PVH Corp reported earnings reached the high end of guidance in the first quarter but it reduced its earnings outlook for the year due to ” particular softness across the U.S. and China retail landscape” and currency headwinds.
First-quarter results
- First quarter revenue increased 2 percent (increased 6 percent on a constant currency basis) compared to the prior year period, in line with previous guidance
First quarter EPS was: - GAAP basis: $1.08 compared to guidance of $0.25 to $0.30, primarily due to a shift in the timing of restructuring costs
Non-GAAP basis: $2.46 compared to guidance of $2.40 to $2.45 - EPS included a negative impact of $0.15 per share related to foreign currency translation compared to guidance of $0.14
Full year 2019 EPS outlook: - GAAP basis: $9.05 to $9.15 compared to $8.90 to $9.00 previously
- Non-GAAP basis: $10.20 to $10.30 compared to $10.30 to $10.40 previously
- EPS outlook includes an increased negative impact of $0.32 per share related to foreign currency translation, compared to $0.22 previously
CEO Comments:
Commenting on these results, Emanuel Chirico, chairman and chief executive officer, noted, “We are pleased with our first quarter 2019 results, as our earnings per share exceeded the high end of our guidance range. While the global retail environment was challenging, the power of our diversified business model and the strength of our brands, global platforms and teams drove our businesses forward.”
Chirico continued, “Looking ahead, the volatile and challenging macroeconomic backdrop has continued into the second quarter, with particular softness across the U.S. and China retail landscape. Additionally, further volatility in foreign exchange rates is expected to pressure our full year earnings per share by an incremental $0.10 compared to our prior expectations. As such, we believe it is prudent to factor this into our updated full year earnings outlook.”
Chirico concluded, “We remain confident that we are in a strong position to gain market share as we deliver against our strategic priorities. We are incredibly excited to strengthen our management team with the appointment of Stefan Larsson as President, who will help fuel our global growth. As we continue to invest in the strategic areas of the business that address the increasingly dynamic and ever-changing consumer landscape, while also taking a more nimble approach to react to emerging business trends, we see a significant opportunity to deliver long-term value for our stockholders.”
First Quarter Business Review:
Tommy Hilfiger
Revenue in the Tommy Hilfiger business for the quarter increased 4 percent to $1.1 billion (increased 9 percent on a constant currency basis) compared to the prior year period. Tommy Hilfiger International revenue increased 4 percent to $680 million (increased 12 percent on a constant currency basis) compared to the prior year period, primarily driven by strong performance in Europe. International comparable store sales increased 9 percent. Tommy Hilfiger North America revenue increased 3 percent to $372 million (increased 3 percent on a constant currency basis) compared to the prior year period, driven by growth in the North America wholesale business, partially offset by a 4 percent decline in North America comparable store sales.
Earnings before interest and taxes on a GAAP basis for the quarter decreased to $92 million, inclusive of a $9 million negative impact due to foreign currency translation, from $132 million in the prior year period. Included in earnings before interest and taxes for the current quarter were costs of $55 million incurred in connection with the closure of the company’s TOMMY HILFIGER flagship and anchor stores in the United States (the “TH U.S. store closures”), primarily consisting of noncash lease asset impairments. Included in earnings before interest and taxes for the prior year period were costs of $7 million related to the April 2016 acquisition of the 55 percent interest in the company’s former Tommy Hilfiger joint venture in China that it did not already own (the “TH China acquisition”), consisting of noncash amortization of short-lived assets. Earnings before interest and taxes on a non-GAAP basis for these periods exclude these amounts.
Earnings before interest and taxes on a non-GAAP basis for the quarter increased to $147 million, inclusive of a $9 million negative impact due to foreign currency translation, from $139 million in the prior year period. The earnings increase was principally due to strong performance in the international business.
Calvin Klein
Revenue in the Calvin Klein business for the quarter of $890 million was flat (increased 4 percent on a constant currency basis) compared to the prior year period. Calvin Klein International revenue decreased 2 percent to $466 million (increased 5 percent on a constant currency basis) compared to the prior year period, as solid growth in Europe was more than offset by the negative impacts of foreign currency translation and weakness in China. International comparable store sales decreased 4 percent. Calvin Klein North America revenue increased 2 percent to $424 million (increased 3 percent on a constant currency basis) compared to the prior year period, due to an increase in the wholesale business, partially offset by a 5 percent decline in North America comparable store sales.
