PVH Corp. Form 10-Q Summary
Period covered: The filing is for the 13 and 26 weeks ended August 2, 2020, compared with the periods ended August 4, 2019. The request metadata says “2019 Q2,” but the filing itself reports 2020 Q2.
Business context and results
PVH is a global apparel company with Tommy Hilfiger, Calvin Klein and Heritage Brands businesses. COVID-19 materially disrupted stores, wholesale customers and licensing partners. Most stores had reopened by mid-June, generally with reduced hours or occupancy; directly operated digital commerce grew strongly.
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Total revenue | $1.581B | $2.364B | $2.925B | $4.721B |
| Gross profit | $883M | $1.288B | $1.549B | $2.584B |
| Gross margin | 55.9% | 54.5% | 53.0% | 54.7% |
| SG&A | $882M | $1.155B | $1.822B | $2.316B |
| Operating income (loss), before interest and taxes | $(2)M | $250M | $(1.220)B | $385M |
| Net income (loss) attributable to PVH | $(51)M | $194M | $(1.148)B | $276M |
| Diluted EPS | $(0.72) | $2.58 | $(16.12) | $3.65 |
| Cash provided by operating activities | Not stated separately | Not stated separately | $248M | $318M |
Financial position and material changes
- Cash and cash equivalents were $1.394B at August 2, 2020, up from $503M at fiscal year-end. Management reported approximately $1.4B of additional borrowing capacity.
- Long-term debt was $3.498B, short-term borrowings were $71M, and current long-term debt was $15M. Total debt carrying value, including current long-term debt, was about $3.583B. Approximately 70% of long-term debt was fixed-rate after swaps.
- First-half operating cash flow declined to $248M from $318M. Investing activities provided $62M, including $169M of Speedo sale proceeds; capital expenditures were $108M. Cash increased by $891M, supported by debt issuance and the Speedo sale.
- Q2 revenue fell 33% year over year; first-half revenue fell 38%. First-half wholesale revenue declined 40% and retail revenue declined 35%; directly operated digital commerce sales increased 70% in the first half and 87% in Q2.
- Q2 gross margin rose 140 basis points, primarily reflecting prior-year Calvin Klein restructuring markdowns and a more favorable international revenue mix, partly offset by currency effects. First-half gross margin fell 170 basis points, mainly due to pandemic-related inventory reserves and the stronger U.S. dollar.
- First-half results included $969M of impairment charges across goodwill, intangible assets, store assets and an equity-method investment. The income statement included $933.5M in goodwill and intangible impairment charges; goodwill impairment alone was $879M. These noncash charges drove much of the reported loss.
Outlook, actions and risks
- Management expected full-year 2020 revenue to decline significantly versus 2019, including an estimated approximately 25% decline in the second half. Full-year gross margin was expected to decline; second-half gross margin was expected to be relatively flat with the first-half 53.0% level.
- Management expected full-year SG&A dollars to be significantly lower than 2019, but SG&A as a percentage of revenue to increase substantially because of revenue deleveraging. No full-year effective tax rate estimate was provided.
- PVH issued $500M of 4.625% notes due 2025 in July and an additional €175M of 3.625% notes due 2024 in April, and entered a $275M 364-day revolving facility. A June credit amendment temporarily suspended leverage and interest coverage tests through Q1 2021, added a $400M minimum liquidity covenant, and restricted dividends and share repurchases during the relief period. The company said it was compliant and expected compliance with amended covenants for at least 12 months based on current forecasts, while warning that a worse-than-expected recovery could threaten compliance.
- Dividends and share repurchases were suspended. Capital expenditures were expected to be approximately $190M for 2020, versus $345M in 2019.
- Planned North American actions included eliminating approximately 450 office positions (12%), with expected annual savings of approximately $80M, and exiting Heritage Brands Retail, comprising about 162 stores, by mid-2021. Expected costs were approximately $40M for the workforce reduction and $50M for the retail exit; $38.4M and $12.3M, respectively, had been incurred through August 2.
- Key risks include prolonged COVID-19 effects on demand, store traffic, wholesale shipments and suppliers; customer bankruptcies and receivable collectability; inventory markdowns; foreign exchange and tariff exposure; and potential further impairments. Goodwill valuations for certain Calvin Klein units and Tommy Hilfiger International remained sensitive to forecast and discount-rate assumptions.
Important facts for investors to verify
- Whether store traffic, wholesale shipments and digital demand developed in line with management’s second-half assumptions.
- Subsequent inventory levels, markdowns, customer credit losses and the recoverability of receivables.
- Liquidity, borrowing availability and covenant compliance as temporary relief terms and restrictions evolve.
- Actual savings, total cash costs and timing for the workforce reduction and Heritage Brands Retail exit.
- Whether updated forecasts or market conditions trigger additional asset impairments, particularly in Calvin Klein and Tommy Hilfiger International reporting units.