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Macy's store closures haven't spooked Gap, PVH

ECONOMY US
Gary Gardiner | Bloomberg | Getty Images

Macy's looming wave of store closures hasn't sent the broader retail industry running for cover.

Instead, with 100 of the department store's locations on the chopping block, the CEO of one of Macy's most important vendors shook off what he predicts will have a "minimal" impact on his company's business.

During a presentation at Goldman Sachs' Annual Global Retailing Conference, PVH Chief Executive Manny Chirico said that while Macy's has not yet outlined which of its 675 stores it will close, they will be the least profitable and most cannibalizing locations.

And because PVH's Calvin Klein and Tommy Hilfiger brands are only stocked at roughly 500 of the retailer's top stores, its exposure to Macy's contraction is relatively limited, Chirico said. Macy's has said it expects the store closings to result in $1 billion in lost revenue.

"They cost us a fortune in gross margin dollars," Chirico said. "It's not that big [of] an issue for us."

Competitor Gap likewise didn't take the news too hard. Despite his company's similar skew toward mall-based stores, CEO Art Peck told attendees at the Goldman conference that he views Macy's closures as an opportunity to grab market share.

"That is demand that is going to get placed into other businesses," Peck said.

He added that Gap's brands have good co-tenancy clauses, meaning if a traffic-generating anchor store were to close in a center where they operate, it could lead to a break on rent.

The CEOs' comments come less than a month after J.C. Penney Chief Marvin Ellison told analysts that some of Macy's previous store closures have been a net positive for his company. Because the closings are "well-telegraphed," "there are specific things we can do to take market share," he said.

That is, of course, so long as the shopping center remains a viable place to do business. Sometimes, when an anchor tenant closes a store, it can be the nail in the coffin for a dying center. Retailers across the industry have been shuttering stores in a bid to boost their profitability.

Yet despite department stores' recent struggles, Chirico reaffirmed PVH's allegiance to these locations, which account for 80 percent of his company's wholesale business. He reiterated that he sees opportunity for margin expansion during the second half, thanks to tighter inventory levels.

Michael Kors CEO John Idol similarly pledged his brand's commitment to the major department stores. Despite the accessories label's recent decision to pull back its distribution to these stores — as well as sit out their promotional events — Idol said he understands why discounting got so out of hand there.

"People are suffering from low mall traffic," he said. "They're trying to [remedy] that through additional promotions."

That doesn't mean, however, that Michael Kors needs to participate in those tactics.

Though Idol doesn't expect fall trends to show robust dollar or comparable-sales growth, inventories are in a much healthier position to drive gross margin improvement, he said. And come February, when the label starts pulling back on its promotional activity, Michael Kors will have additional opportunity to generate more profitable sales.

"If we lose market share in the U.S., that's OK," Idol said. "We want to get [our] integrity back."

Nordstrom, the only department store to present at the conference Wednesday, also acknowledged that it's keeping inventories lean as it tries to drive urgency with consumers. If shoppers know the handbag they want is only available in a limited quantity, they're more likely to buy it full price, rather than risk it selling out while they wait for a discount, CFO Mike Koppel said.

The department store will also continue partnering with brands that have limited distribution.

"We continue to want to be differentiated," Koppel said.