Business context and reporting period
PVH Corp. is a global apparel company with Calvin Klein, Tommy Hilfiger, Heritage Brands and licensed brands. This 10-Q reports the 13 and 39 weeks ended October 29, 2017, compared with periods ended October 30, 2016. The request labels the filing “2016 Q3,” but the filing itself is for fiscal 2017 Q3.
Financial performance
| Metric | 13 weeks ended Oct. 29, 2017 | 13 weeks ended Oct. 30, 2016 | 39 weeks ended Oct. 29, 2017 | 39 weeks ended Oct. 30, 2016 |
|---|---|---|---|---|
| Total revenue | $2,357.0 million | $2,244.3 million | $6,415.9 million | $6,095.4 million |
| Gross profit / margin | $1,297.3 million / 55.0% | $1,191.6 million / 53.1% | $3,525.4 million / 54.9% | $3,232.3 million / 53.0% |
| Income before interest and taxes | $280.7 million | $197.9 million | $574.4 million | $635.5 million |
| Net income attributable to PVH | $239.2 million | $126.2 million | $429.3 million | $448.3 million |
| Diluted EPS | $3.05 | $1.56 | $5.45 | $5.52 |
| SG&A expenses | $1,020.3 million (43.3% of revenue) | $918.0 million (40.9%) | $2,956.8 million (46.1%) | $2,657.9 million (43.6%) |
Third-quarter revenue increased about 5% year over year; year-to-date revenue increased about 5%. Third-quarter diluted EPS rose substantially, while year-to-date EPS and net income attributable to PVH declined. Third-quarter effective tax rate was 4.4%, versus 25.3% a year earlier; the year-to-date rates were 11.7% and 18.4%, respectively. Lower international tax rates and discrete tax benefits affected the comparisons.
Cash flow, liquidity and debt
- Operating cash flow for the 39 weeks was $243.1 million, down from $577.3 million. Management attributed the decline chiefly to working-capital changes, including higher receivables and inventory.
- Capital expenditures were $235.2 million, compared with $163.0 million. Cash and cash equivalents were $612.3 million at October 29, 2017, down from $730.1 million at fiscal year-end.
- Long-term debt was $3,182.7 million and short-term borrowings were $207.5 million; cash less these borrowings implies net debt of approximately $2.78 billion. About 60% of long-term debt was fixed-rate after swaps. The company was in compliance with debt covenants.
- Current assets were $3,144.1 million and current liabilities were $1,726.3 million. Inventory was $1,466.2 million, up from $1,317.9 million at fiscal year-end.
- PVH repurchased $192.3 million of shares during the 39 weeks; $616.5 million remained available under its repurchase authorization.
Material changes and unusual items
- International Calvin Klein and Tommy Hilfiger businesses drove much of the third-quarter growth. Third-quarter comparable store sales increased 9% for Calvin Klein International, 7% for Tommy Hilfiger International and 6% for Tommy Hilfiger North America; Calvin Klein North America comparable sales declined 1%.
- Gross margin expanded 190 basis points year over year in both the quarter and year-to-date period, reflecting international mix, less promotional selling in North America, and the shift from directly operated businesses to royalty revenue following the Mexico deconsolidation and G-III license.
- SG&A increased as a share of revenue, reflecting international business mix, higher planned marketing, the $54.2 million Li & Fung supply-chain termination charge, Tommy Hilfiger’s New York office relocation, North American distribution consolidation, and a $9.4 million pension settlement loss.
- PVH acquired True & Co. for $28.5 million in March and acquired Tommy Hilfiger and Calvin Klein wholesale and concessions businesses in Belgium and Luxembourg for $13.9 million in September.
- Prior-year comparisons include a $76.9 million noncash Mexico deconsolidation loss in Q3 2016 and a $153.1 million noncash gain on remeasurement of the TH China investment in the 2016 year-to-date period. These items make reported earnings comparisons less representative of underlying operating trends.
Outlook, commentary and risks
- Management expected full-year 2017 revenue to increase about 7%, including an approximately 1% favorable currency effect. It expected Calvin Klein revenue to rise about 9%, Tommy Hilfiger about 8%, and Heritage Brands to be flat. Mexico deconsolidation and the G-III license were expected to reduce annual revenue by about $150 million.
- Management expected full-year gross margin to increase, but at a slower pace in Q4, and expected SG&A as a percentage of revenue to rise. Full-year effective tax rate guidance was 13.0%–13.5%; net interest expense was expected to be about $120 million and capital expenditures about $400 million.
- Key risks include foreign-exchange movements, promotional and consumer demand pressures, inventory and working-capital management, supply-chain and sourcing costs, leverage and variable interest rates, and possible volatility in retirement-plan expenses. Management noted that a 0.25% change in the pension discount-rate assumption would change 2017 pension expense by approximately $29 million, all else equal.
- Management said litigation was not expected to have a material adverse effect on financial position and reported no material changes to the risk factors in its latest annual report. Disclosure controls were deemed effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Confirm the fiscal-period label: the supplied filing is for the quarter ended October 29, 2017, not 2016 Q3.
- Assess whether revenue and margin gains are sustainable after adjusting for currency, business mix, deconsolidations, licensing changes and prior-year unusual items.
- Track cash conversion and working capital, particularly the increase in receivables and inventory and the decline in operating cash flow.
- Monitor debt repayment, interest-rate exposure, liquidity and the use of cash for repurchases and capital spending.
- Evaluate the assumptions behind management’s full-year outlook, including foreign exchange, tax benefits, pension volatility and the timing of seasonal sales.