PVH Corp. (then Phillips-Van Heusen Corporation) — Form 10-Q Summary
Business context and reporting period
The filing covers the thirteen weeks ended May 1, 2011, compared with the thirteen weeks ended May 2, 2010. Although the request metadata says 2010 Q1, the filing itself is for fiscal 2011 Q1. Results include Tommy Hilfiger, acquired May 6, 2010, for the full current quarter but not the prior-year reported quarter, so reported year-over-year comparisons are not like-for-like.
PVH operates wholesale, retail and licensing businesses across its heritage brands, Calvin Klein and Tommy Hilfiger. Amounts below are in millions of U.S. dollars unless stated otherwise.
Financial results and liquidity
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Total revenue | $1,369.2 | $619.0 |
| Gross profit | $728.6 | $317.0 |
| Gross margin | 53.2% | 51.2% |
| SG&A expense | $591.9 | $287.2 |
| Income (loss) before interest and taxes | $120.4 | $(22.6) |
| Net income (loss) | $57.7 | $(27.6) |
| Diluted EPS | $0.79 | $(0.53) |
| Cash used by operating activities | $(12.0) | $(40.6) |
- Revenue comprised $1,257.0 of net sales, $82.9 of royalties and $29.3 of advertising and other revenue. Tommy Hilfiger contributed $715.4 of segment revenue: $271.8 in North America and $443.7 internationally.
- Gross margin improved 200 basis points, reflecting Tommy Hilfiger’s international and retail mix, partly offset by a lower proportion of high-margin licensing revenue and increased promotions in certain businesses. SG&A was 43.2% of revenue versus 46.4%.
- Cash and cash equivalents were $295.0 at May 1, down $203.8 from the fiscal-year opening balance. Investing cash outflow was $57.8, including $34.5 of capital expenditures and $10.4 invested in a China joint venture; financing cash outflow was $149.1, including about $149.3 of credit-facility repayments.
- Debt consisted of $2,254.5 of long-term debt, including $46.3 current, plus $12.3 of short-term borrowings. Cash less these borrowings implies approximate net debt of $1,971.8. The company had $470 million of revolving capacity, no revolver borrowings, and $165.2 of letters of credit outstanding.
- Interest expense was $33.4 versus $8.4, primarily reflecting borrowing to finance the Tommy Hilfiger acquisition. The company recorded $16.2 of debt-modification costs. Common dividends declared were $0.075 per share.
Material changes versus the prior comparable period
- Reported revenue rose substantially, principally because Tommy Hilfiger was consolidated for the full quarter. For additional context, the filing gives prior-year pro forma revenue of $1,256.2 and net income of $60.0, assuming the acquisition and related financing had occurred at the start of that prior-year period; these unaudited pro forma figures exclude expected synergies and are not actual results.
- On that pro forma revenue comparison, current-quarter revenue was about 9% higher; current-quarter net income was lower than the pro forma prior-year amount. The filing does not present a directly comparable pro forma current-versus-prior segment profit analysis.
- PVH recorded $30.5 of Tommy Hilfiger integration and restructuring costs in Q1 2011 and expects about $29 million more during the rest of 2011. Q1 2010 included $104.0 of Tommy Hilfiger acquisition-related charges, including a $52.4 foreign-currency hedge loss and $51.6 of transaction and related costs.
- In March 2011, PVH amended and restated its secured credit facility, extended certain maturities to January 2016, reduced borrowing spreads and voluntarily repaid approximately $149 million. Total voluntary debt repayments since the acquisition closing were approximately $400 million.
- PVH changed U.S. retail apparel inventory accounting from LIFO to weighted average cost and U.S. wholesale inventory accounting from LIFO to FIFO. The change had no effect on reported financial statements.
Guidance, management commentary, risks and unusual items
- Management projected FY2011 revenue of $5.70–$5.75 billion; Tommy Hilfiger segment revenue of $2.91–$2.94 billion; combined Calvin Klein Licensing and Other (Calvin Klein Apparel) revenue growth of 9%–10%; and combined heritage-brand segment growth of 1%–2%.
- Management expected full-year gross margin to decline from FY2010’s 52.2%, citing product-cost inflation and revenue mix. SG&A as a share of revenue was expected to decrease significantly, principally due to lower acquisition, integration and restructuring costs.
- Expected FY2011 net interest expense was $132.5–$134.5 million; management planned approximately $300 million of additional voluntary term-loan repayments for the rest of 2011. Expected tax rate was 29%–31%, capital expenditures about $200 million, and Calvin Klein contingent purchase-price payments $48–$50 million.
- After quarter-end, PVH entered into a three-year interest-rate swap on an initial $632 million of U.S.-dollar term-loan exposure and a 15-month cap on an initial €165.9 million of euro-denominated debt exposure. These were intended to reduce, not eliminate, interest-rate volatility.
- Key risks include substantial acquisition-related leverage and debt-service demands; variable interest rates and foreign-exchange exposure; covenant restrictions and potential default consequences; integration and realization of Tommy Hilfiger benefits; product-cost inflation, consumer demand, discounting, weather and seasonality; sourcing and supply-chain disruption; and licensee and brand risks. PVH reported compliance with its financial and non-financial debt covenants at May 1, 2011.
- Other notable items: the purchase-price allocation for Tommy Hilfiger remained subject to change; the company formed a 45%-owned China joint venture expected to take over Tommy Hilfiger distribution on August 1, 2011; and $42.6 of foreign-currency derivative liabilities were reported at quarter-end. Management stated disclosure controls were effective and there were no material changes in internal control over financial reporting.
Important facts for investors to verify
- Reconcile reported growth with the Tommy Hilfiger acquisition and assess performance against the filing’s limited prior-year pro forma comparison.
- Track debt paydown, cash generation, covenant headroom, upcoming mandatory repayments and actual availability under the revolving facilities.
- Compare realized gross margins and product costs with management’s full-year margin outlook, and monitor integration costs against the expected remaining amount.
- Review the final Tommy Hilfiger purchase-price allocation, China joint-venture transition and outcomes of the interest-rate hedges.
- Monitor foreign-exchange exposure, the substantial share of goodwill and tradenames in assets, and seasonal working-capital movements.