PVH Corp. (formerly Phillips-Van Heusen) — Form 10-Q Summary
Reporting-period note: Request metadata says “2009 Q3,” but this filing covers the thirteen and thirty-nine weeks ended October 31, 2010, with comparison to November 1, 2009. The quarter ended October 31, 2010 is referred to below as Q3 2010. Financial figures are in millions of dollars unless stated otherwise.
Business context and reporting period
PVH designs, markets, wholesales, licenses and retails apparel and related products, including Calvin Klein, Van Heusen, IZOD and Tommy Hilfiger. PVH acquired Tommy Hilfiger on May 6, 2010; its results are included from that date. Consequently, reported year-over-year growth is substantially acquisition-driven and periods are not directly comparable. The interim statements are unaudited; the independent accountant performed a review, not an audit.
Financial results and liquidity
| Metric | Q3 2010 | Q3 2009 | 39 weeks 2010 | 39 weeks 2009 |
|---|---|---|---|---|
| Total revenue | $1,516.4 | $697.4 | $3,238.7 | $1,784.1 |
| Gross profit | $793.5 | $337.7 | $1,685.7 | $875.3 |
| Gross margin | 52.3% | 48.4% | 52.0% | 49.1% |
| SG&A | $615.2 | $247.2 | $1,427.0 | $684.3 |
| Income before interest and taxes | $178.3 | $90.4 | $111.6 | $191.0 |
| Net income (loss) | $80.7 | $83.6 | $(1.5) | $134.9 |
| Diluted EPS | $1.12 | $1.58 | $(0.03) | $2.58 |
| Interest expense | $41.7 | $8.4 | $89.8 | $25.1 |
- Q3 revenue rose about 117%; nine-month revenue rose about 82%. Tommy Hilfiger contributed $1,240.6 of revenue from acquisition through October 31.
- Q3 gross margin increased 390 basis points, primarily reflecting Tommy Hilfiger’s international and retail mix. Nine-month gross margin rose 290 basis points.
- PVH reported a $140.5 loss on acquisition-related euro forward contracts and $6.7 of debt-extinguishment costs during the first nine months. Acquisition and integration charges, including non-cash valuation amortization, were substantial; management reported $307.3 of such costs for the period.
- Operating cash flow was $136.3 for the first 39 weeks, versus $81.1 a year earlier. Investing used $2,718.5, principally reflecting the acquisition; financing provided $2,577.1. Cash increased $10.6 to $491.4.
- At October 31, current assets were $1,914.6 and current liabilities $856.0 (current ratio approximately 2.2). Long-term debt was $2,523.9 and stockholders’ equity $2,415.2. The company also had approximately $460 of revolving capacity, with no revolver borrowings and $137.0 of letters of credit outstanding.
Material changes, outlook and risks
- The Tommy Hilfiger acquisition materially expanded the company and changed its segment reporting. PVH funded the approximately $3.0 billion consideration with cash, common and preferred stock issuances, $600 million of 7⅜% notes due 2020 and approximately $1.9 billion of term loans. It had repaid $100 million of term loans by quarter-end.
- Management estimated 2010 revenue of approximately $4.2 billion, including about $1.9 billion from Tommy Hilfiger; Heritage Brands and Calvin Klein sales were projected to grow about 12%. Full-year royalty, advertising and other revenue was projected at $405–$410 million.
- Management expected 2010 interest expense of $128–$130 million, a tax rate of 52.5%–53.0%, capital expenditures of approximately $130 million, and an additional approximately $300 million of voluntary term-loan repayments by year-end. It expected roughly $15 million of additional Tommy Hilfiger integration expenses in Q4.
- Debt carries variable-rate and foreign-currency exposure and is subject to financial and operating covenants; covenant breach could trigger default and acceleration. Management also cited integration, leverage and debt-service needs, foreign-exchange movements, consumer demand, inventory and sourcing conditions, and brand/licensee performance as risks.
- PVH formed PVH Europe to pursue international growth for heritage brands, with the ARROW European dress-shirt business planned to begin with the fall 2011 collection. Seasonality means interim results may not indicate full-year performance.
Important facts for investors to verify
- Confirm the period: the supplied filing is for the quarter ended October 31, 2010, not 2009 Q3.
- Assess underlying performance separately from Tommy Hilfiger’s partial-period contribution and the disclosed acquisition, integration, valuation and hedge costs.
- Track term-loan repayments, covenant headroom, interest expense and cash generation against management’s repayment and outlook assumptions.
- Review the final purchase-price allocation: the filing says the allocation was preliminary and subject to change.
- Monitor foreign-exchange effects, inventory and working-capital needs, and the execution and costs of integrating Tommy Hilfiger.