PVH Corp. — Form 10-Q Summary
Reporting period: Thirteen weeks ended May 3, 2020 (fiscal 2020 first quarter), compared with the thirteen weeks ended May 5, 2019. The filing is for 2020, notwithstanding the request metadata indicating 2019 Q1. Amounts below are in U.S. dollars; financial statement amounts are in millions except per-share data.
Business context and results
PVH is a global apparel company whose principal brands include TOMMY HILFIGER and CALVIN KLEIN, alongside Heritage Brands. COVID-19 caused widespread retail closures and major disruptions to wholesale customers, licensees and suppliers. The company completed the sale of its Speedo North America business on April 6, 2020.
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Total revenue | $1,344 | $2,356 | Down 43% |
| Net sales | $1,257 | $2,237 | Down 44% |
| Gross profit / margin | $666 / 49.5% | $1,296 / 55.0% | Margin down 5.5 percentage points |
| SG&A | $940 | $1,162 | 70.0% of revenue versus 49.3% |
| Loss before interest and taxes | $(1,218) | Income of $135 | Includes substantial impairment charges |
| Net income (loss) attributable to PVH | $(1,097) | $82 | Diluted loss per share: $(15.37), versus diluted EPS of $1.08 |
| Operating cash flow | $(143) | $(73) | Cash used increased |
| Capital expenditures | $56 | $77 | Lower spending |
Directly operated digital commerce sales increased 47%, partly offsetting declines in other channels. Revenue fell across all reported segments; Tommy Hilfiger International revenue declined 32%, Calvin Klein International 40%, and North American Tommy Hilfiger and Calvin Klein revenue declined 51% and 54%, respectively. These figures include currency effects as described in the filing.
Liquidity, debt and cash flow
- Cash and cash equivalents were $801 at May 3, 2020, up from $503 at February 2, 2020. Operating activities used $143 of cash; investing activities provided $113, including $169 of net Speedo sale proceeds; financing activities provided $336, including $187 of net proceeds from additional euro notes and $272 of net short-term borrowings.
- Short-term borrowings were $322 and long-term debt, including current portion, was approximately $2,868. Cash less these carrying amounts implies net debt of approximately $2,389; this calculation excludes lease liabilities. Operating lease liabilities totaled approximately $1,892.
- PVH reported approximately $1 billion of borrowing capacity available at quarter-end. It issued an additional €175 million of 3⅝% senior notes due 2024 and entered into a $275 million 364-day revolving facility in April; no borrowings were outstanding under the new facility at quarter-end.
- In June 2020, after quarter-end, PVH amended its senior credit facilities. The amendment temporarily suspended specified leverage and interest-coverage tests through Q1 2021, introduced a $400 million minimum-liquidity covenant and restricted dividends and share repurchases during the relief period. The company said it expected to comply with the amended covenants for at least 12 months based on current forecasts.
Material changes and unusual items
- PVH recorded $961.8 of noncash impairment charges: $879.0 for goodwill, $54.5 for other intangible assets, $16.0 for store assets and $12.3 for an equity-method investment. The charges were driven by pandemic-related business deterioration and reduced market capitalization.
- Inventory reserves increased by $59.1 and the allowance for credit losses increased by $32.9. The filing attributes the receivables allowance increase principally to customer and licensee credit deterioration, including pandemic effects.
- Gross margin declined due mainly to increased inventory reserves and unfavorable currency-related product costs. SG&A as a share of revenue rose sharply as sales fell, despite cost-cutting actions.
- PVH completed the Speedo North America sale for $169.1 of net proceeds and recognized a further $5.9 pre-tax noncash loss on closing, partly offset by a $2.8 pension-related gain.
- The effective tax rate was 11.5%, compared with 22.4% a year earlier; largely nondeductible goodwill impairment charges lowered the current-period rate.
Outlook, commentary and risks
Management expected the pandemic to continue to significantly reduce revenue and net income for the remainder of 2020. It also expected full-year revenue to decline significantly, gross margin to decrease, and SG&A dollars to be significantly lower but SG&A as a percentage of revenue to increase. Management did not provide a full-year effective tax-rate estimate because of uncertainty. It forecast 2020 capital expenditures of approximately $190, down from $345 in 2019.
PVH had temporarily closed virtually all retail stores during the quarter; approximately 85% had reopened by the report date, mostly with reduced hours and occupancy. Many North American and European wholesale customers had stopped accepting shipments beginning in March, and this had not materially improved into Q2. The company cited uncertainty around consumer demand, store traffic, inventory levels, supply-chain disruptions, customer collections, foreign exchange and the pace of recovery. Further impairment charges or covenant pressure could arise if business performance or recovery falls short of assumptions. Goodwill in several Calvin Klein-related reporting units was only partially impaired; Tommy Hilfiger International’s estimated fair value exceeded carrying value by 5%, leaving sensitivity to forecasts and valuation assumptions.
Liquidity measures included cost reductions, tighter inventory and working-capital management, reduced capital spending, suspension of share repurchases beginning in mid-March and suspension of dividends after the March payment. PVH stated it expected capital expenditure reductions and ongoing expense controls to support financial flexibility; future cash flows remained subject to material uncertainty.
Important facts for investors to verify
- Whether store reopening, consumer demand and wholesale shipments recover as management assumed, and how subsequent quarters affected sales and inventory.
- Whether liquidity, cash conversion and borrowing capacity remained adequate, including the impact of debt maturities, interest costs and the June covenant amendment.
- Whether customer and licensee credit quality, returns, markdowns and inventory reserves required further increases.
- Whether impairment assumptions and reporting-unit headroom—particularly for partially impaired Calvin Klein units and Tommy Hilfiger International—remained supportable.
- The final Speedo sale adjustment and subsequent payments relating to the Australia acquisition’s mandatorily redeemable non-controlling interest; tranche-one shares were purchased in June 2020.