PVH Corp. 10-Q Summary
Reporting-period note: The supplied filing is for the thirteen and thirty-nine weeks ended October 28, 2012 (fiscal 2012 third quarter), not 2011 Q3 as stated in the request metadata. Amounts below are in U.S. dollars.
Business context and reporting period
PVH is a global apparel company with owned brands including Calvin Klein and Tommy Hilfiger and a portfolio of licensed and heritage brands. It reports seven segments spanning wholesale, retail and licensing. Results are unaudited and seasonal; the year-to-date period is not necessarily indicative of full-year results.
Financial performance and liquidity
| Metric | 13 weeks ended Oct. 28, 2012 | 39 weeks ended Oct. 28, 2012 |
|---|---|---|
| Total revenue | $1.643 billion, down 0.7% year over year | $4.407 billion, up 1.1% |
| Gross profit / margin on total revenue | $869.1 million / 52.9%, versus 50.1% | $2.369 billion / 53.7%, versus 52.4% |
| Income before interest and taxes | $237.4 million, versus $196.8 million | $539.3 million, versus $450.8 million |
| Net income | $165.4 million, versus $112.2 million | $346.2 million, versus $236.6 million |
| Diluted EPS | $2.24, versus $1.54 | $4.70, versus $3.25 |
| Interest expense | $28.7 million, versus $31.7 million | $86.7 million, versus $96.9 million |
Operating cash flow for the thirty-nine weeks was $285.4 million, compared with $173.3 million. Capital expenditures were $137.0 million; investing cash flow was negative $187.7 million and financing cash flow was negative $53.2 million. Cash rose $43.4 million to $276.6 million. Inventory was $855.4 million at period-end.
Current assets were $1.912 billion and current liabilities $1.140 billion (working capital of about $772 million; current ratio about 1.68). Debt comprised $142.5 million of short-term borrowings, $84.0 million of current long-term debt and $1.648 billion of long-term debt. Cash less these debt balances was approximately $1.598 billion net debt, excluding $35.2 million of capital lease obligations. PVH reported compliance with its debt covenants.
Material changes versus the prior comparable period
- Quarterly net sales fell $16.1 million, while total revenue declined $11.4 million. Management cited approximately $50 million of quarterly sales impact from exiting IZOD women’s and Timberland wholesale sportswear, and approximately $40 million from currency translation.
- Gross margin improved, attributed to lower product costs, higher average selling prices, growth in higher-margin Calvin Klein and Tommy Hilfiger businesses, and exits from lower-margin businesses. Quarterly SG&A rose slightly in dollars and to 38.6% of revenue from 38.3%; year-to-date SG&A was 41.6% of revenue versus 41.7%.
- Tommy Hilfiger North America and Calvin Klein Apparel grew; Tommy Hilfiger International sales were affected by currency translation and weakness in Japan. Heritage wholesale sales were pressured by the exited businesses and lower dress-furnishings sales to a mid-tier retailer.
- Year-to-date effective tax rate declined to 23.6% from 33.3%, reflecting international tax rates, Tommy Hilfiger tax synergies and tax-credit benefits. The prior-year period included $16.2 million of debt modification costs and a $20.7 million one-time expense associated with reacquiring Tommy Hilfiger rights in India.
Outlook, transactions and risks
- Management forecast approximately 2% full-year 2012 revenue growth, gross margin expansion of about 175 basis points, SG&A increasing about 30 basis points as a share of revenue, an effective tax rate near 23.5%, and net interest expense of about $114 million. Full-year capital expenditures were expected to be about $225 million; management planned roughly $130 million of additional term-loan payments in the remainder of 2012.
- On October 29, 2012, PVH agreed to acquire Warnaco for approximately $3.0 billion in cash and stock, subject to shareholder, antitrust and other customary conditions, with closing expected early 2013. Financing commitments of $4.325 billion had been received. Management expected significant transaction and integration costs, and warned that the acquisition would increase debt and debt-service demands. The outlook above does not generally include the acquisition’s effects.
- PVH incurred $6.4 million of Warnaco-related costs through the quarter and expected about $30 million of additional costs during the remainder of 2012, some regardless of closing. Tommy Hilfiger integration costs were $14.4 million year to date, with about $1 million more expected in 2012.
- Other risks include foreign-exchange exposure, changing consumer demand and discounting, inventory and supply-chain management, and restrictive debt covenants. Approximately 70% of long-term debt was fixed-rate after the interest-rate swap; the Euro interest-rate cap had expired. Management said existing litigation was not expected to materially adversely affect financial position. Guarantees included up to approximately $3.9 million for a former leased property, with stated recourse of about $2.4 million.
Important facts for investors to verify
- Whether the Warnaco acquisition closed on the anticipated terms and timing, and its ultimate financing, dilution, integration costs and leverage effects.
- Whether the full-year revenue and margin outlook was achieved, particularly given currency movements, discontinued businesses, Japan weakness and seasonality.
- Debt repayment progress, liquidity needs, covenant headroom and the cost and terms of any replacement financing.
- Working-capital and inventory trends, capital spending, and cash available after debt service and contingent payments, including Calvin Klein-related payments.
- Whether reported earnings benefited from lower taxes and prior-year unusual costs in ways that limit comparability with recurring performance.