PVH CORP. quarterly report, Q2 FY2016

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PVH Corp. — Form 10-Q summary

Business context and reporting period

PVH is a global apparel company with Calvin Klein, Tommy Hilfiger and Heritage Brands businesses. This filing covers the 13 and 26 weeks ended July 31, 2016, compared with periods ended August 2, 2015. The request metadata says “2015 Q2,” but the filing itself is for the second quarter of fiscal 2016.

Financial performance and liquidity

  • Revenue: Second-quarter revenue was $1.933 billion, up from $1.864 billion. First-half revenue was $3.851 billion, up from $3.743 billion.
  • Profit: Second-quarter net income was $90.5 million ($1.11 diluted EPS), versus $102.2 million ($1.22). First-half net income was $322.1 million ($3.95 diluted EPS), versus $216.3 million ($2.59); the 2016 first-half result included a $153.1 million noncash gain related to the TH China acquisition.
  • Margins: Gross margin was 53.5% in Q2 versus 53.8%; first-half gross margin was 53.0% versus 53.1%. First-half SG&A was 45.2% of revenue versus 44.5%.
  • Cash flow: First-half operating cash flow was $408.7 million, compared with $323.0 million. Investing activities used $270.5 million, including the TH China acquisition and capital expenditures of $102.8 million. Cash increased $185.3 million to $741.7 million.
  • Debt and liquidity: Long-term debt was $3.358 billion and short-term borrowings were $19.4 million at July 31; cash was $741.7 million. PVH amended its secured facilities, extended their maturity to May 2021 and replaced the Term Loan B with additional Term Loan A borrowings. No revolving-credit borrowings were outstanding; $24.1 million of letters of credit were outstanding. PVH reported covenant compliance.
  • Other: Inventory was $1.412 billion. Capital expenditures for full-year 2016 were projected at approximately $275 million. The annual common dividend was $0.15 per share.

Material changes versus the prior comparable period

  • Calvin Klein and Tommy Hilfiger revenue growth, including the consolidation of TH China beginning April 13, 2016, more than offset lower Heritage Brands revenue. Heritage Brands revenue fell amid business rationalization, softer neckwear and shipment timing.
  • Q2 Calvin Klein International revenue rose 13% and comparable store sales rose 11%; Tommy Hilfiger International revenue rose 10%, supported by Europe and TH China. U.S. comparable store sales remained weak: Calvin Klein North America declined 4% and Tommy Hilfiger North America declined 7% in Q2.
  • The stronger U.S. dollar weighed on reported international results and raised local-currency inventory costs. Q2 gross margin also faced promotional pressure at Tommy Hilfiger North America and TH China acquisition-related inventory adjustments.
  • PVH acquired the remaining 55% of TH China for $263.0 million cash consideration, with $105.3 million of cash acquired. It recognized a $153.1 million remeasurement gain on its pre-existing interest and added $261.6 million of goodwill.
  • PVH issued €350 million of 3⅝% senior notes due 2024 and repurchased approximately 1.4 million shares for $129.2 million during the first half.

Outlook, commentary and risks

  • Management projected 2016 revenue growth of approximately 2%, including an approximately 1% adverse currency effect; Calvin Klein growth of approximately 5%, Tommy Hilfiger growth of approximately 5%, and Heritage Brands decline of approximately 8%.
  • Management expected full-year gross margin to improve versus 2015, but SG&A as a percentage of revenue to rise. Expected 2016 net interest expense was $117–$120 million; full-year capital expenditures were projected at approximately $275 million.
  • Management expected unfavorable currency impacts to continue. Estimated 2016 net-income reductions were approximately $20 million from translation and $110 million from transaction exposure, based on then-current exchange rates.
  • PVH expected additional 2016 TH China acquisition charges of approximately $33 million, Warnaco integration/restructuring charges of approximately $2 million, and charges related to the Tommy Hilfiger womenswear licensing transition of approximately $1 million. It also anticipated a roughly $15 million gain in Q3 from an expected payment relating to a European Tommy Hilfiger flagship location.
  • Risks include currency movements, consumer demand and tourist traffic, promotional activity, inventory management, leverage and debt covenants, interest rates, supply-chain and geopolitical disruption, and execution of acquisitions and restructuring. PVH cited contingent Calvin Klein purchase-price payments based on sales through February 2018 and Bass lease guarantees with a maximum exposure of $34.3 million. It reported no material change to previously disclosed risk factors and stated that pending litigation was not expected to materially affect its financial position.

Important facts for investors to verify

  • Separate recurring operating performance from the $153.1 million TH China remeasurement gain and acquisition-related costs when assessing first-half earnings.
  • Track segment trends, especially U.S. comparable store sales, Heritage Brands declines, and the contribution and costs of consolidated TH China.
  • Assess foreign-exchange assumptions against actual currency movements and the disclosed projected effects on revenue, gross margin and net income.
  • Monitor debt, refinancing and covenant headroom, floating-rate exposure, planned repayments, and the use of cash for share repurchases and investment.
  • Check progress against 2016 guidance and expected acquisition, restructuring, marketing and flagship-location items; actual results may differ, and interim results are seasonal.