Tensions Flare Between CK, Raf Simons
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 sellthroughs 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.” ■