Updated 4:48 p.m. ET Dec. 5
PVH Corp. is still tiptoeing through the geopolitical minefield that is the Xinjiang Uyghur Autonomous Region.
In September, China started investigating whether or not PVH had taken “discriminatory measures” against products from Xinjiang — where more than a million Uyghurs and other Turkic Muslims are reported to be under internment, with many forced to work.
“We have cooperated fully, including as requested, submitting our written response back to them within the deadline,” said Stefan Larsson, chief executive officer of PVH, on a conference call with analysts Thursday morning. “And at this point in time, it’s not known when [the investigation] will be concluded.”
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PVH prohibited licensees from producing finished goods in Xinjiang in 2021 and had also cut ties with factories that used cotton from the region.
That was very much in keeping with the general practice of many Western fashion companies at the time and it appears PVH is being held out as an example.
It’s a tough spot.
Xinjiang supplies more than 80 percent of China’s cotton, but has been a hot button issue for years. It is currently illegal to bring goods made of Xinjiang cotton into the U.S.
The investigation falls under China’s Unreliable Entity List mechanism, which can prevent companies from bringing goods in or out of the massive market.
Larsson said: “What’s important for us to share is that PVH has operated in China for more than 20 years, proudly serving our Chinese consumers and contributing to the Chinese economy, and we look forward to doing that for many years to come. As a company, our policy is to conduct business in compliance with both local and international laws and regulations and in line with established industry standards and practices.”
He added that PVH would continue to engage with China’s Ministry of Commerce and business partners in the country.
“We remain committed to drive our business forward in China, where we generated approximately 6 percent of our revenue and approximately 16 percent of our [earnings before interest and taxes] in 2023,” Larsson said.
The update came along with a deep dive into the company’s third-quarter results, which Larsson said showed that the PVH+ strategic plan was working and driving more full-price sales.
Revenues for the three months ended Nov. 3 decreased 4.6 percent to $2.26 billion, but gross margins expanded by 170 basis points to 58.4 percent of sales.
While the company continues to build for the future, the fourth quarter could be a little rough.
Zac Coughlin, chief financial officer, said on the call: “We are projecting gross margin to decline approximately 200 basis points, driven by a moderately more promotional environment than last year in the U.S. and China, an increase in freight costs due to the recent disruptions in a couple of our key sourcing locations as well as Red Sea surcharges and the mix of wholesale shipments within the second half of the year, which negatively impacts our gross margin but does not impact our overall profitability.”
Investors were wary at first and sent PVH shares down more than 6 percent when the results were released Wednesday afternoon, but the stock recovered some Thursday and closed down 3.5 percent to $108.86.