PVH Corp. 10-Q Summary
Reporting period: The filing covers the thirteen weeks ended May 3, 2015, compared with the thirteen weeks ended May 4, 2014. Although the request identifies the period as 2014 Q1, the filing itself is for 2015 Q1.
Business context and results
PVH is a global apparel company whose major brands include Calvin Klein, Tommy Hilfiger and Heritage Brands. It sells through wholesale, retail, e-commerce and licensing channels. Results are seasonal and the quarter is not necessarily indicative of full-year performance. Unless stated otherwise, amounts are in millions of dollars.
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Total revenue | $1,879.3 | $1,963.7 |
| Gross profit / margin | $985.6 / 52.4% | $1,033.2 / 52.6% |
| SG&A / share of revenue | $814.9 / 43.4% | $859.1 / 43.7% |
| Income before interest and taxes | $176.8 | $84.5 |
| Net income attributable to PVH | $114.1 | $35.3 |
| Diluted EPS | $1.37 | $0.42 |
| Operating cash flow | $60.4 | $(51.4) |
| Capital expenditures | $48.5 | $50.7 |
Revenue fell 4.3%, while net income attributable to PVH rose substantially. The comparison benefited from the absence of $93.1 million of debt modification and extinguishment costs recorded in Q1 2014; 2014 also included an $8.0 million net gain from deconsolidations. The stronger U.S. dollar materially reduced reported international revenue and profit. Gross margin declined 20 basis points; SG&A as a percentage of revenue improved 30 basis points. Net interest expense fell to about $30 million from about $41 million.
Segments and material changes
- Tommy Hilfiger International revenue declined to $413.2 million from $500.0 million, including an estimated $100 million adverse currency translation impact across Tommy Hilfiger North America and International.
- Calvin Klein International revenue declined to $315.1 million from $327.7 million, including an estimated $45 million adverse translation impact across Calvin Klein segments. International comparable-store sales were stronger in Calvin Klein and Tommy Hilfiger, but U.S. tourist traffic and spending weakened.
- Heritage Brands revenue increased to $458.3 million from $436.0 million, with shipment timing and Van Heusen retail comparable-store growth contributing.
- PVH continued Warnaco integration and restructuring, incurring $18.8 million of related costs in the quarter; management expected about $31 million more during the remainder of 2015. The company was also exiting Izod retail, with $1 million of current-quarter charges and about $19 million of additional charges expected in the remainder of 2015.
Liquidity, debt and capital
Cash and equivalents were $419.3 million at May 3, 2015, down $60.0 million from February 1. Current assets were $2,735.7 million and current liabilities $1,227.6 million. Cash from operations improved to $60.4 million, primarily reflecting higher earnings adjusted for noncash items; investing used $62.6 million and financing used $59.5 million.
Total debt, including current maturities, was $3,489.0 million, compared with $3,538.0 million at February 1, 2015; long-term debt was $3,389.7 million. PVH repaid $49.8 million on term loans during the quarter and expected about $350 million of debt repayment for 2015. About 70% of long-term debt was fixed or capped for interest-rate purposes. No revolving-credit borrowings were outstanding; $39.9 million of letters of credit reduced facility availability. PVH reported compliance with its debt covenants. Approximately $330 million of cash was held by foreign subsidiaries and considered permanently reinvested.
Capital expenditures were expected to be approximately $300 million for 2015. The company projected 2015 cash dividends of about $13 million and, effective June 3, 2015, authorized a new $500 million, three-year share repurchase program; purchases were not assured.
Outlook, risks and contingencies
- Management projected full-year revenue down 3% versus 2014, including a 6% negative foreign-currency impact: Calvin Klein up 1% including a 5% negative currency impact; Tommy Hilfiger down about 7% including a 10% negative currency impact; Heritage Brands down about 3%.
- Management expected full-year gross margin to increase, principally from Calvin Klein, but said currency headwinds would partly offset improvement. SG&A as a percentage of revenue was expected to decline. Full-year net interest expense was forecast at $120–$125 million, compared with $139 million in 2014.
- Key risks include further U.S. dollar strength, promotional activity and consumer demand, execution of Warnaco integration and Izod exit plans, leverage and debt-service requirements, and compliance with restrictive debt covenants. Currency and interest-rate exposures are partly hedged but not eliminated.
- PVH disclosed $54.8 million of maximum Bass-related lease guarantees, with recourse against the buyer, and approximately $8.3 million of guarantees for joint-venture obligations. Management said pending litigation was not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
- Pension assumptions are a potential earnings sensitivity: management estimated a 0.25 percentage-point change in the discount rate would change 2015 net periodic pension expense by approximately $35 million.
Important facts for investors to verify
- Whether reported revenue and segment trends excluding foreign-exchange effects align with underlying demand, particularly in Europe and U.S. tourist-dependent locations.
- Progress against full-year sales, margin, debt repayment and capital-spending expectations, including the expected remaining Warnaco and Izod charges.
- Debt maturities, covenant headroom, interest-rate exposure and the company’s capacity to fund operations and any share repurchases while reducing leverage.
- Whether operating cash flow remains sufficient given seasonal working-capital movements and the planned investment and debt repayments.
- Potential pension-cost volatility, contingent Calvin Klein payments, lease guarantees and the future effect of the new revenue-recognition standard.