PVH Corp. Form 10-Q Summary
Period note: The request metadata says 2017 Q1, but the filing is for the thirteen weeks ended May 6, 2018, compared with the thirteen weeks ended April 30, 2017. Figures are unaudited and in U.S. dollars unless stated otherwise.
Business context and reporting period
PVH is a global apparel company whose principal brands include Calvin Klein and Tommy Hilfiger, alongside Heritage Brands. It sells through wholesale, retail and digital channels and earns licensing revenue. The filing reports six operating segments across those businesses.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Total revenue | $2,314.6 million | $1,989.0 million |
| Gross profit / margin | $1,291.0 million / 55.8% | $1,080.8 million / 54.3% |
| Income before interest and taxes | $244.3 million | $113.2 million |
| Net income attributable to PVH | $179.4 million | $70.4 million |
| Diluted earnings per share | $2.29 | $0.89 |
| Net cash used by operating activities | $125.7 million | $57.4 million |
| Cash and cash equivalents, period-end | $434.5 million | $490.9 million |
| Long-term debt, period-end | $3,013.2 million | $3,157.1 million |
Net interest expense was approximately $28 million, versus approximately $29 million. The effective tax rate was 17.1%, compared with 17.0%. Gross margin increased 150 basis points; SG&A was $1,053.0 million, or 45.5% of revenue, versus $960.9 million, or 48.3%.
At May 6, 2018, short-term borrowings were $254.5 million and current liabilities were $1,727.1 million, against current assets of $3,041.6 million. Total debt, including short-term borrowings, was approximately $3.27 billion. About 50% of long-term debt was fixed-rate after considering the interest-rate swap. PVH was in compliance with its financing covenants.
Material changes versus the prior comparable period
- Revenue increased 16%, led by Calvin Klein and Tommy Hilfiger international businesses. Foreign-currency translation contributed approximately $122 million to the reported revenue increase, according to management’s segment discussion.
- Calvin Klein International revenue rose 25% and Tommy Hilfiger International revenue rose 25%, each including favorable currency translation; comparable store sales increased 9% in both. Calvin Klein North America revenue rose 10%, with comparable store sales up 5%; Tommy Hilfiger North America revenue rose 13%, with comparable store sales up 9%.
- Heritage Brands revenue rose 5%, primarily reflecting wholesale shipments moving into Q1 from Q2; comparable store sales increased 1%.
- Management attributed improved gross margin to business mix shifting toward higher-margin international operations and less promotional selling, particularly at Tommy Hilfiger. Lower SG&A as a share of revenue also reflected the absence of prior-year Li & Fung termination, office relocation and warehouse consolidation costs.
- Prior-year results included $54.2 million of Li & Fung restructuring-related costs, $7.0 million of Tommy Hilfiger office relocation costs and a $9.4 million pension settlement loss. These items make the year-over-year earnings comparison less like-for-like.
- Operating cash use increased to $125.7 million, principally due to working-capital movements, including lower accounts payable and accrued expenses and higher trade receivables associated partly with increased wholesale sales.
Outlook, commentary, risks and unusual items
- Management expected 2018 revenue to increase approximately 6% versus 2017, including about a 1% favorable currency impact. Forecasts were approximately 8% growth for Calvin Klein, 7% for Tommy Hilfiger and relatively flat revenue for Heritage Brands.
- Management expected full-year gross margin to improve and SG&A as a percentage of revenue to decline. Full-year net interest expense was projected at approximately $120 million; the effective tax rate at 14%–15%; capital expenditures at approximately $450 million; debt repayments at approximately $250 million; and share repurchases at $200–$250 million.
- PVH expected 2018 revenue and net income to benefit by approximately $80 million and $15 million, respectively, from foreign exchange at then-current rates. Currency movements can also affect inventory costs, debt service and reported results; hedges reduce but do not eliminate exposure.
- Cash used by operating activities and capital expenditures exceeded cash generated internally during the quarter. PVH used $235 million of net short-term borrowing proceeds, repurchased shares for $75.1 million in cash-flow-statement reporting, and ended the quarter with $434.5 million of cash. Management noted that approximately $402 million of cash was held by international subsidiaries.
- PVH acquired the Geoffrey Beene tradename for $17 million of total consideration, including $15.9 million cash. The company also expected to make the final Calvin Klein contingent purchase-price payment in Q2 2018; such payments were based on specified Calvin Klein worldwide sales through February 12, 2018.
- The 2017 Tax Act produced a provisional $52.8 million net tax benefit in Q4 2017; PVH said the estimates remained subject to adjustment during 2018 and reported no Q1 adjustment. The company highlighted uncertainty around tax guidance and its international tax structure.
- Other cited risks include leverage and debt-service needs, consumer demand and promotional activity, inventory management, retail-industry disruption, foreign exchange, tariffs and trade rules, sourcing and freight costs, and pension assumptions. Management reported no material change to the risk factors in its latest annual report. It said pending lease accounting adoption was expected to significantly increase assets and liabilities but not materially affect operating results.
- Management stated that certain litigation was not expected to have a material adverse effect on financial position. The filing reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the reporting-period mismatch in the request metadata: this filing covers Q1 2018, not Q1 2017.
- Assess how much of reported growth and margin improvement reflects underlying demand and pricing versus foreign exchange, segment mix, and the absence of prior-year charges.
- Monitor operating cash conversion, working-capital trends, inventory levels, and whether full-year capital spending and debt-repayment plans are funded without materially increasing borrowings.
- Review the maturity and variable-rate exposure of debt, the use and terms of hedges, and the impact of currency changes on earnings and euro-denominated debt service.
- Track delivery against revenue, margin, tax-rate, capital-expenditure and repurchase expectations, and any revisions to provisional Tax Act estimates.