PVH Corp. Form 10-K Summary
Period clarification: The supplied filing is PVH’s annual report for the 52 weeks ended February 3, 2019 (fiscal 2018), not a 2017 Q4 filing. The comparison year ended February 4, 2018 and included 53 weeks.
Business context
PVH is a global apparel company whose principal brands include Tommy Hilfiger and Calvin Klein, alongside its Heritage Brands portfolio. It operates through wholesale, retail, digital commerce and licensing channels; more than 50% of 2018 revenue came from outside the United States. Tommy Hilfiger and Calvin Klein together generated more than 80% of revenue.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue | $9.657 billion | $8.915 billion |
| Gross profit / gross margin | $5.308 billion / 55.0% | $4.894 billion / 54.9% |
| Income before interest and taxes | $892 million | $632 million |
| Net income attributable to PVH | $746 million; diluted EPS $9.65 | $538 million; diluted EPS $6.84 |
| Cash from operating activities | $853 million | $644 million |
| Capital expenditures | $380 million | $358 million |
| Cash and cash equivalents | $452 million | $494 million |
| Long-term debt | $2.819 billion | $3.061 billion |
| Working capital / current ratio | $1.345 billion / 1.7 | $1.159 billion / 1.6 |
Revenue grew 8% year over year. The prior year’s extra week affects the comparison. International Tommy Hilfiger and Calvin Klein segments drove much of the growth; comparable sales increased 13% and 5%, respectively, for those international businesses. Gross margin edged up 10 basis points, while SG&A declined to 45.9% of revenue from 47.6%. Operating cash flow rose, partly reflecting higher earnings, though receivables and inventory used cash. Cash less capital expenditures was approximately $473 million, a simple calculation rather than a company-reported free-cash-flow measure.
PVH reported $2.839 billion of aggregate debt principal in its risk disclosure. Approximately 50% of long-term debt was fixed-rate after swaps; the senior secured facilities mature in May 2021. The company reported compliance with financing covenants. Approximately $415 million of cash was held by international subsidiaries.
Material changes and unusual items
- Calvin Klein restructuring generated $40.7 million of 2018 costs; total costs expected through 2019 were approximately $170.7 million. Actions include closing Calvin Klein 205 W39 NYC and its Madison Avenue flagship, reorganizing creative and design teams, and consolidating certain businesses.
- 2018 tax expense was $31 million, or a 4.0% effective rate, including discrete benefits tied to U.S. tax legislation and the Dutch Tax Plan. In 2017, the company recorded a tax benefit and a negative 5.1% effective tax rate, making reported earnings comparisons tax-sensitive.
- Foreign currency translation reduced other comprehensive income by $361 million in 2018, principally as the U.S. dollar strengthened against the euro.
- PVH repurchased approximately $300 million of shares in 2018 and paid $12 million in dividends. A further $750 million was added to the repurchase authorization in March 2019.
- Goodwill and other identifiable intangible assets totaled approximately $7.24 billion, about 61% of total assets. No goodwill or indefinite-lived intangible impairment was recorded in 2018; retail and shop-in-shop asset impairments were $17.9 million.
Outlook, risks and contingencies
Management’s 2019 guidance called for revenue growth of approximately 4%, including an estimated 1% negative foreign-exchange impact. Forecast growth was approximately 6% for Tommy Hilfiger, 2% for Calvin Klein and 3% for Heritage Brands. Guidance assumed completion of the Australia and Tommy Hilfiger Central and Southeast Asia acquisitions in the second quarter, expected to add about $150 million of revenue. Management expected gross margin to improve, but SG&A as a percentage of revenue, net interest expense and restructuring costs to increase. The company projected a 15%–16% effective tax rate, approximately $425 million of capital expenditures, and approximately $150 million of debt repayments.
- PVH expected approximately $60 million of 2019 costs from closing U.S. Tommy Hilfiger flagship and anchor stores.
- Key risks include wholesale customer concentration and retail-sector store closures; the termination of Macy’s exclusive U.S. Tommy Hilfiger men’s sportswear distribution arrangement for Spring 2019; promotional pricing and inventory risk; foreign-exchange exposure; and tariffs on China-sourced goods. PVH imported approximately $400 million of inventory from China into the U.S. in 2018.
- Other disclosed risks include dependence on third-party manufacturers and licensees, supply-chain disruption, cyber and privacy risks, pension assumptions, tax audits and changes in tax rules, and uncertainty surrounding Brexit. Management stated that pending acquisitions remained subject to customary approvals and closing conditions.
- Management said existing litigation was not expected to have a material adverse effect on financial position. The filing also disclosed $184 million of net potential cash obligations related to uncertain tax positions, whose timing was uncertain.
Important facts for investors to verify
- Whether 2019 revenue, margin, tax and cash-flow guidance was achieved, accounting for the acquisitions and currency effects.
- Actual restructuring charges and benefits, including the Calvin Klein program and U.S. Tommy Hilfiger store closures.
- How the loss of Macy’s exclusivity and department-store consolidation affected wholesale demand and customer concentration.
- Debt reduction, refinancing and covenant capacity ahead of the May 2021 senior secured facility maturity.
- Exposure to China tariffs, foreign exchange, inventory levels and the substantial goodwill and intangible-asset balances.