PVH Corp. — Form 10-Q Summary
Reporting period: The filing covers the 13 and 26 weeks ended August 4, 2019, compared with periods ended August 5, 2018. Although the request metadata says 2018 Q2, the filing itself reports fiscal 2019 Q2.
Business context and key financial metrics
PVH is a global apparel company with Tommy Hilfiger, Calvin Klein and Heritage Brands businesses. It sells through wholesale, retail and licensing channels.
| Metric | 13 weeks ended Aug. 4, 2019 | Prior-year quarter | 26 weeks ended Aug. 4, 2019 | Prior-year half |
|---|---|---|---|---|
| Total revenue | $2.364 billion | $2.334 billion | $4.721 billion | $4.648 billion |
| Gross profit | $1.288 billion | $1.297 billion | $2.584 billion | $2.588 billion |
| Gross margin | 54.5% | 55.6% | 54.7% | 55.7% |
| Income before interest and taxes | $249.8 million | $231.4 million | $384.9 million | $475.7 million |
| Net income attributable to PVH | $193.5 million | $165.2 million | $275.5 million | $344.6 million |
| Diluted EPS | $2.58 | $2.12 | $3.65 | $4.42 |
Second-quarter SG&A was $1.155 billion, or 48.8% of revenue, versus $1.071 billion, or 45.9%, a year earlier. For the first half, SG&A was $2.316 billion, or 49.1% of revenue, versus $2.124 billion, or 45.7%.
First-half operating cash flow was $317.9 million, compared with $310.9 million. Cash and equivalents were $433.5 million at August 4, 2019, versus $452.0 million at fiscal year-end. Current assets were $3.399 billion and current liabilities $2.428 billion. Inventory was $1.862 billion, up from $1.732 billion at February 3, 2019.
At August 4, total borrowings were approximately $2.967 billion, including $183.2 million short-term borrowings and $2.784 billion long-term debt (including current maturities). Operating lease liabilities were $1.881 billion; these are separate from borrowings. PVH reported compliance with applicable debt covenants.
Material changes versus prior comparable periods
- Quarterly revenue increased 1%; first-half revenue increased 2%. Tommy Hilfiger International was a key growth contributor, while Calvin Klein North America revenue declined, including the impact of the G-III license and weaker comparable-store sales.
- Gross margin declined 110 basis points in the quarter and 100 basis points for the half, primarily from more promotional selling in North America and Calvin Klein restructuring-related inventory markdowns.
- Quarterly net income and EPS increased, but first-half net income attributable to PVH fell about 20% and diluted EPS fell from $4.42 to $3.65. The periods include significant unusual items, including a $113.1 million noncash acquisition-related gain in 2019.
- PVH acquired the remaining interest in its Australian business and acquired Tommy Hilfiger retail operations in Central and Southeast Asia. The Australian acquisition brought previously equity-accounted operations into consolidation.
- PVH refinanced its senior credit facilities in April 2019, replacing secured facilities with senior unsecured facilities due in 2024; it recorded $5.2 million of debt modification and extinguishment costs in the half.
- PVH adopted lease accounting in fiscal 2019, recognizing substantial right-of-use assets and lease liabilities; prior periods were not restated.
Outlook, management commentary, risks and unusual items
- Management expected 2019 revenue to increase about 1% versus 2018, including an approximately 2% negative foreign-currency impact. Tommy Hilfiger revenue was projected up about 5%, Calvin Klein down about 2%, and Heritage Brands down about 1%.
- Full-year gross margin was expected to increase slightly; SG&A as a percentage of revenue was expected to rise. Management cited promotional selling, brand restructuring costs and expected tariffs on U.S. imports from China as pressures.
- Other stated 2019 expectations included net interest expense of about $110 million, an effective tax rate of 11.5%–12.5%, capital expenditures of about $400 million, and approximately $300 million of share repurchases. Management also projected an approximately $215 million revenue and $25 million net-income headwind from foreign-currency translation. The supplied filing text does not provide clear full-year EPS or net-income guidance.
- Unusual first-half items included the $113.1 million noncash gain from remeasuring prior Australian equity investments; $87.8 million of long-lived asset impairments; $99.4 million of Calvin Klein restructuring costs; and approximately $60 million of socks-and-hosiery license termination costs. PVH expected about $6 million of additional Calvin Klein restructuring costs and about $18 million of additional acquisition-related costs in the remainder of 2019.
- Key risks include further U.S.–China tariffs, foreign-exchange movements, consumer and retail conditions, promotional activity, inventory management, and debt-service requirements. Management cautioned that pension actuarial results could produce a significant fourth-quarter loss.
- PVH stated that pending litigation was not expected to have a material adverse effect on its financial position and that there had been no material changes to the risk factors in its latest annual report.
Important facts for investors to verify
- How much reported earnings depend on the noncash $113.1 million acquisition gain and how the $87.8 million impairment and restructuring charges affect comparability.
- Whether the 2019 revenue, margin, tax, interest, capital-spending and buyback expectations were achieved, particularly given currency and tariff risks.
- Underlying sales and comparable-store trends by brand and region, including weakness in North American Calvin Klein and Tommy Hilfiger retail.
- Inventory growth, operating cash conversion, and the effect of acquisitions and seasonal working-capital needs on liquidity.
- Debt repayment capacity and the cost and exposure associated with variable-rate borrowings, euro-denominated debt and lease obligations.