Business context and reporting period
PVH Corp. (then Phillips-Van Heusen Corporation) filed this Form 10-K for fiscal 2010, the 52 weeks ended January 30, 2011—not 2009 Q4 as indicated in the request metadata. Fiscal 2009 ended January 31, 2010. The filing reports the Tommy Hilfiger acquisition, completed May 6, 2010, in 2010 results from that date onward; therefore, year-over-year comparisons are not like-for-like.
PVH operates branded apparel, retail and licensing businesses, including Calvin Klein, Tommy Hilfiger and its Heritage Brands. Tommy Hilfiger contributed 42% of consolidated revenue for the year and 64% of year-end assets.
Key financial metrics
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | FY 2010 | FY 2009 |
|---|---|---|
| Total revenue | $4,636.8 | $2,398.7 |
| Net sales | $4,219.7 | $2,070.8 |
| Royalty, advertising and other revenue | $417.1 | $328.0 |
| Gross profit | $2,422.0 | $1,182.6 |
| Gross margin on total revenue | 52.2% | 49.3% |
| Income before interest and taxes | $203.4 | $243.8 |
| Net income | $53.8 | $161.9 |
| Diluted EPS | $0.80 | $3.08 |
| Cash provided by operating activities | $352.2 | $214.4 |
| Capital expenditures | $101.0 | $23.9 |
Revenue rose about 93%, principally because Tommy Hilfiger was consolidated for most of the year. Despite higher gross margin, operating income fell about 17% and net income about 67%, reflecting acquisition-related costs and substantially higher interest expense. The reported gross margin includes royalty revenue, which has no cost of goods sold; it may not be comparable with other companies’ gross margins.
At January 30, 2011, cash and cash equivalents were $498.7 million, working capital was $902.4 million and the current ratio was 2.0, down from 2.7. Long-term debt was $2,364.0 million and short-term borrowings were $4.9 million; cash less these borrowings implies net debt of approximately $1.87 billion. The company reported $2,442.6 million of stockholders’ equity and no revolving-credit borrowings, with $138 million of letters of credit outstanding. Operating cash flow less capital expenditures was approximately $251 million, a simple calculation from reported amounts.
Material changes versus the prior comparable period
- Tommy Hilfiger generated $1,945.2 million of revenue from acquisition through year-end. Its acquisition for approximately $3.0 billion materially expanded PVH’s international business, assets, retail footprint and debt.
- Gross margin increased 290 basis points, primarily reflecting Tommy Hilfiger’s international and retail mix; acquisition-related valuation amortization reduced the margin by about 100 basis points.
- SG&A increased to $2,071.4 million, or 44.7% of revenue, from $938.8 million, or 39.1%. The increase included acquisition/integration and exit costs, as well as Tommy Hilfiger’s higher retail and international expense profile.
- Interest expense increased to $128.6 million from $33.5 million after acquisition financing. The company repaid $250 million of term loans during 2010.
- Operating cash flow improved, but inventories and receivables increased substantially alongside the acquired business. Capital expenditures also rose, to $101.0 million.
- Reported FY 2010 diluted EPS was $0.80 versus $3.08 in FY 2009. Quarterly data show fourth-quarter revenue of $1,398.1 million and net income of $52.2 million in 2010, versus $614.6 million and $27.0 million in 2009; the acquired business makes these comparisons non-comparable.
Outlook, commentary, risks and unusual items
- Management forecast FY 2011 revenue of $5.1–$5.2 billion, mainly from owning Tommy Hilfiger for a full year. Heritage Brands and Calvin Klein net sales were projected to increase approximately 3%–4%; royalty, advertising and other revenue was projected at approximately $450 million, with Calvin Klein royalty revenue growth of 7%–8%.
- Management expected the gross-margin percentage to decline, citing product-cost inflation and revenue mix, while SG&A as a percentage of revenue was expected to decrease significantly as acquisition-related and exit costs abated. Expected 2011 net interest expense was $134–$136 million; tax rate, 29%–31%; capital expenditures, approximately $200 million; and additional Tommy Hilfiger integration expenses, approximately $60 million.
- PVH paid $2.486 billion cash and issued 7.9 million common shares for Tommy Hilfiger. FY 2010 included $338.3 million of pretax acquisition and integration charges, including a $140.5 million loss on purchase-price currency hedges and $76.8 million of short-lived non-cash valuation amortization. The company also recorded $6.6 million of costs for exiting its UK and Ireland Van Heusen dresswear business.
- Management emphasized debt reduction: voluntary term-loan repayments reached approximately $400 million by March 2011, including a $150 million post-year-end repayment. A March 2011 credit-facility amendment reduced borrowing spreads and extended certain maturities; the company intended to hedge part of its variable-rate debt. Credit agreements contain financial and operating covenants, and substantially all assets are pledged as collateral. PVH reported covenant compliance at year-end.
- Key risks include leverage and debt service, variable interest rates and foreign exchange exposure; reliance on major retailers and licensing partners; fashion, consumer-spending and discounting risks; and dependence on overseas suppliers and third-party sourcing. The top five customers represented 22.6% of revenue, and Macy’s alone represented 10.1%. Macy’s is the exclusive U.S. department-store distributor for most Tommy Hilfiger sportswear under an agreement currently running to January 2014.
- Following the March 2011 earthquake and tsunami in Japan, management expected negative effects on Calvin Klein licensing and Tommy Hilfiger Japan revenue but did not expect a material effect on PVH’s results. The company reported that litigation was not expected to materially affect its financial position and that it had no material off-balance-sheet arrangements.
- Management and the auditor concluded internal control over financial reporting was effective for the assessed business; however, Tommy Hilfiger was excluded from that assessment, despite representing 64% of assets and 42% of revenue. The purchase-price allocation was still subject to change.
Important facts for investors to verify
- Separate acquisition-driven growth from organic performance, and review segment results and Tommy Hilfiger’s full-year contribution.
- Reconcile acquisition/integration charges, the $140.5 million hedge loss, and the timing and nature of projected 2011 integration costs.
- Confirm debt balances, scheduled and voluntary repayments, covenant headroom, interest-rate exposure and the impact of any debt hedges.
- Assess the working-capital needs behind the large increases in inventory and receivables, and the planned $200 million of capital expenditures.
- Monitor product-cost inflation, margin performance, customer concentration and the Macy’s relationship, as well as the Japan impact and final acquisition accounting.