmed investors’ nerves with its stock surging almost 15 percent Thursday to close at $127.26, while several analysts expressed confidence the Calvin Klein fashion issues have been contained.
“The bear case for CK, including potential contagion to other categories or, worse, that CK may have ‘jumped the shark,’ was always overblown, in our opinion (hence, our strong buy rating),” Steven L. Marotta, managing director of equity research at CL King & Associates, said in a note to clients.
Credit Suisse’s Michael Binetti added that Calvin Klein order growth remains solid, “suggesting that recent fashion issues are largely contained.” He also raised PVH’s target price from $125 to $130.
The stock was on shakier ground in late January when analysts at Cowen & Co. downgraded its stock from outperform to market perform for the first time in eight years, lowering its price target to $119 from $142.
But as PVH continues to attempt to breathe life back into the Calvin Klein brand through new advertising campaigns and an updated product, just how much did the 2018 fashion miss cost the company?
According to earnings statements and transcripts of calls with investors, the money spent to build the business around Simons and the costs to wind it down were significant.
In January, the company said $120 million was earmarked for pretax costs related to the restructuring of Calvin Klein, consisting of severance, inventory markdowns and allowances, asset impairments, and lease and other contract termination expenses.
On Wednesday, it provided further detail, divulging that restructuring costs added up to $41 million in the fourth quarter — $27 million for severance, $7 million for noncash asset impairments, $4 million for contract termination and other costs, and $2 million for inventory markdowns.
It’s not known how much of this is related to Simons’ severance since the restructuring also included the departure of Kessler-Sanders and others. Simons’ annual salary was widely reported to be in the region of $18 million.
On top of the $120 million, PVH admitted in December that it invested between $60 million and $70 million in the 205W39NYC collection, but has not seen returns that it had hoped for. This pushes the total to as high as $190 million.
A costly misstep, but one that Chirico is confident he can remedy.