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S&P Global Market Intelligence: US Brands Offset Domestic Challenges with International Growth (Cathy Leonhardt quoted)

  • August 9, 2017

By Richard Collings

When V.F. Corp. raised its full-year outlook in late July, it cited international growth as the reason for its optimism.

Other U.S. apparel and footwear conglomerates, such as NIKE Inc. and PVH Corp., cited similar growth drivers in recent earnings reports. These companies are placing a major emphasis on growing an international presence as sales in their home market see slower growth, or even decline.

Their initiatives include buying back licenses, streamlining physical footprints and expanding e-commerce in various countries. V.F. Corp.'s revenue grew 4% overseas in its second quarter, while it grew only 1% in the U.S. Sales of the company's Vans brand jumped 26% in the Asia-Pacific region, while sales of The North Face-branded items climbed 23% in Europe, the Middle East and Africa.

NIKE, meanwhile, reported better-than-expected fourth-quarter earnings, with international sales driving its results. Sales of its flagship brand grew 11% to $1.09 billion in Greater China during the fourth quarter, while sales in the company's emerging markets — including Argentina, Brazil, Mexico and Australia — rose 21% to $1.05 billion. In North America, sales were flat.

Similarly, international revenue at PVH Corp.'s Calvin Klein unit grew 11.2% to $380.4 million during its fiscal first quarter ended April 30, even as its North American sales shrunk 1.4% to $375.4 million over the same time period. Tommy Hilfiger, another PVH unit, clocked international first-quarter sales growth at 14.5%, while its North America revenue declined by 4.8%.

NIKE, V.F. and PVH did not respond to requests for comment.

Rather than relying on a single formula, the efforts of these companies are often calibrated specifically to each geographic market, according to industry observers.

Thirty years ago, U.S. brands leaned more heavily on licensing agreements, especially overseas, said Mary Ann Domuracki, a managing director at investment bank MMG Advisors. That meant a brand could collect royalty fees without concerns about inventory risk or the cost of operations. But that also meant the company had less control over the product or how it was distributed.

To claw back that control, companies such as PVH have been buying back licenses to ensure consistency in distribution and product, Domuracki said. PVH's biggest deal in this area was the acquisition of Warnaco, owner of Calvin Klein licenses for both denim and underwear, for $2.9 billion in 2012. PVH also bought the 55% it did not own in TH Asia, a joint venture to sell Tommy Hilfiger products in China, for $172 million in early 2016.

Another element in PVH's success is managing both Calvin Klein and Tommy Hilfiger as global lifestyle brands, said Cathy Leonhardt, co-head of investment bank Peter J. Solomon Co.'s retail group. PVH has "operational centers of excellence" specific to each region that tackle merchandising, marketing, distribution, wholesale, retail and e-commerce, she said.

The company hired and developed strong talent for each of the geographic regions it operates in such as Asia, Latin America and Europe, while singling out the best local partners for real estate and other functions, Leonhardt explained. And while staying true to heritage, these brands are managed from a global perspective, rather than a U.S.-centric viewpoint, Leonhardt said, with each adapted to be relevant to local markets while retaining a unified brand aesthetic and experience.

Brands must understand that specialty retail and boutiques dominate the landscape in countries such as France and Italy, Domuracki said, while in Germany, the United Kingdom and Spain, department stores are important. Given the rapid growth of e-commerce in China, brands need to employ a more aggressive online strategy for that market. Meanwhile, in the Middle East, retailers must establish joint ventures with local partners to succeed, Domuracki explained.

Even though many U.S.-based retailers have struggled to expand overseas, it is important for U.S. brands to position themselves as global businesses, Domuracki said.

Global brands tend to be selective about where they open stores, building locations in world capitals such as London, New York, Paris and Tokyo, which have higher per-store sales than regional cities in the U.S. The success of fast fashion banner Zara, owned by Industria de Diseño Textil SA, is due in part to the fact it thought of itself as a global brand from the very beginning, according to Leonhardt. Since establishing its e-commerce business, Zara has pivoted to opening physical stores only in profitable "A" locations, she said.

Similarly, NIKE appears to be focusing its business on specific locations, announcing a new strategy June 15 for "deeply serving consumers" in 12 cities across 10 countries, including New York, London, Shanghai, Beijing, Los Angeles, Tokyo, Paris, Berlin, Mexico City, Barcelona, Seoul and Milan. The company said these cities and countries are expected to represent over 80% of its projected growth through 2020. NIKE is also building out its direct-to-consumer or online efforts with mobile apps and memberships.

"The information exchange in the world is happening much faster thanks to the increased availability of travel and the internet," observed Jelena Sokolova, a retail analyst at Morningstar. "As a result, most brands compete on a global scale even if they are focusing on the local market."

Source: S&P Global Market Intelligence
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