For clothing companies like PVH Corp. (PVH) , distribution partners can make or break sales trends.
Shares of the New York-based brand owner marked their largest, one-day percentage drop in over a decade Thursday, after PVH reported weakened sales in China and the U.S. and tempered guidance for the full year.
In order to assess how the apparel giant might be able to dig itself out of its current hole, it's important to check on key partners hawking its products like Macy's (M) , J.C. Penney (JCP) , and Amazon (AMZN) , among others.
Department Store Dilemma
One of the headline risks for distribution of PVH products is the decline in some of the department store traffic that the company depends on. Most prominent among its partners in the space would be J.C. Penney and Macy's, which are seen as buoys to make up for the loss of sales in the wake of Sears Holding Corp.'s recent bankruptcy.
However, PVH has recognized these retailers are downsizing and offer less shelf space for its apparel and lightened purchases of PVH product overall.
"Collectively, Macy's and J. C. Penney Company, Inc., two of our ten largest customers in 2018, have closed over 200 stores since 2016 and will be closing additional stores," PVH's 10-K recognizes. "These store closings have resulted and may continue to result in a decrease in the total amount of purchases made by Macy's and J. C. Penney. A continued decline in purchases made over the next several years could have a materially adverse effect on our United States wholesale business."
With J.C. Penney currently counted as a penny stock and operating under a mountain of debt, a Sears-like trajectory for the key PVH partner is not an unwarranted caution to take heed of. The company is expected to close another 27 stores in 2019.
Kohl's Corp. (KSS) and its BonTon subsidiary are noted as possibly more promising customers for the long term, while PVH CEO Emanuel Chirico also called out Belk and Dillard's (DDS) as a key factor for the clothing company's future.
The company notes Kohl's as a key partner for its Van Heusen brand of dress shirts as well as Chaps brand of shirts and sweaters. Still, a 30% decline in share price after the retailer reported weaker than expected sales suggests it might not be the savior PVH was banking on.
Internet Opportunity?
One of the areas of opportunity outside of PVH's play among the brick-and-mortar laggards is its ability to ride on the coat tails of e-commerce.
According to Nomura Instinet, Amazon carries more PVH products, specifically Tommy Hilfiger and Calvin Klein, than Macy's or J.C. Penney. The forecasted trends in e-commerce suggest this could be the key point of sale for the company moving forward.
The company has leaned into this relationship, leveraging its Calvin Klein brand for fashion pop up shops alongside Amazon and hosting interactive brand events in New York driven by the Jeff Bezos-led behemoth.
Chirico noted the partnership with Amazon as a key to increasing penetration of the Tommy Hilfiger brand toward an over $100 million valuation. J.P. Morgan concurred with this analysis, noting that Amazon is the company's fastest growing and likely most important wholesale partner.
However, the PVH CEO added that the company is not satisfied with simply relying on its existing online partners. Moving forward, the company hopes to drive its own direct-to-consumer effort as well, which could lessen correlation between partner performance and sales seen in its department store exposure.
"Our investments in digital continue to pay dividends as online again during the quarter was our fastest-growing channel with revenues growing over 20% in our owned and operated businesses," Chirico told analysts. "Overall digital sales continue to track at slightly over 10% of our total revenues."
Considering the crossroads some its traditional partners have led the company to, this go-it-alone effort will be a key factor to monitor for long term investors.
In the near term, it would appear Amazon will need to do the heavy lifting.
(Amazon and Kohl's are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells AMZN or KSS? Learn more now.)
