Discussing the impact with analysts on Thursday after the company reported first quarter financial results and before the Mexico tariff threat, Manny Chirico, chairman and CEO, said, “Tariffs and trade rhetoric and threats weighed on consumers in China and in the U.S., and we did see a further softness post Chinese New Year in our China business for both [Tommy Hilfiger and Calvin Klein] brands.”
Chirico said while part of this impact was due to the Chinese New Year calendar shift, which benefited fourth quarter 2018 and shifted business out of the first quarter of 2019, “we certainly saw consumers in China buying less.”
Chirico said as apparel manufacturing continues to shift out of China, factories are reducing their production or closing facilities, “which is impacting not only the middle class, but is also having a spillover effect into the overall economy.”
“The macro retail environment has gotten more challenging, and it remains under pressure as we have entered the second quarter,” he said. “Notably, the U.S. market was weak, driven by a number of factors, from weaker international tourist traffic to the higher tax bills for many U.S. consumers.”
The tax refunds and lower withholding taxes that consumers saw last spring gave a boost to spending and has made comparisons difficult, Chirico noted.
“The challenge we’re facing right now is being up against some of those real positive dynamics from last year and some of the negatives issues that have come up this year around trade and the uncertainty that’s being created in the market overall with the consumer,” he said. “I think that has put pressure on the apparel segment… Accordingly, we saw soft traffic and conversion trends across our business, particularly in the outlet retail channel.”
Another issue is that due to the overall macroeconomic and geopolitical environment, the dollar has continued to strengthen. “As such, foreign currency translation will further pressure our fiscal year earnings by an incremental 10 cents per share versus our prior fiscal year guidance,” Chirico said.
Looking at the key brands, he said Tommy Hilfiger had a good quarter, led by strong product assortments, fresh marketing campaigns and “immersive brand experiences.”
“Our tightly curated exclusive collaborations continue to drive hype, brand heat and relevance with the consumers, from Tommy Hilfiger’s Coca-Cola capsule collection in spring, which brought heat and hallow to the brand with significantly strong full price sell-throughs, to our newly launched Kith capsule which is seeing incredible sell-throughs,” Chirico told analysts. “On a regional basis, we drove momentum through our collaboration with Lewis Hamilton in a consumer event in Berlin, a celebrity-studded Tommy Jeans store opening event in Seoul and a highly visible Tommy Hilfiger ‘Store-of-the-Future’ opening event in Beijing.”
Tommy Hilfiger’s revenues increased 4 percent in the quarter, with earnings up 6 percent, driven by outperformance in the international businesses, where revenues rose 12 percent and comparable store sales increased 9 percent, driven by robust performance in Europe.
“Asia was a mixed story for us,” Chirico said. “Our Japan businesses, which is about half of the Tommy’s revenues in Asia, posted very strong results, as our product positioning and consumer engagement initiatives are clearly resonating with consumers, and the consumer backward drop is relatively healthy. However, our China business was soft during the quarter. We believe that consumer sentiment is increasingly impacted by the ongoing headlines about trade and tariff wars, with consumers’ uncertainty resulting in consumers buying less.”
He said the company’s teams in the region are working diligently to cater to domestic and Chinese consumers, with product assortments, marketing campaigns and brand activations tailored specifically to the market.
Regarding Calvin Klein, Chirico said denim assortments are in a better position, with “notable improvements to the balance of basics versus fashion and our core programs are showing a positive response.”
“We expect to see further progress as we move into the fall-holiday season,” Chrico said.
Calvin Klein revenues were flat at $890 million in the quarter, while earnings rose 9 percent to nearly $120 million and operating margins improved 110 basis points.
Calvin Klein Europe is seeing an improvement in response to offerings, particularly in jeans, but “still has a way to go,” the CEO said.
“Moving on to Asia, Calvin Klein experienced the same pressure in China… as it was not immune to the softening consumer environment there, namely the combination of Chinese New Year shifting and the macro retail sales weakness, which is a direct result of the uncertainty created by the U.S.-China trade disputes,” Chirico said. “Looking ahead, we have exciting plans for the China market, including the launch of several new local brand ambassadors… and loyalty programs to shoppers.”