PVH Corp. — Form 10-Q Summary
Reporting period: The filing covers the 13 and 26 weeks ended July 29, 2012, compared with periods ended July 31, 2011. Although the request metadata says “2011 Q2,” the filing itself is for the second quarter of fiscal 2012. Financial statements are unaudited; amounts below are in U.S. dollars.
Business context and results
PVH designs, markets, sells and licenses apparel and related products, including Calvin Klein, Tommy Hilfiger and heritage brands. Its operations span wholesale, retail and licensing. Results reflect ongoing Tommy Hilfiger integration, exits from the IZOD women’s and Timberland men’s wholesale sportswear businesses, and foreign-currency effects.
| Metric | 13 weeks ended July 29, 2012 | 13 weeks ended July 31, 2011 | 26 weeks ended July 29, 2012 | 26 weeks ended July 31, 2011 |
|---|---|---|---|---|
| Total revenue | $1,336.6 million | $1,334.4 million | $2,764.0 million | $2,703.6 million |
| Gross profit | $742.7 million | $724.1 million | $1,499.5 million | $1,452.7 million |
| Gross margin | 55.6% | 54.3% | 54.3% | 53.7% |
| Income before interest and taxes | $149.7 million | $133.5 million | $301.9 million | $253.9 million |
| Net income | $87.7 million | $66.7 million | $180.8 million | $124.4 million |
| Diluted earnings per share | $1.19 | $0.92 | $2.46 | $1.71 |
| Interest expense | $28.6 million | $31.8 million | $58.1 million | $65.2 million |
Financial position and cash flow
- Cash and cash equivalents were $262.0 million at July 29, 2012, versus $233.2 million at January 29, 2012.
- Reported short-term borrowings were $52.8 million; long-term debt was $1,715.5 million, plus $88.0 million current portion. Total reported debt was approximately $1,856.3 million, excluding capital leases. The company reported $35.4 million in capital lease obligations.
- Operating cash flow for the first half was $207.3 million, up from $141.0 million. Cash increased $28.8 million after $89.7 million of term-loan repayments.
- First-half investing cash outflow was $107.4 million, including $81.7 million of capital expenditures and $25.7 million in Calvin Klein contingent purchase-price payments. Financing cash outflow was $63.3 million.
- Inventories were $909.4 million, compared with $809.0 million at January 29, 2012. Current assets were $1,819.9 million and current liabilities were $1,109.4 million.
- PVH said it had repaid approximately $790 million of term loans since the Tommy Hilfiger acquisition and was in compliance with its financial and non-financial debt covenants at quarter-end.
Material changes and management commentary
- Second-quarter total revenue was nearly flat year over year; first-half revenue increased 2.2%. First-half net sales rose 1.9%, while royalty, advertising and other revenue also increased.
- Second-quarter net sales decreased 1%; management cited a $56 million adverse impact from currency translation and the exited businesses. In the first half, net sales increased despite a $76 million adverse impact from those factors.
- Higher-margin Tommy Hilfiger and Calvin Klein growth, improved Tommy Hilfiger average unit retail prices, and the exit of lower-margin businesses helped lift gross margin. First-half SG&A as a share of revenue declined to 43.4% from 43.7%, primarily due to lower integration and restructuring costs.
- Tommy Hilfiger North America revenue grew; its second-quarter retail comparable sales increased 11%. European Tommy Hilfiger retail comparable sales rose 15% in the quarter and 11% in the first half. Japan remained weak amid strategic repositioning and investment. Calvin Klein royalty growth was partly offset by weaker global jeans and underwear royalties.
- The first half included $7.9 million of Tommy Hilfiger integration and restructuring costs; the company expected approximately $7 million more in the remainder of 2012. First-half 2011 included $41.7 million of integration and restructuring costs and $16.2 million of debt modification costs.
Outlook, risks and contingencies
- Management expected full-year 2012 revenue growth of 1%–2%, including an approximately 4% adverse impact from currency translation and the exited sportswear businesses. Forecasts were 2%–3% growth for Tommy Hilfiger, 6%–7% for Calvin Klein, and a 4%–5% decline for Heritage Brands.
- Management expected full-year gross margin to increase approximately 150 basis points, SG&A as a percentage of revenue to decrease approximately 50 basis points, net interest expense of $115–$117 million, and an effective tax rate of 23.5%–24.0%.
- Expected 2012 capital expenditures were approximately $250 million; management planned approximately $210 million of additional term-loan payments in the second half, mostly voluntary. It also expected approximately $55 million of 2012 Calvin Klein contingent purchase-price payments.
- Key disclosed risks include substantial indebtedness and debt covenants, currency and interest-rate exposure, sales and inventory variability, consumer and retail conditions, sourcing and shipping disruptions, acquisition integration, and licensee performance. Approximately 75% of long-term debt was fixed-rate or capped-rate after hedges; the remainder was uncapped variable-rate debt.
- PVH disclosed ongoing litigation that management did not expect to have a material adverse effect on its financial position, and stated that there were no material changes to the risk factors in its latest Form 10-K. Tommy Hilfiger integration costs and contingent purchase-price obligations remain relevant cash-flow items.
Important facts for investors to verify
- Confirm the correct reporting year: the filing is for the quarter ended July 29, 2012, notwithstanding the “2011 Q2” request label.
- Track whether projected full-year revenue, margin, tax, interest and capital-expenditure targets were achieved, and assess currency effects against reported growth.
- Monitor inventory growth, operating cash conversion, seasonal borrowing needs, planned debt repayments and covenant headroom.
- Assess ongoing weakness in heritage wholesale and jeans/underwear royalties, Japan performance, and execution of Calvin Klein’s European license reacquisition and Tommy Hilfiger integration.
- Review contingent purchase-price payments, remaining integration costs, and the sensitivity of results to foreign exchange and variable interest rates.