PVH Corp., whose business is now very much centered on its Calvin Klein and Tommy Hilfiger brands, after shutting down its multi-brand Heritage retail operations a couple of years ago, last week held its first investors day in a decade.
That means it was the first such event for CEO Stefan Larsson, who took the reins at the conglomerate less than two years ago, amid the throes of a pandemic that at the time was crushing demand for apparel. But Larsson exuded confidence as he and his team outlined their targets for 2025. Speaking from Calvin Klein's first building in New York, on the ground floor of 205 West 39th Street where the designer held runway shows throughout the decades, Larsson outlined goals that several analysts characterized as aggressive.
The strategy, which the company is calling "PVH plus," includes reaching high single-digit global compounded annual revenue growth and total revenue of $12.5 billion, with operating margin expanding to 15% and free cash flow above $1 billion. Wells Fargo analyst Ike Boruchow called it "compelling" but said the targets may be "optimistic," adding, "While extremely bullish, we believe investors will need to see more proof before buying into the new plan."
Credit Suisse analyst Michael Binetti similarly called these "stretch goals," especially in light of ongoing pandemic-related supply chain constraints, the increasingly likelihood of a recession in Europe next year, other macroeconomic concerns, and PVH's need to catch up in e-commerce.
"And PVH didn't offer as much detail as we'd like in what we believe is the key flashpoint for the story — the components of rebuilding N. America margins that has lagged peers for years," Binetti said in an April 14 research note.
Still, Credit Suisse also praised the company's specificity. "For 10 years, we haven't had any long-term targets at all to evaluate PVH against," Binetti said, adding later that "some of PVH's targets aren't that big of stretches," including that the return of tourism in North America will boost the brands' sales here.
Heroes on a grand scale
According to Larsson, PVH's prospects rest with the legacies of its two major brands and their scale, which he called "an incredible advantage" that goes unappreciated.
"It's probably the least recognized insight into what's needed to win in the new normal because, if you have scale, you have, as in our example, ... two global brands almost impossible to build today," he said during the virtual meeting. "We have the global consumer base that we don't have to acquire ... we have a consumer globally, in all markets, that love our brands."
It's not that Larsson is staking his claims, or his goals, only on the pull of its two popular brands, however. While he is known for his supply chain talents, last week he sounded very much like a merchant.
"Starting with product, where we have set out to create the best 'hero products' in the market," he said, noting that these are items in the most in-demand segments, like casual, athletic and streetwear. "Hero products to us are the most essential products in the consumers wardrobe. So think about the sea of generic stuff on one hand and then think about the 10 most important products in your wardrobe. And think about it from a consumer perspective. ... Even if it's cold in New York, it is spring, officially we're moving into spring. You as a consumer are starting to shop your wardrobe."
This approach serves as "a canvas for seasonal newness," which increasingly incorporates demand for more sustainable products, according to Larsson.
"So when you have found your favorite pair of denim, your favorite shirt, your favorite outerwear, silhouette ... we play with that silhouette with seasonal newness, seasonal fabrics, limited-edition collaborations," he said. "So you combine being the most trusted source and go-to source for the most essential products. And then we add the newness and the reason to to come back all the time. And we need hero products to then connect them to a responsive, demand-driven supply chain."
Digital first, except for stores. Direct-to-consumer, except for wholesale
The attention to consumers, reflected in the "hero product," influences a slew of other decisions, including brand collaborations and distribution.
Analysts likely appreciated PVH executives' emphasis on a "digital-first" approach, a must at a time when valuations favor the internet. Credit Suisse's Binetti called any shift toward direct-to-consumer retail and away from wholesale "low-hanging fruit."
"The consumer is also telling us, 'We love shopping third party e-commerce,'" Larsson said. "'We love shopping your brands, we might get inspired in your brand world, and then we shop on the third party [site] and ... we also love to shop in brick and mortar, in your own stores and in a wholesale experience.' And what our job is, is to make sure that we focus the distribution strategy on the consumer."
The company is expecting digital growth to top 20%, and for direct-to-consumer growth to outpace wholesale. At the moment, the direct business accounts for 35% of sales, compared to 65% at wholesale, Larsson said. The company's rationale for boosting its direct sales, according to Larsson, is that PVH "owns the consumer journey" and first party data. But he also called the wholesale business "very important for us," noting that "the reach that those wholesale partners have, and the points of distribution they have to raise our brand awareness and to showcase the best of our brands, is critical."
The question before most brands, including the well-established ones at PVH, is how far to go with their DTC ambitions. Pointing to his recent, surprising research on the limits of direct sales compared to wholesale, BMO Capital Markets Managing Director Simeon Siegel noted that PVH and its brands, like Levi's and others, have mature wholesale operations — making direct-to-customer appealing for growth.
"What I think was encouraging was, despite the clear conversation around moving direct, the company was also explicit that they were not anti-wholesale," he said by phone. "The general perception is that going direct is universally good. That's what made our findings so interesting — that just does not seem to bear out in the math. The reality is, wholesale is the easiest way to scale and, historically, if done right, an incredibly profitable way to achieve it."