Earnings before interest and taxes on a GAAP basis for the quarter decreased to $48 million, inclusive of a $5 million negative impact due to foreign currency translation, from $109 million in the prior year period. Included in earnings before interest and taxes for the current quarter were costs of $70 million in connection with the restructuring associated with the strategic changes for the Calvin Klein business announced in January 2019 (the “Calvin Klein restructuring”), consisting of a $30 million noncash lease asset impairment resulting from the closure of the company’s flagship store on Madison Avenue in New York, New York, $19 million of severance, $15 million of contract termination and other costs, $5 million of other noncash asset impairments, and $2 million of inventory markdowns. Earnings before interest and taxes on a non-GAAP basis for the period, excludes these amounts.
Earnings before interest and taxes on a non-GAAP basis for the quarter increased to $119 million, inclusive of a $5 million negative impact due to foreign currency translation, from $109 million on a GAAP basis in the prior year period (there were no non-GAAP exclusions in the prior year period). The earnings increase was principally due to lower expenses.
Heritage Brands
Revenue in the Heritage Brands business for the quarter increased 1 percent to $415 million compared to the prior year period, due to an increase in the wholesale business, partially offset by a 6 percent decline in comparable store sales.
Earnings before interest and taxes for the quarter decreased to $40 million from $42 million in the prior year period, principally due to gross margin pressure from a more promotional U.S. retail environment.
First Quarter Consolidated Results:
First quarter revenue increased 2 percent to $2.4 billion (increased 6 percent on a constant currency basis) compared to the prior year period.
Earnings per share on a GAAP basis was $1.08 for the first quarter of 2019 compared to $2.29 in the prior year period. These results include the amounts for the applicable period described under the heading “Non-GAAP Exclusions” later in this release. Earnings per share on a non-GAAP basis for these periods exclude these amounts.
Earnings per share on a non-GAAP basis was $2.46 for the first quarter of 2019 compared to $2.36 in the prior year period. Earnings per share on both a GAAP and non-GAAP basis for the first quarter of 2019 included a $0.15 negative impact related to foreign currency translation.
Earnings before interest and taxes on a GAAP basis for the quarter decreased to $135 million, inclusive of a $14 million negative impact due to foreign currency translation, from $244 million in the prior year period. Included in earnings before interest and taxes for the current quarter were $131 million of costs consisting of (i) $70 million related to the Calvin Klein restructuring, (ii) $55 million in connection with the TH U.S. store closures, and (iii) $6 million in connection with the refinancing of the company’s senior credit facilities. Included in earnings before interest and taxes for the prior year period were costs of $7 million related to the TH China acquisition. Earnings before interest and taxes on a non-GAAP basis for these periods exclude these amounts.
Earnings before interest and taxes on a non-GAAP basis for the quarter increased to $267 million, inclusive of a $14 million negative impact due to foreign currency translation, compared to $251 million in the prior year period. The improvement in earnings was principally driven by growth in the Tommy Hilfiger and Calvin Klein businesses.
Net interest expense increased to $30 million from $28 million in the prior year period. The effective tax rate on a GAAP basis was 22.4 percent as compared to 17.1 percent in the prior year period. The effective tax rate on a non-GAAP basis was 21.4 percent as compared to 17.3 percent in the prior year period.
Stock Repurchase Program:
During the first quarter of 2019, the company repurchased approximately 500,000 shares of its common stock for $61 million (9.5 million shares for $1.1 billion since inception) under the $2.0 billion stock repurchase program authorized by the Board of Directors through June 3, 2023. Stock repurchases under the program may be made from time to time over the period through open market purchases, accelerated share repurchase programs, privately negotiated transactions or other methods, as the company deems appropriate. Purchases are made based on a variety of factors, such as price, corporate requirements and overall market conditions, applicable legal requirements and limitations, restrictions under the company’s debt arrangements, trading restrictions under the company’s insider trading policy and other relevant factors. The program may be modified by the Board, including to increase or decrease the repurchase limitation or extend, suspend, or terminate the program, at any time, without prior notice.
2019 Outlook:
The company’s 2019 guidance assumes that two acquisitions will close in the second quarter of 2019. The first is the company’s pending acquisition of the approximately 78 percent interest in Gazal Corporation Limited (“Gazal”) that it does not already own (the “Australia acquisition”). The company and Gazal jointly own and manage a joint venture, PVH Brands Australia Pty. Limited (“PVH Australia”), which licenses and operates businesses under the “TOMMY HILFIGER,” “CALVIN KLEIN” and “Van Heusen” brands, along with other licensed and owned brands. PVH Australia will come under the company’s full ownership as a result of the Australia acquisition. The second is the company’s pending acquisition of the Tommy Hilfiger retail business in Hong Kong and certain other countries in Central and Southeast Asia from the company’s current licensee in those markets (the “TH CSAP acquisition”). These pending acquisitions are expected to add approximately $150 million of revenue in 2019.
