Business Context and Reporting Period
Company: Phillips-Van Heusen Corporation (PVH)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: November 2, 2008 (13 and 39 weeks)
Business Overview: PVH is a global apparel company managing a portfolio of owned brands (Calvin Klein, Van Heusen, IZOD, Bass, Eagle) and licensed brands (Timberland, Tommy Hilfiger, DKNY, etc.). Operations are divided into Wholesale Dress Furnishings, Wholesale Sportswear, Retail Apparel, Retail Footwear, and Calvin Klein Licensing segments.
Key Financial Metrics
| Metric (in thousands) | 13 Weeks Ended Nov 2, 2008 |
13 Weeks Ended Nov 4, 2007 |
39 Weeks Ended Nov 2, 2008 |
39 Weeks Ended Nov 4, 2007 |
|---|---|---|---|---|
| Total Revenue | $727,484 | $696,370 | $1,914,149 | $1,840,652 |
| Net Sales | $636,210 | $611,399 | $1,659,676 | $1,620,714 |
| Gross Profit | $341,300 | $328,608 | $941,027 | $898,634 |
| Gross Margin % | 46.9% | 47.2% | 49.2% | 48.8% |
| Net Income | $53,699 | $60,879 | $129,706 | $152,985 |
| Diluted EPS | $1.03 | $1.05 | $2.48 | $2.65 |
| Operating Cash Flow (39 wks) | $79,416 (2008) vs $43,174 (2007) | |||
| Cash & Equivalents | $197,557 (Nov 2, 2008) | |||
| Long-Term Debt | $399,564 (Nov 2, 2008) |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 4.5% in the third quarter and 4.0% for the first nine months of 2008 compared to the prior year. Growth was driven by the acquisition of Confezioni Moda Italia (CMI), the launch of the Timberland wholesale business, and expansion of Calvin Klein retail stores.
- Profitability Decline: Net income decreased 11.8% in the third quarter and 15.2% for the first nine months. This was primarily due to increased Selling, General, and Administrative (SG&A) expenses and inventory liquidation costs.
- SG&A Expenses: SG&A increased significantly (12.6% in Q3, 11.9% for 39 weeks) due to advertising for the Calvin Klein 40th anniversary and Olympics, costs associated with new retail stores, and restructuring charges.
- Restructuring Charges: The company recorded approximately $18.2 million in pre-tax charges for the first nine months related to the closure of the Geoffrey Beene outlet retail division, including inventory liquidation, asset impairments, and lease terminations.
- Acquisitions: PVH acquired CMI (Jan 2008), Mulberry assets (Apr 2008), and BVH assets (Oct 2008), contributing to revenue but also increasing operating costs and goodwill.
Guidance, Outlook, and Risks
- Full Year 2008 Guidance:
- Net Sales: Expected to increase 2% to 3% year-over-year.
- Gross Profit Rate: Expected to decrease 70 to 80 basis points year-over-year, largely due to inventory liquidation markdowns and promotional selling in heritage brands.
- SG&A Expenses: Expected to increase 190 to 200 basis points as a percentage of revenue.
- Effective Tax Rate: Anticipated to be approximately 36.5% for the full year.
- Cash Flow: Estimated full-year cash flow generation of approximately $70.0 million.
- Outlook Commentary: Management expects fourth-quarter net sales to be flat compared to the prior year. Positive impacts from new businesses (Timberland, CMI, Calvin Klein specialty stores) are expected to be offset by an anticipated 8% to 13% comparable store sales decline in outlet retail businesses.
- Risks and Contingencies:
- Geoffrey Beene Closure: Approximately 15 of 100 stores closed by Q3; remaining stores to be closed or converted by end of 2008. Additional charges of ~$3 million expected in Q4.
- CMI Dispute: A dispute exists with Warnaco regarding the working capital calculation for the CMI acquisition, which could materially change recorded goodwill.
- Market Conditions: Weak retail environment, difficult economic conditions, and a strengthening U.S. dollar negatively impacting foreign royalty revenue.
- Liquidity: While cash position is strong ($197.6M) and a $325M credit facility is available, the global credit crisis may impact refinancing terms.
Key Facts for Investor Verification
- Restructuring Impact: Verify the final costs associated with the Geoffrey Beene outlet closure and the timeline for store conversions to Calvin Klein.
- CMI Goodwill Adjustment: Monitor the resolution of the working capital dispute with Warnaco, as it could lead to a material adjustment to goodwill.
- Outlet Retail Performance: Confirm the severity of the comparable store sales decline in heritage brands (Van Heusen, IZOD, Bass) and the effectiveness of promotional strategies.
- Timberland Integration: Assess the performance of the newly launched Timberland wholesale sportswear line as a growth driver.
- Cash Flow Sustainability: Review the ability to maintain the projected $70M full-year cash flow given the high capital expenditures ($85M-$90M expected) and contingent purchase price payments (~$40M-$41M expected).