Former Chairman & Chief Executive Officer, PVH CORP
Retail earnings on deck: BCI Brands' Manny Chirico on what to expect
Manny Chirico, LNK partner and BCI Brands chairman, joins 'Squawk Box' to discuss the state of the retail sector, what to expect from earnings this week, impact of tariffs, and more.
About Emanuel Chirico
Emanuel Chirico, former chairman and CEO of PVH, discussed the company's response to the coronavirus pandemic and social justice issues in a June 2020 CNBC interview. He described the U.S. as being "ripped apart by systemic racism" and said PVH needed to improve in recruiting, training, and representation at leadership levels, stating the company would set "meaningful targets" within three months. Chirico also addressed inventory challenges, noting that 2020 would be "a mess" and that the company aimed to manage cash and inventory to be competitive in 2021. He mentioned that PVH had $1.8 billion in liquidity but had implemented furloughs and salary reductions due to shareholder pain. In earlier appearances, Chirico commented on trade policy and business performance. In December 2019, he said tariffs on apparel would result in higher costs for consumers and criticized the uncertainty of U.S.-China trade policy, noting that PVH had reduced its China sourcing for the U.S. from 35-40% to 10-15% over five years. In 2018, he described the business as the strongest he had seen in 25 years, with strong online growth and robust European performance. At a 2019 Concordia College event, Chirico said profitability was necessary for sustainability and that "made in America" was not practical for the apparel industry, arguing the U.S. should compete in high-tech robotics rather than labor-intensive garment production.
Transcript (9 segments)
✨ AI-enhanced transcript with speaker attribution
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Interviewer0:00
Okay Courtney, thank you. Appreciate it. Thanks.
All right. Joining us right now with more on the retail sector is Manny Chirico, Lnk partner, BCI Brands chairman, and former PVH chair and CEO. Manny, first of all, thanks for being here. Why don't you break this all down for us? What are you going to be looking for from these earnings results? How much do you think we'll see on the tariffs front? How much do you think we'll see about the strength of the consumer?
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Emanuel Chirico0:29
I think business has been good through the second quarter. It's actually gotten better as the quarter got on, and back to school is off to a strong start. I expect second quarter earnings to be good pretty much across the board. I'm sure there'll be a few exceptions for underperformers, but I do expect the guidance for the second half to be muted and conservative. I think, well, because of the tariffs, I think we're looking at most especially in the soft goods retailer, footwear, apparel, accessories, which what you're going to be seeing going forward is tariffs averaging somewhere between 20 and 25%. And that is a cost that the retailer is going to have to deal with. I think that the wholesale companies, the manufacturers overseas, the importers are eating about half of that in this next six months. A combination of the retailer themselves and the manufacturer overseas. So I think you'll start to see prices increase anywhere from 5 to 10% in the back to school season and particularly in the holiday season. And then I expect that to continue with price increase in the first half of next year as those prices all start to roll their way through to the consumer. I just don't, there's not a big enough profit margin for everyone to hold on and eat those tariff costs going forward.
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Interviewer2:03
You know, I think a lot of people assume that we will see in the most recent reports the impact of the tariffs. But there is this issue of how much was pulled forward, how much they brought in ahead of time, how much they've been able to dodge some of them. And with the tariffs maybe not fully kicking in to some of these goods. I mean, this is the big question with Jay Powell, the chairman of the Fed. Will we see the inflation at this point or do you think it's really just something that's slowly starting to wind in right now with back to school?
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Emanuel Chirico2:32
I don't think you're going to see inflation significantly in the retailers' margins in the second quarter. I think you're going to see the guidance where they start to talk about cost pressure and raising prices. And then the whole question about is how the consumer reacts to that. You know, I think the big box retailers I think have the scale and a much more diverse basket that they can manage it pretty consistently. Specialty retailers and department stores, all soft goods, they're looking at tariff increases and those payments are due immediately on entry into the country. It's a seasonal business. So through July minimal goods have come through with real tariff impact on them. But starting August and beyond back to school you're going to start to see the margin pressure. And as we get into the fourth quarter, you should really start to see the margin pressure. And I think you're going to see ticket prices across the board up anywhere from 5 to 10%. And what you'll see is planned promotional margin markdowns and discounts that will be worked into the model, assuming that the consumer will push back a bit. So I think the earnings reports are going to be fine in the second quarter and even the full year guidance. I think the retailers will manage it, but they're definitely going to be seeing pressure on costs in the second half of the year.
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Interviewer4:02
Let's talk about some of the retailers reporting this week. Target, Walmart, Gap. You've got Macy's reporting too. Who do you expect to be winners? Who do you expect to have a tougher time dealing with, not just what they can get into the stores, what they can charge, what they can eat in terms of the tariffs, but what they mean to the consumer too.
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Emanuel Chirico4:23
I think Walmart will continue to perform. The sense I have, I don't have any insight, the sense I have is their sales have remained fairly strong. They're starting to see a little bit of the tariff pressure in the second quarter, but it's been minimal. I think that will intensify in the third and fourth quarter. So I think their guidance will be conservative going forward. But I think their second quarter results will be solid. I think you mentioned the Gap. I don't want to pick on them, but I think the specialty retailers, their results may be fine for the second quarter. But again, not to just say it again, I just think they're going to be on the margin pressure in the third and fourth quarter, and I think they're going to plan for it as they go, as when they're giving guidance to the street. You know, everybody wants to under-promise and overdeliver. So I think they're going to build in some level of margin compression for the second half of the year.
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Interviewer5:21
And Manny, very quickly on Target and Ulta, the partnership that they had formed that is they're going to be going their separate ways. What does that mean for Target?
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Emanuel Chirico5:33
I think in that situation strategies really just weren't aligned. I think, you know, Ulta is a high touch consumer service model dealing with the consumer. And Target is a value oriented retailer, minimal customer support and service store presentation. I just don't think the strategies are aligned. I think Target will have a harder time dealing with it. The availability of brands at Target's will be more limited, and I think just the presentation will not be as strong. They'll look to make it up with more with value. But I think they have, you know, I think in this environment they're going to potentially lose that higher end consumer that goes in there, that...