PVH Corp. Form 10-Q Summary
Period discrepancy: The supplied filing is for the third quarter of fiscal 2020, the thirteen weeks ended November 1, 2020, with year-to-date results for the thirty-nine weeks ended that date. It is not a 2019 Q3 filing; comparisons below are to the corresponding 2019 periods.
Business context
PVH is a global apparel company whose principal brands include TOMMY HILFIGER and Calvin Klein, alongside Heritage Brands. It sells through wholesale, retail and digital channels and earns licensing revenue. The results were heavily affected by COVID-19, store restrictions, reduced consumer demand and disruptions among wholesale customers and business partners.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Thirty-nine weeks 2020 | Thirty-nine weeks 2019 |
|---|---|---|---|---|
| Total revenue | $2.118 billion | $2.588 billion | $5.043 billion | $7.308 billion |
| Gross profit | $1.101 billion | $1.406 billion | $2.651 billion | $3.991 billion |
| Gross margin | 52.0% | 54.3% | 52.6% | 54.6% |
| SG&A | $987 million | $1.142 billion | $2.810 billion | $3.458 billion |
| Operating income (loss) before interest and taxes | $122 million | $270 million | $(1.098) billion | $654 million |
| Net income (loss) attributable to PVH | $70 million | $209 million | $(1.078) billion | $485 million |
| Diluted EPS | $0.98 | $2.82 | $(15.15) | $6.46 |
| Cash provided by operating activities | Not reported separately for quarter | Not reported separately for quarter | $427 million | $432 million |
Q3 revenue declined 18% year over year; nine-month revenue declined 31%. Q3 gross margin fell 230 basis points, mainly due to heavier promotions and inventory liquidation and adverse currency effects. Nine-month results included $933.5 million of goodwill and intangible-asset impairment charges, including $879 million related to goodwill. The filing also reports $23.2 million of other long-lived asset impairments and a $12.3 million impairment of an equity-method investment.
Cash, debt and liquidity
- Cash and cash equivalents were $1.460 billion at November 1, 2020, compared with $503 million at February 2, 2020.
- Long-term debt, including its current portion, had a carrying value of $3.487 billion; short-term borrowings were $21 million. Long-term debt increased from $2.708 billion at fiscal year-end, in part following new note issuances.
- PVH reported approximately $1.5 billion of additional borrowing capacity. Operating cash flow for the first nine months was $427 million, while capital expenditures were $159 million.
- Cash generation benefited from working-capital actions, including inventory reduction and extended supplier payment terms. The company reported approximately $325 million of outstanding supplier obligations sold by suppliers through its voluntary supply-chain finance program at period-end.
- PVH was in compliance with amended debt covenants at November 1. Its June 2020 credit amendment temporarily suspended certain leverage and interest-coverage tests, added a $400 million minimum liquidity covenant and restricted dividends and share repurchases during the relief period.
Outlook, management commentary and material items
- Management expected COVID-19 to continue materially pressuring results in Q4 2020. It projected Q4 revenue to decline approximately 20% year over year and full-year revenue to decline significantly from 2019; it did not provide a specific full-year revenue figure.
- Management expected Q4 gross margin to be relatively flat compared with 53.7% in Q4 2019, but expected full-year gross margin to decline from 2019. It also expected Q4 SG&A dollars to be lower year over year, while SG&A as a percentage of revenue was expected to rise significantly because of lower sales.
- Digital commerce performed relatively well: directly operated digital sales increased 70% in both the quarter and first nine months. Q3 wholesale sales declined 22%, while direct-to-consumer retail sales declined 11%.
- PVH planned to eliminate approximately 450 North American office positions, or 12% of that workforce, with expected annual savings of about $80 million. It recorded $40 million of related costs in the first nine months. It also planned to exit its 162-store Heritage Brands Retail business by mid-2021, expecting approximately $50 million of total exit costs; $21 million had been recorded through November 1.
- The Speedo North America sale closed in April 2020 for net proceeds of $169 million. The transaction reduced Heritage Brands revenue; a final working-capital adjustment remained subject to resolution.
- PVH suspended dividends after its March 2020 payment and halted share repurchases. Capital spending for 2020 was expected to be approximately $200 million, down from $345 million in 2019.
- Key risks include renewed store closures, weaker demand, wholesale customer bankruptcies, supply-chain disruption, foreign-exchange movements, further asset impairments and possible future covenant pressure if earnings and operating cash flows recover more slowly than forecast. Management said it expected to maintain covenant compliance for at least the next 12 months based on its forecasts, but noted this was not assured if conditions worsened.
Important facts for investors to verify
- Confirm the intended reporting period: the filing covers Q3 2020, despite the request specifying 2019 Q3.
- Review the impairment disclosures and assumptions, particularly the remaining goodwill in Calvin Klein reporting units and sensitivity to revenue growth and discount rates.
- Track cash generation, inventory, receivables and supplier-finance balances to assess whether liquidity remains resilient as pandemic conditions evolve.
- Monitor debt maturities, covenant relief and restrictions on dividends and repurchases, as well as credit-rating developments.
- Assess whether the projected recovery, approximately $80 million in annual workforce savings and Heritage Brands Retail exit timetable and costs are achieved.