REPORT Reverdy Johnson, [email protected] PVH’s Calvin Klein Turnaround Will Take Even Longer Than Anticipated Companies: BME:ITX, GES, HKG:0330, ICON, JOEZ, JWN, KORS, LVMUY, M, PVH, RL, STO:HM-B, TYO:9983, VFC March 5, 2015 Research Question: Can PVH increase same-store-sales for its Calvin Klein and Tommy Hilfiger brands in the United States and Europe in 2015? Silo Summaries Summary of Findings 1) European Department Store Executives . PVH Corp.’s (PVH) revitalization of Calvin Klein already was These five sources believe PVH managing CK is a expected to be a slow process and now is proving to be even positive for the brand and will result in eventual lengthier than anticipated. Sources who contributed to Blueshift success, but also said the turnaround will take longer than originally expected. The spring CK line appears to Research’s May and/or September 2014 reports now are less have improved incrementally, but one source said initial optimistic and said the timeframe to success has been extended. feedback from a small sample in the stores is negative. Sources are not excited about Calvin Klein’s sales prospects in Two sources said fall is a further improvement on spring in terms of quality and branding, but the small gains 2015 based on a litany of challenges in revitalizing the brand, but underscore the slow turnaround. TH saw a boost in they also noted potential incremental gains on easy comparables sales in Jan. and Feb. following disappointing results in from a poor performance in 2014. the warmer fall and early winter. Sources were split on Tommy Hilfiger’s 2015 prospects as it is a 2) European Industry Specialists well-respected premium brand in Europe but is expected to All six sources said PVH is the right organization to struggle in the United States. One supply chain source said its reinvigorate CK, but all acknowledged the sizable task orders from Hilfiger are down 25% year to year and other suppliers and the length of time needed to get there. Only two have similar pullback. sources believe CK can increase sales this year despite easy comps with 2014. TH continues to do well and is . Four sources said overall customer demand for denim is waning. expected to be flat to up in 2015. CK is beginning to . Calvin Klein jeans are stymied by uninspiring styles and colors; a benefit from its association with TH among buyers. lack of variety; nonpremium quality as the company focuses on 3) U.S. Supply Chain improving its bottom line instead of on better materials; and a These four sources expressed concern for PVH’s ability crowded market in which more popular brands with better looks to deliver strong results with its CK and TH brands in are charging lower prices. 2015. PVH is emphasizing margins and has opted for lower-quality materials to grow its bottom line. One . Calvin Klein also needs to improve its distribution in Europe to source is less optimistic about PVH and CK than in increase its presence in stores, where sources said inventory is Sept., forecasting a decline in denim reorders and high and reorders are low because of slow demand. lower-than-expected sales this year. One source said . Sources could provide little insight into sales performance of the TH’s spring product was off to a slow start. No source had insight into CK’s spring product line. new spring lines for Calvin Klein or Tommy Hilfiger given that their cycles are just beginning. The few who did offer information said 4) U.S. Industry Specialists the new products were an incremental improvement from previous Both sources said PVH could grow in 2015 if it makes collections but that initial sales were tepid. A few sources also the right choices. The first source said PVH could grow expressed some optimism for the fall line, saying it was yet another in the mid-single digits and peak during back-to-school step above the spring collection. season. CK will only show incremental improvements this year. One source suggested the brand look into . Still, sources agreed that PVH is the right company to be in charge featuring its products in outlet stores for potential $150 of this turnaround with its resources, know-how, and industry million to $200 million revenue. reputation, and it stands as good a chance as any in executing its strategies over the long term. It has made headway in building 5) U.S. Macy’s Store Visits brand awareness through advertising and marketing messages, All five sources said CK denim sales have not increased improving communication with buyers and store executives, and from a year ago. Four said sales growth is possible this getting the industry to talk about Calvin Klein once again. year, though none said this was a likely occurrence. The displays have not done much to increase sales or traffic, including at one store that houses a shop-in- shop. TH is meeting denim sales expectations in two stores, is flat in one store, and is down in another. 