PVH Corp. — Form 10-Q Summary
Reporting period: The filing covers the thirteen weeks ended April 29, 2012, compared with the thirteen weeks ended May 1, 2011. Although the request metadata says “2011 Q1,” the filing itself reports first-quarter fiscal 2012 results. Amounts below are in millions of dollars unless stated otherwise.
Business context
PVH is a global apparel company with owned brands including Calvin Klein, Tommy Hilfiger, Van Heusen, IZOD, ARROW and Bass, alongside licensed and private-label brands. Revenue comes from wholesale and retail sales and licensing. The company noted that its results are seasonal and that this quarter is not necessarily indicative of full-year performance.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total revenue | $1,427.4 | $1,369.2 | Up 4.3% |
| Net sales | $1,312.8 | $1,257.0 | Up 4% |
| Gross profit | $756.8 | $728.6 | Up 3.9% |
| Gross margin | 53.0% | 53.2% | Down 0.2 percentage points |
| SG&A | $606.5 | $591.9 | Up $14.6 |
| Income before interest and taxes | $152.2 | $120.4 | Up 26.4% |
| Net income | $93.1 | $57.7 | Up 61.5% |
| Diluted EPS | $1.27 | $0.79 | Up $0.48 |
| Operating cash flow | $(0.5) | $(9.5) | Improved by $9.0 |
SG&A was 42.5% of revenue, versus 43.2% a year earlier. The effective tax rate fell to 24.3% from 34.0%. Interest expense decreased to $29.5 million from $33.4 million. Cash at quarter-end was $238.6 million, up from $233.2 million at fiscal year-end. Capital expenditures were $39.1 million; cash used in investing activities was $52.6 million.
At April 29, 2012, current assets were $1,728 million and current liabilities $982 million. Short-term borrowings were $107.4 million, current long-term debt $79.5 million, and long-term debt $1,794.9 million. Total reported debt across those categories was approximately $1,981.7 million. Stockholders’ equity was $2,829.3 million. PVH reported compliance with all financial and non-financial debt covenants.
Material changes and drivers
- Tommy Hilfiger North America revenue rose to $305.2 million from $271.8 million, while Tommy Hilfiger International revenue rose to $465.2 million from $443.7 million. International growth was partly offset by approximately $20 million of adverse currency translation.
- Other (Calvin Klein Apparel) revenue increased to $163.5 million from $146.4 million. Heritage Brand Wholesale Dress Furnishings revenue declined to $122.1 million from $136.6 million.
- Higher product costs across divisions pressured gross margin; increased selling prices and a greater revenue mix from Tommy Hilfiger partly offset the pressure.
- Q1 2012 included $3.3 million of Tommy Hilfiger integration and restructuring costs, compared with $30.5 million in Q1 2011. The prior-year period also included $16.2 million of debt modification costs; there were no such costs in 2012. The 2012 period included $1.9 million of equity income from unconsolidated affiliates.
- PVH made approximately $30 million of term-loan payments in the quarter and approximately $730 million in total since the Tommy Hilfiger acquisition. Holders converted $94.3 million of preferred stock into about 2.1 million common shares.
Outlook, commentary and risks
- Management expected full-year 2012 revenue to increase 1%–2% from 2011, including an estimated 4% negative impact from currency and exits of the Timberland men’s and IZOD women’s wholesale sportswear businesses.
- Management expected full-year gross margin to increase about 125 basis points from 2011, and SG&A as a share of revenue to decline about 40–60 basis points.
- Expected full-year net interest expense was $115–$117 million, versus $128.1 million in 2011. PVH planned approximately $270 million of additional term-loan payments during the rest of 2012, mostly voluntary.
- Expected 2012 capital expenditures were approximately $250 million; Calvin Klein contingent purchase-price payments were expected to be approximately $55 million. Management expected an effective tax rate of 23.5%–24.0%.
- Management cited risks including substantial acquisition-related leverage and debt service, foreign-exchange movements, consumer demand and discounting, inventory and growth management, product costs and supply-chain disruption, and acquisition integration. Approximately 70% of long-term debt was fixed-rate or rate-capped after hedges; the remainder was uncapped variable-rate debt.
- PVH expected approximately $22 million of additional Tommy Hilfiger integration and restructuring costs during the remainder of 2012. It also described planned business exits and license reacquisitions, including the expected 2013 start of sales under reacquired ck Calvin Klein European licenses.
- The company said pending litigation was not expected by management to materially adversely affect its financial position, and reported no material changes to the risk factors in its latest annual report. Disclosure controls were judged effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether revenue and margin expectations were achieved, particularly given currency exposure and the planned business exits.
- Progress on debt reduction, future cash generation, debt maturities, covenant compliance and the planned term-loan repayments.
- Whether product-cost pressures eased as management expected and whether the projected gross-margin improvement materialized.
- Actual integration costs, capital expenditures, Calvin Klein contingent payments and cash needs for license reacquisitions.
- The effect of preferred-stock conversion and other share issuance on diluted share count and per-share results.