PVH Corp. — Form 10-Q Summary
Period clarification: The filing is for the 13 and 39 weeks ended October 30, 2011, not 2010 Q3 as indicated in the request metadata. Financial amounts below are in U.S. dollars; millions are used unless stated otherwise. Results are unaudited.
Business context and reporting period
PVH operates wholesale, retail and licensing businesses across its heritage brands, Calvin Klein and Tommy Hilfiger. Tommy Hilfiger was acquired in May 2010, so the nine-month year-over-year comparison includes additional Tommy Hilfiger ownership in 2011; it is not fully comparable on an organic basis. The business is seasonal, and nine-month results are not necessarily indicative of full-year results.
Key financial metrics
| Metric | 13 weeks ended Oct. 30, 2011 | 13 weeks ended Oct. 31, 2010 | 39 weeks ended Oct. 30, 2011 | 39 weeks ended Oct. 31, 2010 |
|---|---|---|---|---|
| Total revenue | $1,654.2 | $1,516.4 | $4,357.8 | $3,238.7 |
| Gross profit | $829.0 | $793.5 | $2,281.7 | $1,685.7 |
| Gross margin | 50.1% | 52.3% | 52.4% | 52.0% |
| Income before interest and taxes | $196.8 | $178.3 | $450.8 | $111.6 |
| Net income | $112.2 | $99.8 | $236.6 | $1.6 |
| Diluted EPS | $1.54 | $1.39 | $3.25 | $0.02 |
Third-quarter net sales increased 9% to $1,517.5 million. Gross margin contracted 220 basis points, mainly because of higher product costs; higher selling prices in Calvin Klein and Tommy Hilfiger partly offset the pressure. SG&A was $633.0 million, or 38.3% of revenue, versus 40.6% a year earlier, reflecting revenue leverage and Tommy Hilfiger synergies.
For the first 39 weeks, revenue increased 35%, substantially reflecting the additional Tommy Hilfiger ownership period. The reported prior-year net income was unusually low, including a $140.5 million loss on acquisition-related currency hedges and substantial acquisition and integration costs. 2011 year-to-date results included $51.0 million of Tommy Hilfiger integration and restructuring costs, $20.7 million for settlement of an unfavorable India license contract, and $16.2 million of debt-modification costs.
Operating cash flow was $173.3 million versus $140.8 million. Capital expenditures were $117.9 million, implying approximate operating-cash-flow less capital expenditures of $55.4 million. Cash declined $338.7 million to $160.0 million, including $286.2 million of debt repayments. Inventories were $830.1 million, up from $692.3 million at January 30, 2011; trade receivables were $609.6 million, up from $433.9 million.
At October 30, 2011, total debt was approximately $2,104.4 million, comprising $2,091.6 million of long-term debt including its current portion and $12.8 million of short-term borrowings. Cash was $160.0 million; revolving facilities had approximately $460 million available, with no revolving loans drawn and $102.4 million of letters of credit outstanding. Current assets were $1,774.0 million and current liabilities $983.7 million. PVH reported compliance with all financial and non-financial debt covenants.
Material changes and management commentary
- Third-quarter growth was led by Tommy Hilfiger, with Tommy Hilfiger Europe retail comparable-store sales up 5% and North America up 15%; Calvin Klein outlet comparable-store sales rose 12%. Heritage Brand Wholesale Sportswear sales declined, particularly at IZOD and Timberland.
- Calvin Klein licensing royalty revenue grew 8% in the quarter, with strength in several categories and regions partly offset by domestic jeanswear weakness. Tommy Hilfiger royalty revenue increased 21%.
- PVH continued deleveraging, reporting approximately $535 million of term-loan repayments since the Tommy Hilfiger acquisition. Management said it planned about $165 million of additional term-loan payments in the remainder of 2011.
- PVH invested in Tommy Hilfiger distribution in China and India through equity-method ventures, and reacquired the Tommy Hilfiger trademark rights in India. The India transaction included $25 million paid upfront and sales-based contingent payments capped at $25 million.
- The Timberland sportswear license is scheduled to end in 2012; PVH recorded $7.2 million of related exit costs in the first 39 weeks. Tommy Hilfiger integration and exit costs totaled $51.0 million in that period, with about $20 million more expected in Q4 2011.
Outlook, risks and contingencies
- Management projected FY2011 revenue of $5.825–$5.845 billion. Combined Tommy Hilfiger segment revenue was expected at $2.990–$3.000 billion; combined Calvin Klein Licensing and Calvin Klein Apparel revenue growth was forecast at 13%–14%; combined heritage segments were expected to grow 1%–2%.
- Management expected full-year gross margin to decrease slightly from 2010’s 52.2%, citing product-cost increases and revenue mix, partly offset by Tommy Hilfiger contributions and the absence of prior-year purchase-accounting amortization. SG&A as a percentage of revenue was expected to decrease significantly.
- Full-year net interest expense was projected at $128.5–$129.5 million; the 2011 tax rate was estimated at 30.0%–30.5%; capital expenditures were expected to be about $200 million. Calvin Klein contingent purchase-price payments were forecast at $51–$52 million for 2011.
- Key risks include high leverage and debt-service demands, variable interest rates, foreign-exchange exposure, product-cost inflation, consumer and retail conditions, inventory management, sourcing and shipping disruptions, and execution of acquisitions and international expansion. About 70% of debt was fixed-rate or capped after interest-rate hedges; the remainder was uncapped variable-rate debt.
- Debt agreements contain leverage, interest-coverage and capital-expenditure covenants and restrictions on actions including additional borrowing, dividends, acquisitions and asset sales. Reported guarantees included up to $0.5 million for supplier purchases and approximately $3.85 million for a former leased location, with recourse rights of about $2.4 million on the latter.
Most important facts for investors to verify
- Confirm the correct reporting period: this is the 2011 Q3 10-Q, not 2010 Q3.
- Assess the sustainability of revenue and earnings growth separately from the effect of Tommy Hilfiger consolidation and prior-year acquisition-related charges.
- Track gross-margin pressure, particularly product costs, promotions and the performance of IZOD and the Timberland business exit.
- Monitor debt reduction, cash generation, working-capital needs, covenant compliance and interest-rate and currency exposures.
- Check actual full-year results against management’s revenue, margin, tax, capital-expenditure and debt-payment expectations, and follow remaining integration and India contingent costs.