PVH Corp. Form 10-Q Summary
Period clarification: The request identifies “2016 Q1,” but this filing covers the thirteen weeks ended April 30, 2017 (fiscal 2017 Q1), compared with the thirteen weeks ended May 1, 2016. The filing was signed June 5, 2017.
Business context and results
PVH is a global apparel company with Calvin Klein, Tommy Hilfiger, Heritage Brands and licensed brands. It sells through wholesale, retail, digital commerce and licensing. Results are seasonal and the first quarter is not necessarily indicative of the full year.
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Total revenue | $1,989.0 million | $1,917.8 million |
| Gross profit / gross margin | $1,080.8 million / 54.3% | $1,006.9 million / 52.5% |
| SG&A | $968.0 million | $865.2 million |
| Income before interest and taxes | $113.2 million | $294.6 million |
| Net income attributable to PVH | $70.4 million | $231.6 million |
| Diluted EPS | $0.89 | $2.83 |
| Operating cash flow | $(44.9) million | $109.3 million |
| Capital expenditures | $68.4 million | $45.9 million |
Revenue increased 3.7%. Gross margin improved 180 basis points, attributed to favorable international mix, less promotional selling in North America, the addition of TH China and licensing/deconsolidation effects; stronger U.S. dollar effects partly offset the improvement. SG&A rose to 48.7% of revenue from 45.1%. Earnings fell sharply, in part because the prior-year quarter included a $153.1 million noncash gain from remeasuring PVH’s existing TH China investment at fair value. Q1 2017 also included $54.2 million of Li & Fung transaction-related costs, $7.0 million for the Tommy Hilfiger New York office relocation, a $9.4 million pension settlement loss and $1.8 million of warehouse consolidation costs.
Liquidity, debt and cash flows
Cash and equivalents were $490.9 million at April 30, 2017, down $239.2 million from fiscal year-end. Operating cash use was $44.9 million, driven principally by working-capital changes, including higher receivables. Investing cash use was $103.9 million, including $68.4 million of capital spending and $28.1 million for acquisitions. Financing cash use was $94.3 million, including $50.0 million of debt repayments and $64.6 million of treasury-share purchases.
Current assets were $2.655 billion and current liabilities $1.378 billion. Long-term debt was $3.157 billion and short-term borrowings $42.5 million; cash less these borrowings implies net debt of approximately $2.709 billion. Approximately 65% of long-term debt was fixed-rate after swaps. The company reported compliance with applicable debt covenants and said no mandatory long-term debt repayment was due until December 2018, following voluntary repayments. Financing arrangements include leverage and interest-coverage covenants, restrictions on dividends, repurchases and other actions, and collateral pledges.
Segment trends and material changes
- Calvin Klein International revenue rose to $380.4 million from $342.1 million, with 3% international comparable-store sales growth; North America revenue decreased, including a 5% comparable-store sales decline.
- Tommy Hilfiger International revenue increased to $523.5 million from $457.2 million, including a full quarter of TH China and 14% comparable-store sales growth. North America revenue declined, including a 4% comparable-store sales decline and the impact of licensing its directly operated womenswear wholesale business.
- Heritage Brands revenue declined to $391.2 million from $403.3 million, principally due to shipment timing; comparable-store sales were flat.
- PVH acquired True & Co., a direct-to-consumer intimate apparel retailer, on March 30, 2017, for $28.5 million of consideration. The preliminary allocation included $27.7 million of goodwill and remained subject to change.
- The Li & Fung supply-chain restructuring transaction, including termination of the non-exclusive buying agency agreement, was expected to close in Q3 2017.
Outlook, risks and contingencies
Management expected 2017 revenue to increase approximately 3% versus 2016, including an approximately 2% adverse foreign-currency translation impact; Calvin Klein revenue was forecast to grow about 6%, Tommy Hilfiger about 2%, and Heritage Brands to be flat. Full-year gross margin was expected to improve, while SG&A as a percentage of revenue was expected to increase. Management forecast full-year net interest expense of approximately $120 million, an effective tax rate of 15.5%–16.0%, and capital expenditures of approximately $400 million. It expected foreign exchange to reduce 2017 revenue by about $110 million and net income by about $15 million through translation, and to reduce net income by about $10 million through transaction effects, based on then-current exchange rates.
Additional expected 2017 costs included approximately $18 million for TH China acquisition-related items, $1 million for the Li & Fung transaction, $13 million for the office relocation and $13 million for warehouse consolidation. Management cautioned that pension expense may be volatile due to actuarial assumptions and actual results. Other principal risks include currency movements, consumer demand and promotional activity, inventory management, sourcing and shipping costs, trade restrictions, supply-chain disruption, acquisitions and brand/licensee performance. The filing states that litigation was not expected by management to have a material adverse effect and that there were no material changes to the risks disclosed in the prior Form 10-K. No material control weaknesses were reported.
Important facts for investors to verify
- Confirm the intended reporting year: this is Q1 2017, not Q1 2016.
- Assess the sustainability of revenue growth and gross-margin gains against currency headwinds, North American comparable-store declines and changes in licensing and consolidation.
- Separate recurring operating performance from the prior-year TH China fair-value gain and current-period restructuring, pension and relocation costs.
- Monitor cash conversion, working-capital requirements, planned capital spending, share repurchases and the company’s ability to service approximately $3.2 billion of borrowings.
- Track completion and final purchase accounting for True & Co., the expected Li & Fung transaction closing, and management’s full-year guidance assumptions.