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PVH CEO Plans to Accelerate China Pull Back But Says the Company Won’t Raise Prices

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Manny Chirico, chairman and CEO of PVH Corp. would have preferred the global apparel sourcing had taken its natural evolutionary course, but now that the tariff-fueled U.S.-China trade war is upon us, he’s taking action.

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“Moving into 2020, we have significantly moved a lot of our production where we could out of the China market,” Chirico told analysts on a conference call Thursday morning to discuss second quarter results. “Next year, we will be somewhere between 10 percent to 12 percent of our U.S.- required production coming out of China,” which is down from 30 percent just three years ago.

While Chirico said the company has known apparel would become a smaller portion of China’s manufacturing base as the country’s economy continues to improve, the trade war has fueled the shift.

“The tariffs have accelerated that movement,” he said. “And I think as we’ve tried–we have been well positioned because we recognize what was ahead of us over the next three to four years in a normal trading environment and we opened up Africa. We moved to some other locations throughout Asia and we tried to position ourselves with key fabric suppliers throughout the world that would enhance our supply chain.”

Chirico noted that PVH revised guidance downward, reflecting a “significantly more conservative outlook” owed to several headwinds, including the volatility in the macro environment, a weakening global retail landscape and the ongoing escalation of U.S.-China trade tensions. This led the company to conclude it would have a 20 cents per share cumulative impact from the proposed tariff.

“We would like to think that we would get to a more normal world where we could just make economic decisions about where it’s most appropriate to make goods and that China could continue to be a key resource for the U.S. market, even though we would continue to probably trend down over the long-term, just not as dramatically as it’s been occurring,” the CEO said.

Price impact

The impact on price as a result of the tariffs is inevitable, Chirico said, even as cost mitigation strategies are underway.

“I think our factory vendors and our suppliers are partnering with that as we go forward,” he said. “We are also in discussions with some of our retail partners about some of the margin expectations given some of the tariff opportunities. So, I think, those are two areas in the short-term, meaning the balance of 2019, that we have had discussion in.”

Given the current environment and the short reaction time to tariff threats and impositions, Chirico doesn’t think PVH “can take prices up” or that it should “anticipate that we could be less promotional in this environment.”

“We will attempt to do that from a selling point of view, but our guidance assumes none of that is going to be able to be done from mitigating some of these cost increases that will come from tariffs,” Chirico said. “I just don’t think this is an environment that will withstand price increases in apparel as we move forward.”

Economic woes

In the U.S., the market was also traffic-challenged during the second quarter, Chirico said, which led to a highly promotional first half. International tourism continues to be soft and many wholesale partners are taking an “increasingly cautious view of the full holiday season that’s upcoming…as they look to manage inventory levels, which is leading to tighter open to buy plans later in the year and into spring 2020.

The same volatility exists in Europe, given the uncertainty around Brexit, he said, but “we are bucking the retail trend, with most markets in Europe continuing to show strong trends with Tommy Hilfiger and Calvin Klein.”

In Asia, the traffic trends experienced in the first quarter further decelerated into the second quarter, driven by the Greater China region that is being impacted by the rising U.S.-China trade tensions, the ongoing protest in Hong Kong, and a stronger dollar.

Brand picture

“Despite the macro picture, we have great confidence in the underlying power of Calvin Klein and Tommy Hilfiger and believe we are positioning our businesses to succeed in this ever-changing consumer landscape,” Chirico said. “We are also focusing on efficiencies across the business, from our supply chain to our warehousing and distribution, and to optimizing our global retail footprints and operating model.”

In the Tommy Hilfiger business, he said the brand continues to see “outstanding traction globally and we are pleased to see considerations, advocacy, and relevance metrics among 18 to 35 year old consumers continuing to grow in 2019.”

The Tommy Hilfiger jeans business continues to drive a significant amount of growth, and there is also strong growth in footwear and accessories.

In Calvin Klein, Chirico said “momentum continued into the second quarter as the number two most engaged brand on Instagram.” The launch of the Fall Underwear Campaign #MYCALVINS that features a social and digital first rollout, including Odell Beckham Jr., Bella Hadid, Jacob Elordi and Naomi Campbell, drove more than 100 million unique consumer impressions within the first 36 hours with an earned media value totaling over $4.5 million.

Calvin Klein 50, a “highly commercial capsule collection” celebrating the brand’s 50th anniversary will bow in October, supported by a global campaign starring some of the brand’s most famous and iconic faces.

As for Calvin Klein Jeans, Chirico said the company is looking forward to the fourth quarter relaunch of the Calvin Klein women’s jeans business in North America with G-III Apparel Group. Retailer reaction to the women’s jeans product, he said, has been “very enthusiastic and G-III’s initial product placement at retail is running well ahead of our initial plans.”

“Overall, our teams are delivering targeted consumer experiences to not only drive better engagement, but also drive sales conversion,” he said. “We believe that this will result in improved brand performance as Calvin’s product assortments improve going into fall and create a better 360 degree consumer experience.”

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