The world's second-largest apparel group to exit the Chinese market by violating trading principles

The Bureau of Security and Regulation of the Ministry of Commerce of China officially issued an administrative announcement, stating that it has initiated an unreliable entity list management procedure against the American apparel giant PVH Corp. and the biotech company Illumina.

According to the official notice, these companies have violated fundamental market trading principles by unilaterally suspending their commercial cooperation with Chinese enterprises and implementing differentiated treatment policies, which have severely harmed the legitimate rights and interests of Chinese companies. Under the relevant provisions of the "Unreliable Entity List Regulations," entities listed will face a series of regulatory measures such as import and export restrictions, domestic investment bans, and restrictions on the entry of executives. The announcement stated that these entities have violated normal market trading principles, interrupted normal transactions with Chinese companies, and taken discriminatory measures against Chinese enterprises, seriously harming their legitimate rights and interests. The mechanism for the unreliable entity list will take corresponding measures against these entities in accordance with relevant laws and regulations. Matters not covered in this announcement will be executed according to the "Unreliable Entity List Regulations." This announcement will take effect from the date of publication.

According to the "Unreliable Entity List Regulations," entities listed on the unreliable entity list will face restrictions or prohibitions on engaging in import and export activities related to China; restrictions or prohibitions on investment within China; restrictions or prohibitions on the entry of relevant personnel and transportation vehicles; restrictions or cancellations of work permits, stay, or residence qualifications for relevant personnel in China; and fines based on the severity of the situation. This means that PVH Corp. (NYSE: PVH) will exit China.

This regulatory action has long been anticipated. In late Sep, the Ministry of Commerce had already initiated a special investigation procedure against PVH Corp., requiring the group to submit a compliance report and supporting materials related to its Xinjiang operations over the past three years within 30 working days. According to informed sources, the investigation focuses on whether the group has implemented a discriminatory procurement policy for products from the Xinjiang region. Although PVH Corp. claims to be in communication with Chinese regulatory authorities, it has not disclosed relevant investigation details on its official website or in filings with the U.S. Securities and Exchange Commission.

PVH Corp. is an American apparel group that operates men's, women's, children's clothing, and footwear products. Founded in 1881, its original business was shirts, and it has annual sales of $8 billion, making it the world's second-largest apparel group. Headquartered in New York, it owns brands such as Calvin Klein, Tommy Hilfiger, Izod, Van Heusen, and Arrow, and has sales rights for DKNY, Geoffrey Beene, Kenneth Cole, John Henry, and other private brands. PVH Corp. released its third-quarter performance report for 2024. In the third quarter, the company's revenue reached $2.25 billion, a 5% year-over-year decline, but this performance was better than the expected decrease of 6% to 7%.

According to the latest third-quarter performance report released by PVH Corp., for the three months ending Nov 3, 2024, the company's revenue declined by 4.6% from $2.36 billion to $2.26 billion. Revenue for CK and Tommy Hilfiger continued to decline, with Tommy Hilfiger down 1% and Calvin Klein down 3%. The gross margin increased from 56.7% in the third quarter of the previous year to 58.4%.

In the Asia-Pacific region, the company achieved mid-single-digit growth (on a reported basis) and low-single-digit growth at constant exchange rates. This growth encompassed both brands and all sales channels, primarily driven by the Japanese market. In local currency, the Chinese market grew by 7%, benefiting from the company's early and successful execution of the Nov 11 shopping gala. From a channel perspective, the company's e-commerce growth in the region reached double digits, while in-store sales also saw low-single-digit growth.

Notably, PVH Corp. CEO Stefan Larsson responded for the first time during a recent earnings call, stating that while the China business only accounts for 6% of the group's overall revenue, it contributes 16% of the EBITDA. This executive, who previously faced career setbacks at Ralph Lauren, emphasized that compliance documentation has been submitted but declined to disclose specific response strategies.

Market observers generally believe that given the current state of Sino-U.S. trade relations and PVH Corp.'s response strategies, the company is unlikely to pass compliance review. If it is ultimately formally placed on the unreliable entity list, this company, which owns well-known brands such as Calvin Klein and Tommy Hilfiger, will be forced to terminate all business activities in China.