PVH Corp. — Form 10-Q Summary
Reporting-period note: The request metadata says 2013 Q2, but the supplied filing is for the thirteen and twenty-six weeks ended August 3, 2014, compared with periods ended August 4, 2013.
Business context and reporting period
PVH is a global apparel company operating Calvin Klein, Tommy Hilfiger and Heritage Brands businesses through wholesale, retail and licensing. The period reflects continued integration of Warnaco, acquired in February 2013, and excludes the Bass business, sold in November 2013. Results are unaudited and subject to seasonality.
Financial performance
| Metric | 13 weeks ended Aug. 3, 2014 | 26 weeks ended Aug. 3, 2014 | Comparable 2013 period |
|---|---|---|---|
| Total revenue | $1,975.6 million | $3,939.3 million | $1,964.8 million; $3,875.0 million |
| Gross profit / margin | $1,054.7 million / 53.4% | $2,087.9 million / 53.0% | $1,026.1 million / 52.2%; $1,978.0 million / 51.0% |
| Income before interest and taxes | $159.3 million | $243.8 million | $85.7 million; $104.1 million |
| Net income (loss) attributable to PVH | $126.5 million | $161.8 million | $(5.4) million; $(15.7) million |
| Diluted EPS | $1.52 | $1.94 | $(0.07); $(0.19) |
| Operating cash flow | Not separately reported for quarter | $170.2 million | $43.7 million |
Quarter revenue rose about 0.5%; first-half revenue rose about 1.7%. For the first half, net sales were $3,762.0 million and royalty, advertising and other revenue totaled $177.3 million. Gross-margin improvement reflected the absence of prior-year acquisition-related inventory valuation charges and sales returns, as well as growth in higher-margin brands. First-half SG&A was $1,754.9 million, or 44.5% of revenue, versus $1,836.6 million, or 47.4%.
First-half net income includes $93.1 million of debt modification and extinguishment costs; earnings also benefited from an $8.0 million deconsolidation gain. The effective tax rate was 4.5%, principally reflecting favorable resolutions of uncertain tax positions and lower foreign tax rates.
Liquidity, debt and balance sheet
- Cash and equivalents were $461.1 million at August 3, down from $593.2 million at February 2, 2014. Approximately $370 million was held by foreign subsidiaries and treated as permanently reinvested.
- PVH reported $165.2 million of short-term borrowings, $99.3 million of current long-term debt and $3,642.9 million of long-term debt. The filing separately reports $22 million of capital lease obligations in its capital-structure discussion.
- First-half operating cash flow was $170.2 million; investing cash outflow was $150.6 million and financing cash outflow was $153.3 million. Capital expenditures were $102.7 million.
- Inventory was $1,365.4 million, up from $1,281.0 million at February 2, 2014. PVH attributed working-capital cash use in part to inventory growth.
- PVH amended and extended its secured facilities in March 2014 and used additional term borrowings to redeem its $600 million 7⅜% notes, paying a $67.6 million make-whole premium. It made $219.8 million of term-loan payments in the first half, mostly voluntary. The company stated it was in compliance with applicable debt covenants.
Material changes versus the prior comparable period
- Quarterly earnings moved from a loss to profit; first-half earnings also turned positive. Lower Warnaco integration costs and lower interest expense contributed, while the 2014 first half included substantially higher debt extinguishment costs than the prior-year first half.
- Tommy Hilfiger revenue increased: second-quarter North America and International revenue were $395.1 million and $475.3 million, respectively, versus $364.9 million and $434.4 million. First-half revenue was $757.5 million and $975.3 million, versus $711.5 million and $899.2 million.
- Heritage Brands revenue declined largely because of the Bass exit: segment revenue was $94.4 million in the quarter versus $161.4 million, and $171.1 million for the first half versus $293.2 million.
- Cash from operations rose from $43.7 million to $170.2 million for the first half, helped by higher earnings and no comparable pension contribution; PVH contributed $30 million to pension plans in the 2013 period.
Guidance, commentary and risks
- Management projected full-year 2014 revenue of approximately $8.4 billion, up 2%, including a $176 million adverse effect from the Bass exit. Forecast revenue growth was about 7% for Tommy Hilfiger, 3% for Calvin Klein and 2% for ongoing Heritage Brands; Heritage Brands including Bass was expected to decline about 7%.
- Management expected 2014 gross-margin percentage to rise and SG&A as a percentage of revenue to decline versus 2013; net interest expense was projected at approximately $140 million. Planned capital expenditures were approximately $300 million and term-loan repayments approximately $400 million. Warnaco integration and restructuring charges of about $40 million were expected in the remainder of 2014.
- Other projected 2014 cash uses included approximately $53 million of Calvin Klein contingent purchase-price payments and approximately $12 million of common dividends.
- Key risks include substantial leverage and debt-service needs, floating-rate and foreign-exchange exposure, covenant restrictions, execution of Warnaco integration, inventory management, consumer demand and discounting, seasonal sales patterns, and supply-chain, labor, geopolitical and raw-material risks. Management highlighted that a stronger U.S. dollar could adversely affect international results.
- The filing reports a $2.3 million impairment of certain Tommy Hilfiger North America retail-store assets. A transfer-pricing tax position previously recorded as an approximately $185 million liability was resolved for approximately $179 million, payable over three years; other favorable tax-position resolutions also reduced the period tax rate.
- Management said pending litigation was not expected to have a material adverse effect and reported no material change in risk factors from the prior annual report.
Important facts for investors to verify
- Whether the 2014 revenue, margin, interest, capital-spending and debt-repayment outlook was achieved, and how much growth came from comparable operations, currency and acquisition-related effects.
- Progress on Warnaco integration, expected remaining charges and whether reported margin improvements are sustainable after unusual prior-period charges roll off.
- Debt balances, refinancing needs, variable-rate exposure, covenant headroom and availability under revolving facilities.
- Inventory levels and cash conversion, including the location and potential tax cost of repatriating foreign cash.
- Timing and cash impact of the tax settlement, contingent Calvin Klein payments, guarantees associated with sold Bass leases and other disclosed commitments.