The 2019 guidance incorporates the impact on certain of the company’s products of tariffs imposed on nearly $200 billion of total goods imported from China into the U.S. (Tranches 1, 2 and 3) at 25 percent. However, the 2019 guidance does not contemplate any future increase in tariffs on additional goods imported from China into the U.S.
Full Year Guidance
The company currently projects that 2019 earnings per share on a GAAP basis will be in a range of $9.05 to $9.15 compared to $9.65 in 2018. The company currently projects that 2019 earnings per share on a non-GAAP basis will be in a range of $10.20 to $10.30 compared to $9.60 in 2018. Both the GAAP and non-GAAP projections include the estimated negative impact of approximately $0.32 per share related to foreign currency translation.
Revenue in 2019 is projected to increase approximately 3 percent (increase approximately 5 percent on a constant currency basis) as compared to 2018. Revenue for the Tommy Hilfiger business is projected to increase approximately 6 percent (increase approximately 9 percent on a constant currency basis). Revenue for the Calvin Klein business is projected to be flat (increase approximately 2 percent on a constant currency basis). Revenue for the Heritage Brands business is projected to be flat.
Net interest expense in 2019 is projected to increase to approximately $120 million compared to $116 million in 2018. The company estimates that the 2019 effective tax rate will be in a range of 14.5 percent to 15.5 percent on a GAAP basis and in a range of 14 percent to 15 percent on a non-GAAP basis.
The company’s estimate of 2019 earnings per share on a non-GAAP basis excludes approximately $96 million of pre-tax net costs, consisting of (i) $105 million of pre-tax costs expected to be incurred in connection with the Calvin Klein restructuring, consisting of a noncash lease asset impairment resulting from the closure of the company’s flagship store on Madison Avenue in New York, New York, severance, contract termination and other costs, other noncash asset impairments, and inventory markdowns, (ii) $55 million of pre-tax costs incurred in connection with the TH U.S. store closures, primarily consisting of noncash lease asset impairments, (iii) $6 million of pre-tax costs incurred in connection with the refinancing of the company’s senior credit facilities, (iv) an aggregate net pre-tax gain of $70 million expected to be recorded in connection with the Australia acquisition and the TH CSAP acquisition, consisting of a noncash gain to write up the company’s equity investments in Gazal and PVH Australia to fair value, partially offset by pre-tax costs related to both pending acquisitions, primarily consisting of noncash valuation adjustments and amortization of short-lived assets, and the resulting estimated tax effects of these pre-tax items.
Second Quarter Guidance
The company currently projects that second quarter 2019 earnings per share on a GAAP basis will be in a range of $2.75 to $2.80 compared to $2.12 in the prior year period. The company currently projects that second quarter 2019 earnings per share on a non-GAAP basis will be in a range of $1.85 to $1.90 compared to $2.18 in the prior year period. Both the GAAP and non-GAAP projections include an estimated negative impact of approximately $0.06 per share related to foreign currency translation.
Revenue in the second quarter of 2019 is projected to be flat (increase approximately 2 percent on a constant currency basis) compared to the prior year period. Revenue for the Tommy Hilfiger business in the second quarter is projected to increase approximately 3 percent (increase approximately 6 percent on a constant currency basis). Revenue for the Calvin Klein business in the second quarter is projected to decrease approximately 4 percent (decrease approximately 2 percent on a constant currency basis). Revenue for the Heritage Brands business in the second quarter is projected to decrease approximately 2 percent.
Net interest expense in the second quarter of 2019 is projected to decrease to approximately $28 million compared to $29 million in the prior year period. The company estimates that the second quarter 2019 effective tax rate will be in a range of 21 percent to 22 percent on a GAAP basis and in a range of 21.5 percent to 22.5 percent on a non-GAAP basis.
The company’s estimate of second quarter 2019 earnings per share on a non-GAAP basis excludes a net pre-tax gain of approximately $85 million, consisting of (i) an aggregate net pre-tax gain of $105 million expected to be recorded in connection with the Australia acquisition and the TH CSAP acquisition, consisting of a noncash gain to write up the company’s equity investments in Gazal and PVH Australia to fair value, partially offset by pre-tax costs related to both pending acquisitions, primarily consisting of noncash valuation adjustments and amortization of short-lived assets and (ii) $20 million of pre-tax costs expected to be incurred in connection with the Calvin Klein restructuring, and the resulting estimated tax effects of these pre-tax costs.
