PVH Corp. Form 10-Q Summary
Period note: The request identifies 2016 Q2, but the supplied filing is for the thirteen and twenty-six weeks ended July 30, 2017, compared with periods ended July 31, 2016. The 2017 interim statements are unaudited.
Business context and reporting period
PVH is a global apparel company with Calvin Klein, Tommy Hilfiger, Heritage Brands and licensed brands. It sells through wholesale, company-operated retail and digital channels, and earns royalty and related revenue. The filing covers the second quarter and first half of fiscal 2017.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Total revenue | $2,069.9 million | $1,933.3 million | $4,058.9 million | $3,851.1 million |
| Gross profit | $1,147.3 million | $1,033.8 million | $2,228.1 million | $2,040.7 million |
| Gross margin | 55.4% | 53.5% | 54.9% | 53.0% |
| SG&A | $968.5 million | $874.7 million | $1,936.5 million | $1,739.9 million |
| Income before interest and taxes | $180.5 million | $143.0 million | $293.7 million | $437.6 million |
| Net income attributable to PVH | $119.7 million | $90.5 million | $190.1 million | $322.1 million |
| Diluted EPS | $1.52 | $1.11 | $2.41 | $3.95 |
For the first half, operating cash flow was $202.9 million, down from $409.2 million. Investing cash outflow was $205.4 million and financing cash outflow was $183.8 million; cash declined $170.7 million to $559.4 million. The filing attributes lower operating cash generation primarily to working-capital changes, including higher receivables and inventory.
At July 30, 2017, cash was $559.4 million, current assets were $2,935.5 million and current liabilities were $1,633.2 million. Long-term debt was $3,185.7 million and short-term borrowings were $18.0 million. No revolving-credit borrowings were outstanding; $22.6 million of letters of credit were outstanding. PVH said it was in compliance with its debt covenants. Capital expenditures were $156.0 million in the first half.
Material changes versus prior comparable periods
- Q2 revenue increased 7% and net income attributable to PVH increased to $119.7 million from $90.5 million. First-half revenue rose about 5%, but first-half net income fell to $190.1 million from $322.1 million.
- The first-half comparison is affected by the prior-year $153.1 million noncash gain on remeasurement of PVH’s TH China investment, recognized with its 2016 acquisition. Excluding that unusual item, the headline year-over-year net-income decline is less comparable.
- Gross margin improved by 190 basis points in both Q2 and the first half. Management cited stronger international business mix, less promotional selling in North America and increased royalty revenue following the Mexico deconsolidation and G-III license.
- SG&A rose faster than revenue: its share of revenue increased 160 basis points in Q2 and 250 basis points in the first half. Drivers included higher marketing and business-mix effects, plus transaction, relocation, pension-settlement and distribution-network costs.
- International comparable-store sales were positive: Calvin Klein International increased 6% in Q2 and 5% in the first half; Tommy Hilfiger International increased 6% and 9%, respectively. North American comparable-store sales were weaker or flat across the cited brands.
Guidance, commentary, risks and unusual items
- Management expected full-year 2017 revenue to increase approximately 6%, including an approximately 1% positive foreign-currency translation effect. Forecast brand growth: Calvin Klein approximately 8%, Tommy Hilfiger approximately 6%, and Heritage Brands flat.
- Management expected full-year gross margin to increase, while SG&A as a percentage of revenue was expected to rise. Expected full-year effective tax rate was 15.0%–15.5%; net interest expense approximately $120 million; capital expenditures approximately $400 million.
- PVH recorded $54.2 million of first-half costs associated with restructuring its supply-chain relationship with Li & Fung; the transaction was expected to close in Q3 2017. Other first-half items included $14.1 million of Tommy Hilfiger New York office relocation costs, $7.3 million of North American warehouse consolidation costs, and a $9.4 million pension settlement loss. Management expected further costs in these areas and approximately $12 million of remaining TH China acquisition charges in 2017.
- Foreign-exchange exposure remains significant. Based on then-current exchange rates, management estimated approximately $60 million of 2017 revenue benefit from translation but approximately $15 million of net-income reduction, primarily from transaction effects.
- Management cited leverage and debt-service requirements, variable interest rates, currency movements, seasonality, inventory and retail-industry conditions, supply-chain and sourcing risks, and potential volatility in pension expense. About 60% of long-term debt was fixed-rate after swaps. The filing states that no material changes had been made to the risk factors in the prior annual report.
- PVH acquired True & Co. for $28.5 million in March 2017 to expand its direct-to-consumer digital commerce presence. The company also repurchased $123.7 million of shares in the first half; $685.0 million remained under the repurchase authorization.
Most important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is Q2 2017, not Q2 2016.
- Track whether revenue, margin and full-year guidance were achieved, and distinguish underlying performance from currency effects and portfolio changes.
- Assess cash conversion and working-capital needs, particularly inventory growth, alongside planned capital expenditures and share repurchases.
- Monitor debt reduction, interest-rate exposure, covenant headroom and the company’s ability to service its substantial indebtedness.
- Verify completion and financial effects of the Li & Fung transaction and the remaining restructuring, relocation and acquisition-related charges.