PVH Corp. Form 10-Q Summary
Period clarification: The filing covers the thirteen and twenty-six weeks ended August 1, 2021 (fiscal 2021 Q2 and first half), not 2020 Q2 as stated in the request metadata. Comparisons are with periods ended August 2, 2020. Amounts below are in U.S. dollars; financial statement amounts are generally in millions.
Business context and reporting period
PVH is a global apparel company whose principal brands include Tommy Hilfiger and Calvin Klein. Its six reportable segments are those brands’ North American and international businesses, Heritage Brands Wholesale, and Heritage Brands Retail. The company completed its exit from Heritage Brands Retail during Q2 2021. It sold certain Heritage Brands trademarks and related inventory to Authentic Brands Group and other parties on August 2, 2021, the first day of Q3.
Financial results and liquidity
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Total revenue | $2,313.2 | $1,580.7 | $4,392.5 | $2,924.7 |
| Gross profit | $1,333.6 | $883.3 | $2,562.7 | $1,549.2 |
| Gross margin | 57.7% | 55.9% | 58.3% | 53.0% |
| SG&A expense | $1,062.0 | $882.2 | $2,101.4 | $1,822.3 |
| Operating income (loss) | $279.0 | $(1.7) | $476.4 | $(1,220.1) |
| Net income (loss) attributable to PVH | $181.9 | $(51.4) | $281.8 | $(1,148.2) |
| Diluted EPS | $2.51 | $(0.72) | $3.89 | $(16.12) |
- Sales channels: Q2 wholesale net sales rose 77% year over year and retail net sales rose 19%; directly operated digital sales were flat against unusually strong prior-year digital sales. Digital channels represented approximately 25% of revenue.
- Cash flow: First-half operating cash flow was $332.2, compared with $248.0 a year earlier. Capital expenditures were $110.2. Cash and cash equivalents fell $498.8 from fiscal year-end to $1,152.6, including $707.4 of term-loan repayments.
- Debt and liquidity: Long-term debt carrying value was $2,812.2 and short-term borrowings were $19.2 at August 1. Cash was $1,152.6, with approximately $1.5 billion of borrowing capacity available. About 75% of long-term debt had fixed rates after swaps. The company reported compliance with applicable debt covenants.
- Working capital: Inventories were $1,421.3, versus $1,417.1 at January 31, 2021. Trade receivables were $824.1. Suppliers had elected to sell approximately $430 million of PVH payment obligations outstanding at period-end through the voluntary supply-chain finance program.
Material changes versus the prior comparable period
- Revenue increased 46% in Q2 and 50% for the first half. Results improved across the Tommy Hilfiger and Calvin Klein businesses, while the prior-year periods were sharply affected by store closures and weak demand related to COVID-19. Foreign currency translation also contributed positively to growth.
- First-half gross margin rose 530 basis points. Management attributed the improvement primarily to less promotional selling, the absence of significant prior-year inventory reserves, favorable currency effects on international inventory costs, and a higher share of revenue from international segments.
- First-half SG&A increased in dollars but declined as a share of revenue to 47.8% from 62.3%, mainly reflecting expense leverage and the absence of prior-year receivable losses and store impairments. Current-year restructuring costs and reduced pandemic-related subsidies and rent abatements partly offset these benefits.
- The first-half 2020 comparison included $933.5 of goodwill and intangible-asset impairments and substantial other pandemic-related charges. These depressed prior-year operating results and make the year-over-year return to profit less comparable to an ordinary-period recovery.
- PVH repaid approximately $700 million of long-term debt in the first half. Interest expense was $57.8 for the half versus $55.2 in the prior year, reflecting debt issued in 2020, partly offset by repayments and lower rates.
Outlook, management commentary and risks
- Management expected full-year 2021 revenue growth of 26%–28% versus 2020, including an approximately 2% favorable foreign-currency translation effect. The Heritage Brands transaction was expected to reduce full-year revenue by approximately 2% versus 2020.
- Management expected full-year gross margin to increase, while noting higher freight and logistics costs, including air freight, to mitigate supply delays. Some inventory orders were delayed by an average of approximately four to six weeks.
- Other stated 2021 expectations included an effective tax rate of 17%–18%, net interest expense of approximately $105 million, capital expenditures of $300–$325 million, and non-service pension and postretirement income of approximately $16 million before any actuarial gain or loss.
- The Heritage Brands transaction was for $223 million in cash, subject to customary adjustment. Management expected a pre-tax net gain of approximately $110 million in Q3, after estimated transaction-related costs, and planned to use approximately $200 million of net proceeds for share repurchases. The company also announced its intention to reinstate the dividend; future declarations remain at the board’s discretion.
- Management said international businesses had exceeded, and were expected to continue exceeding, 2019 pre-pandemic revenue levels for the rest of 2021; North America remained challenged, including by limited international tourism. The outlook did not assume significant new store closures or lockdowns.
- Key uncertainties include COVID-19 effects on demand and store operations, factory and shipping disruptions, freight costs, wholesale customer and licensee credit, foreign exchange, and the ability to maintain debt covenant compliance if earnings or operating cash flows weaken. Management stated that additional impairments could arise if recovery assumptions or market factors deteriorate.
- The company reported no material changes to its previously disclosed risk factors, no litigation expected by management to have a material adverse effect on financial position, and effective disclosure controls as of period-end.
Important facts for investors to verify
- Confirm the reporting-period mismatch: this is a 2021 Q2 filing, not a 2020 Q2 filing.
- Track whether the stated revenue, margin, tax, interest, capital-expenditure and pension expectations were achieved, and distinguish recovery from the unusually weak COVID-affected comparison period.
- Verify the final Heritage Brands sale proceeds, Q3 gain, associated costs, revenue impact and execution of the planned share repurchases and dividend reinstatement.
- Monitor supply-chain delays, freight expense, inventory availability and the effects of renewed COVID-related restrictions on sales and cash flow.
- Review debt maturities, covenant headroom and liquidity, including the company’s ability to sustain compliance if operating results weaken; assess the scale of supplier obligations transacted through the supply-chain finance program.