1 301 Battery Street, 2nd Floor, San Francisco, CA 94111 | www.blueshiftideas.com PVH Corp.’s Calvin Klein and Tommy Hilfiger Calvin Klein Sales Tommy Hilfiger in 2015 Sales in 2015 European Department Store Executives European Industry Specialists U.S. Supply Chain U.S. Industry Specialists U.S. Macy’s Store Visits Background PVH’s revenue rose 2% during the third quarter of 2014 year to year on the backs of its strong Tommy Hilfiger brand and improving Calvin Klein brand. Tommy Hilfiger’s North American sales revenue grew 3% while comparable store sales in Europe declined 5%. Corporate expects Hilfiger’s wholesale business in Europe to pick up steam in the spring and summer as its 2015 order book is up more than 5% year to year. North American comp stores sales of Calvin Klein increased 5%, while international comp store sales dropped 2% year to year. PVH is increasing the footprint of its Calvin Klein jeans by adding 180 shops in North America, and is taking the same strategy to Europe. It is beginning to see initial positive results for spring and summer 2015 with its order book for Calvin Klein up 10% year to year. Blueshift Research’s Sept. 25, 2014, report showed PVH’s strategy beginning to take shape in Europe, with the potential for a turnaround of its Calvin Klein brand. The execution of its strategy in the United States was inconsistent but held promise. Repeat sources in Europe had noted improvement for Calvin Klein since Blueshift’s May 19, 2014, report, but said the brand had a long way to go to revive its jeans brand. European sources also said Calvin Klein must continue to innovate, become trendier, and appeal to younger audiences if it hopes to compete in the market. Tommy Hilfiger orders in Europe remained healthy, and sources believed the brand’s presence would help Calvin Klein by leveraging its existing retail-level infrastructure. Blueshift’s Oct. 13, 2014, report uncovered success for PVH’s shop-in-shop rollout for its Calvin Klein men’s jeans within U.S. Macy’s Inc. (M) stores. Current Research In this next study, Blueshift Research assessed whether PVH could increase same-store sales for its Calvin Klein and Tommy Hilfiger brands in the United States and Europe this year. We employed our pattern mining approach to establish six independent silos, comprising 22 primary sources (including 13 repeat sources) and nine relevant secondary sources focused on developments for Calvin Klein and Tommy Hilfiger: 1) European department store executives (5) 2) European industry specialists (6) 3) U.S. supply chain (4) 4) U.S. industry specialists (2) 5) U.S. Macy’s store visits (5) 6) Secondary sources (9) 2 301 Battery Street, 2nd Floor, San Francisco, CA 94111 | www.blueshiftideas.com PVH Corp.’s Calvin Klein and Tommy Hilfiger Next Steps Blueshift Research’s next report on PVH will follow up with sources as early as April to get a pulse on the sales performance of the Calvin Klein and Tommy Hilfiger spring lines, on orders for the second half of the year, and on the fall collection for back- to-school. We also will include a deeper look at the Calvin Klein shop-in-shop rollout in U.S. department stores and the corresponding effect on sales. Lastly, we will take a closer look at Calvin Klein and Tommy Hilfiger sales and growth opportunities in East Asia and South America. Silos 1) European Department Store Executives These five sources, who all have taken part in Blueshift’s previous reports, believe PVH managing Calvin Klein is a positive for the brand and will result in eventual success, but also said the turnaround will take longer than originally expected. Calvin Klein is making slow progress in addressing its problems, particularly in becoming a trendy brand with current styles, colors and variety. Also, its prices are too high and out of step with its peers. Two sources reported declining sales of Calvin Klein year to year in 2014 and into 2015, and two other sources maintained their lack of desire or intention to carry the brand. The spring Calvin Klein line appears to have improved incrementally, but one source said initial feedback from a small sample in the stores is negative. Two sources said fall is a further improvement on spring in terms of quality and branding, but the small gains underscore the slow turnaround. Still, PVH has improved communication with buyers and store executives and has built a stronger marketing campaign.