PVH Corp. Form 10-Q Summary
Period clarification: Although the request metadata says 2014 Q2, the filing itself reports the thirteen and twenty-six weeks ended August 2, 2015, compared with periods ended August 3, 2014. The filing is unaudited.
Business context and reporting period
PVH is a global apparel company, with Calvin Klein, Tommy Hilfiger and Heritage Brands businesses. It sells through wholesale, company-operated stores, e-commerce and licensing. The company had announced it would exit its IZOD retail business by the end of 2015.
Financial performance and liquidity
| Metric | 13 weeks ended Aug. 2, 2015 | 13 weeks ended Aug. 3, 2014 | 26 weeks ended Aug. 2, 2015 | 26 weeks ended Aug. 3, 2014 |
|---|---|---|---|---|
| Total revenue | $1,864.0 million | $1,975.6 million | $3,743.3 million | $3,939.3 million |
| Gross profit / margin | $1,002.1 million / 53.8% | $1,054.7 million / 53.4% | $1,987.7 million / 53.1% | $2,087.9 million / 53.0% |
| Income before interest and taxes | $154.1 million | $159.3 million | $330.9 million | $243.8 million |
| Net income attributable to PVH | $102.2 million | $126.5 million | $216.3 million | $161.8 million |
| Diluted EPS | $1.22 | $1.52 | $2.59 | $1.94 |
| Operating cash flow | — | — | $323.0 million | $170.2 million |
For the quarter, revenue fell about 6% and net income about 19% year over year. For the half-year, revenue fell about 5%, while net income rose; the comparison benefited from $93.1 million of debt modification and extinguishment costs recorded in the prior-year period. Quarterly SG&A was $850.5 million, or 45.6% of revenue, versus $895.8 million, or 45.3%.
At August 2, 2015, cash was $466.7 million and current assets and liabilities were $2,819.8 million and $1,369.0 million, respectively. Total debt carrying value, including current maturities, was $3,373.9 million; short-term borrowings were $8.1 million. The company had no revolver borrowings and $38.1 million of letters of credit outstanding. About 70% of long-term debt was fixed-rate or capped-rate after hedging. Cash declined $12.6 million from fiscal year-end; approximately $409 million was held overseas and considered permanently reinvested. Half-year capital expenditures were $100.9 million.
Material changes versus the prior comparable period
- Foreign-exchange translation was a major headwind: the stronger U.S. dollar reduced second-quarter revenue by approximately $148 million across Tommy Hilfiger and Calvin Klein, according to the segment discussion; the half-year impact was approximately $294 million. International sales and profits translated into fewer U.S. dollars.
- Excluding currency effects, management cited strength in Europe and growth in international retail comparable sales. Quarter comparable sales increased 9% at Tommy Hilfiger International, 3% at Calvin Klein International and 4% at Calvin Klein North America. Tommy Hilfiger North America comparable sales were relatively flat.
- Gross margin improved modestly, led by Calvin Klein and a greater retail mix, but promotional activity at Tommy Hilfiger North America and currency effects on higher-margin international businesses offset some gains.
- Operating cash flow increased to $323.0 million from $170.2 million, primarily from working-capital changes and higher net income adjusted for noncash charges. Inventory rose to $1,402.6 million from $1,257.3 million at fiscal year-end.
- Interest expense declined year over year, reflecting lower average debt balances and rates. Half-year comprehensive income attributable to PVH was $52.9 million versus $179.2 million, including a $140.1 million foreign-currency translation loss in 2015.
Guidance, management commentary and risks
- Management projected full-year 2015 revenue down approximately 2%, including an approximately 6% negative foreign-exchange impact. By business, it expected Calvin Klein revenue up about 1% (including a 7% currency headwind), Tommy Hilfiger down about 5% (including a 9% currency headwind), and Heritage Brands down about 3%.
- Full-year gross margin was expected to be relatively flat. SG&A as a percentage of revenue was expected to decrease, reflecting lower expected Warnaco integration costs and no anticipated repeat of the prior-year $139 million U.S. pension actuarial loss; pension assumptions and experience could still cause volatility.
- Management expected 2015 net interest expense of approximately $120 million, long-term debt repayments of approximately $350 million, capital expenditures of approximately $300 million, and Calvin Klein contingent purchase-price payments of approximately $51 million.
- PVH expected approximately $26 million of additional Warnaco integration and restructuring charges and approximately $8 million of additional IZOD retail exit charges during the remainder of 2015. It had incurred $31.0 million cumulatively of an estimated $35.0 million in IZOD exit costs by August 2.
- Other notable items included a $2.2 million one-time gain in the Karl Lagerfeld equity investment, $31.9 million of half-year Warnaco integration and restructuring costs, and $6.3 million of half-year costs related to operating and exiting IZOD retail. The company recorded a $1.6 million store-asset impairment.
- Key risks include currency translation and transaction exposure, consumer demand and promotional activity, inventory management, acquisition integration, and substantial leverage. Credit facilities include financial covenants and restrictions on debt, dividends, repurchases and other activities. PVH reported compliance with its covenants at period-end; its disclosed ratings were Ba1 from Moody’s and BB+ from S&P, both with stable outlooks.
- Management said pending litigation was not expected to materially adversely affect financial position and reported no material change in the risk factors from its latest Form 10-K. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Confirm the intended reporting year: this filing covers Q2 2015, not Q2 2014.
- Track actual revenue and earnings against full-year outlook, particularly the assumed currency headwinds and performance of Tommy Hilfiger and Calvin Klein internationally.
- Monitor inventory, operating cash flow, debt repayments, interest costs and compliance with credit-facility covenants.
- Compare realized Warnaco integration and IZOD exit costs with remaining estimates, and assess progress on the planned store exit.
- Review the availability and use of overseas cash, the pace of the $500 million share-repurchase authorization, and the effects of pension actuarial changes.