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Denim, International Driving Calvin Klein Turnaround

If PVH Corporation’s first quarter results are any indication, the reinvigoration of the Calvin Klein brand has finally begun in earnest, and denim, particularly in international markets, is driving the trend.

The parent company of Calvin Klein, Tommy Hilfiger and heritage brands Van Heusen, IZOD and Warner’s reported that strength in its international businesses offset softness domestically.

Corrected for currency fluctuations, revenue rose 3 percent in the quarter, driven by a 5 percent increase in the Calvin Klein business that was fueled by an 8 percent jump in Calvin Klein international sales.

The Calvin Klein brand, which comprised $2.9 billion, or 35 percent of PVH revenue last year, still has a long way to go to regain the market share in denim that it has lost over the years to the dozens of new premium-priced entrants in the space, but the company definitely sees improvement, particularly in the men’s category.

Tommy Hilfiger, which represented 43 percent of company revenue in 2014, had only a 1 percent sales increase in the quarter.

On the quarterly earnings conference call with analysts, CEO Manny Chirico said, “The Calvin Klein brand initiatives are taking hold and we continue to be pleased with our latest Justin Bieber spring campaign and our recently announced denim series featuring Kendall Jenner. We believe we are beginning to connect with a much younger consumer.”

Chirico reported that consumers are reacting positively to the new Calvin Klein jeans product, particularly in markets where the company has installed new jean shops. PVH feels the men’s denim category is beginning to show signs of improvement, and expects retailers to do a lot of marketing around denim for Fall 2015. Men’s continues to outpace women’s denim across North America and Europe, but women’s is starting to improve. The women’s denim market has been pressured by the active/athleisure trend, which is beginning to wane.

Looking ahead, the company reports that second-quarter jeans sales trends in Europe continue to improve, and are running in the high-single-digits. The situation in Southern Europe, particularly in Spain, where its largest customer is El Corte Ingles, is one of “decelerating negative trends” – in other words, an improvement over the dire market conditions of a year ago.

In North America, the Calvin Klein retail comps are–as expected–flat, negatively impacted by weak international tourist traffic and spending in stores in tourist destinations like Miami, Orlando, New York and Las Vegas.

However, North American locations where the company has installed new Calvin Klein shops in department stores saw a 25 percent retail sales increase and 10 percent rise in average unit prices. The company is targeting new jean shops in the top 150 North American department store doors for FY15.

In the three months ended May 3, total company revenue declined 4 percent on a reported basis to $1.88 billion from $1.96 billion in the prior year period, exceeding Wall Street expectations of $1.86 billion. Gross profit increased by approximately 140 basis points to $985.6 million, or 52.4% of revenue. Adjusted net income rose 2 percent to $124.7 million, or $1.50 per share, beating analyst expectations of $1.38 per share.

Chirico also told analysts that a number of competitors, particularly in Europe, are starting to move prices up for fall, so the company is following that very closely, and will probably do so as well in early 2016, taking care not to overprice themselves. The company is also looking for opportunities to improve supply chain efficiency and reduce product costs.

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