PVH Corp. — Form 10-Q Summary
Period clarification: The supplied filing covers the thirteen and thirty-nine weeks ended November 1, 2015, with comparisons to periods ended November 2, 2014. This differs from the request metadata identifying 2014 Q3.
Business context and reporting period
PVH is a global apparel company operating Calvin Klein, Tommy Hilfiger and Heritage Brands businesses through wholesale, retail, e-commerce and licensing. It exited its IZOD retail business during the quarter. Results are unaudited and subject to seasonality; the third quarter typically benefits from licensee sales ahead of the holiday season.
Key financial metrics
| Metric | 13 weeks ended Nov. 1, 2015 | 13 weeks ended Nov. 2, 2014 | 39 weeks ended Nov. 1, 2015 | 39 weeks ended Nov. 2, 2014 |
|---|---|---|---|---|
| Total revenue | $2,164.5 million | $2,233.1 million | $5,907.8 million | $6,172.4 million |
| Gross profit / margin | $1,101.0 million / 50.9% | $1,167.5 million / 52.3% | $3,088.7 million / 52.3% | $3,255.4 million / 52.7% |
| Income before interest and taxes | $253.6 million | $279.9 million | $584.5 million | $523.7 million |
| Net income attributable to PVH | $221.9 million | $225.7 million | $438.2 million | $387.5 million |
| Diluted EPS | $2.67 | $2.71 | $5.26 | $4.66 |
| Operating cash flow | Not presented for the quarter | $388.1 million | $323.9 million |
Quarterly SG&A was $853.8 million, or 39.4% of revenue, versus $892.9 million, or 40.0%. Thirty-nine-week SG&A was $2,519.2 million, or 42.6%, versus $2,647.8 million, or 42.9%. Net interest expense was $27 million for the quarter and $85 million for the thirty-nine weeks.
At November 1, 2015, cash was $369.9 million; current assets were $2,858.2 million and current liabilities were $1,366.4 million. Long-term debt, including its current portion, was $3,339.6 million; short-term borrowings were $27.6 million. The company had no revolving-credit borrowings and $31.1 million of letters of credit outstanding. Approximately 70% of long-term debt was fixed or capped in rate. Cash declined $109.4 million from fiscal year-end. Capital expenditures were $169.0 million for the thirty-nine weeks.
Material changes versus comparable periods
- Third-quarter revenue fell $68.6 million, while gross margin declined 140 basis points. For the thirty-nine weeks, revenue declined $264.6 million and gross margin declined 40 basis points.
- Foreign currency translation was a significant headwind: management attributed approximately $83 million of the quarterly Tommy Hilfiger revenue reduction and $58 million of the Calvin Klein reduction to currency; for the thirty-nine weeks, the corresponding impacts were approximately $283 million and $153 million.
- Quarterly net income and diluted EPS were lower year over year. Thirty-nine-week net income and EPS were higher, with the prior-year comparison affected by $93.1 million of debt modification and extinguishment costs and other unusual items.
- Operating cash flow rose to $388.1 million from $323.9 million, primarily due to working-capital changes. Cash used in investing was $210.4 million; cash used in financing was $276.1 million, including $87.3 million for treasury-share purchases.
- Debt declined from $3,718.0 million of long-term debt at November 2, 2014 to $3,339.6 million at November 1, 2015. The filing says cumulative long-term debt repayments since the Warnaco acquisition were $1.126 billion.
Outlook, management commentary, risks and unusual items
- Management projected full-year 2015 revenue to decrease approximately 3%, including an approximately 6% negative foreign-currency impact. Forecast revenue changes: Calvin Klein up approximately 1% (including a 7% currency headwind), Tommy Hilfiger down approximately 7% (including a 10% currency headwind), and Heritage Brands down approximately 3%.
- Management expected full-year gross margin to decrease from 2014, citing promotional selling at Tommy Hilfiger North America and currency effects. SG&A as a percentage of revenue was expected to decrease, but pension-related actuarial results could cause significant volatility.
- Full-year 2015 net interest expense was projected at approximately $115 million, debt repayments at approximately $350 million, and capital expenditures at approximately $275 million. Approximately $200 million of debt had been repaid in the first thirty-nine weeks.
- Management expected approximately $19 million of additional Warnaco integration and restructuring charges, less than $1 million of further IZOD retail exit charges, and approximately $4 million related to discontinuing licensed Heritage Brands product lines during the remainder of 2015.
- For the thirty-nine weeks, Warnaco integration and restructuring costs were approximately $51 million; the prior-year period included approximately $109 million. IZOD exit-related charges were approximately $9 million, and discontinuation of licensed product lines generated approximately $16 million of costs.
- Key risks include sustained dollar strength and related translation and inventory-cost impacts; promotional pressure and weaker U.S. tourist traffic and spending; leverage and debt-service demands; financing covenants; seasonal and inventory-related cash-flow swings; and pension-estimate volatility. The company reported compliance with financing covenants and no material change to its previously disclosed risk factors.
- The effective tax rate was 1.9% for the quarter and 12.2% for the thirty-nine weeks, reflecting lower-tax foreign jurisdictions and discrete tax benefits, including expirations of statutes of limitation for uncertain tax positions.
Most important facts for investors to verify
- Confirm the intended reporting year: the filing itself is for 2015 Q3, not 2014 Q3.
- Track currency-adjusted sales, margins and comparable-store trends, particularly in Europe, China and U.S. tourist locations.
- Assess progress against full-year revenue, gross-margin, SG&A, capital-spending and debt-repayment expectations.
- Review debt maturity and covenant exposure, variable-rate debt, and restrictions on dividends and repurchases.
- Monitor working capital, seasonal cash needs, inventory levels, and the remaining Warnaco, IZOD and product-line exit costs.
- Evaluate the sustainability of tax benefits and the potential fourth-quarter impact of pension actuarial assumptions.