PVH’s Q2 Revenues Climb 4 Percent

PVH Corp., the parent of Speedo, reported second-quarter earnings rose 8.7 percent to 125.5, or $1.51 a share, topping its guidance between $1.40 to $1.45. The company, which also owns Calvin Klein and Tommy Hilfiger, reaffirmed its full year non-GAAP EPS guidance of $7.30 to $7.40, which implies second half non-GAAP EPS growth in excess of 15 percent.

Overview of Second Quarter Results:

Earnings per share on a non-GAAP basis was $1.51 as compared to $1.39 in the prior years second quarter.
GAAP earnings per share was $1.52 as compared to the prior years second quarter loss per share of $(0.07).
Revenue was $1.98 billion, an increase of 4 percent as compared to the prior years second quarter amount excluding $62 million of revenue related to the Bass business (which was sold during the fourth quarter of 2013). Revenue increased 1 percent as compared to the prior year period including the Bass revenue. Revenue increased 9 percent in the companys Tommy Hilfiger business and 1 percent in the companys Calvin Klein business. Revenue in the companys Heritage Brands business was flat to the prior year excluding the $62 million of 2013 Bass revenue and decreased 13 percent including such revenue.

CEO Comments:

Commenting on these results, Emanuel Chirico, Chairman and Chief Executive Officer, noted, We are pleased with our second quarter performance, which exceeded our earnings per share guidance. Despite the anticipated difficult macroeconomic environment, we successfully navigated through heightened promotional activity in North America and volatility in certain key international markets. We believe the global macroeconomic environment will remain under pressure, yet we are cautiously optimistic about the second half of the year. We believe we are well-positioned to achieve earnings per share growth on a non-GAAP basis in excess of 15 percent for the second half of the year, as we anniversary our strategic investments in our acquired businesses, introduce our new Fall Calvin Klein jeanswear product and presentations at retail, and experience improving trends in our Southern European business.

Mr. Chirico concluded, The opportunity that we identified with the Warnaco acquisition remains significant and we believe that the strategic investments made during 2013 and 2014, along with our strong balance sheet and continued debt repayment, will enable us to capitalize on long term global growth opportunities and deliver stockholder value.

Second Quarter Business Review:

Calvin Klein

Revenue in the Calvin Klein business increased 1 percent to $675 million from $671 million in the prior year. Revenue for the North American business increased 1 percent, as an increase in comparable store sales of 2 percent and square footage expansion in the companys retail stores was partially offset by a decline in the wholesale jeans business, as the company works to restructure the sales distribution mix by reducing off-price sales. Revenue for the Calvin Klein International business was flat to the prior year. The companys Calvin Klein International comparable store sales declined 4 percent, primarily driven by the ongoing transitioning of the Europe business and softness in Asia. Globally, the underwear business continued to exhibit strength during the quarter. Total Calvin Klein royalty revenue increased 6 percent to $41 million in the second quarter, primarily driven by strength in North America in the womens apparel and handbag product categories.

Earnings before interest and taxes on a non-GAAP basis for the Calvin Klein business was $86 million as compared to $95 million in the prior years second quarter. This decrease was due principally to strategic investments in the acquired Calvin Klein businesses.

GAAP earnings before interest and taxes for the Calvin Klein business was $70 million as compared to a loss of $(5) million in the prior years second quarter. The increase was principally driven by a reduction in acquisition, integration and restructuring costs incurred during the second quarter of 2014 as compared to 2013, partially offset by strategic investments.

Tommy Hilfiger

Revenue in the Tommy Hilfiger business increased 9 percent to $870 million from $799 million in the prior year period. Tommy Hilfiger North America revenue increased 8 percent, due principally to strong wholesale growth, as well as retail comparable store sales growth of 2 percent and square footage expansion in the companys retail stores. Revenue in the Tommy Hilfiger International business increased 9 percent, driven by comparable store sales growth of 3 percent in Europe, square footage expansion in the companys retail stores and low-single digit growth in the Europe wholesale business. Also contributing to the revenue growth was the positive impact of foreign currency translation resulting from a stronger Euro in the second quarter of 2014 as compared to the prior year period.

Earnings before interest and taxes for the Tommy Hilfiger business increased 18 percent to $118 million on a non-GAAP basis, and increased 16 percent to $116 million on a GAAP basis, from $100 million on a GAAP basis in the prior years second quarter, principally driven by the revenue increase mentioned above combined with operating expense leverage.

Heritage Brands

Revenue for the Heritage Brands business of $431 million was relatively flat as compared to the prior year period excluding $62 million of revenue related to the Bass business, as a 1 percent increase in the wholesale business was offset by a 4 percent comparable stores sales decline in the companys retail stores. Including the Bass revenue in 2013, revenue decreased 13 percent from the prior year period revenue of $495 million.

Earnings before interest and taxes on a non-GAAP basis for the Heritage Brands business was $29 million, as compared to $44 million in the prior years second quarter. The decrease was principally driven by a gross margin decline attributable to increased promotional activity resulting from the continued competitive environment across the moderate tier.

Earnings before interest and taxes on a GAAP basis for the Heritage Brands business decreased to $25 million from $33 million in the prior years second quarter, driven by the decrease in earnings before interest and taxes on a non-GAAP basis discussed above, partially offset by a reduction in acquisition, integration and restructuring costs incurred in 2014 as compared to the prior year period.

Second Quarter Consolidated Earnings:

Earnings before interest and taxes on a non-GAAP basis decreased to $206 million from $213 million in the prior years second quarter, driven principally by investments in the businesses acquired with Warnaco and a gross margin decline in the companys Heritage Brands business, offset, in part, by strong growth in the companys Tommy Hilfiger business as discussed above.

Earnings before interest and taxes on a GAAP basis was $159 million as compared to $86 million in the prior years second quarter. The increase was primarily due to a decrease in acquisition, integration and restructuring costs as compared to the second quarter of 2013, partially offset by the investments and gross margin decline that caused the decrease in non-GAAP earnings discussed above.

Net interest expense decreased to $34 million from $47 million in the prior years second quarter due to lower average debt balances, combined with the effect of the amendment and restatement of the companys credit facility during the first quarter of 2014 and the redemption of its 7 3/8 percent senior notes due 2020 in connection therewith.

Six Months Consolidated Results:

Earnings per share on a non-GAAP basis was $2.98 as compared to $3.29 for the prior year. GAAP earnings per share was $1.94 as compared to a loss of $(0.19) for the prior year.

Revenue was $3.94 billion, as compared to the prior year periods $3.91 billion on a non-GAAP basis and $3.88 billion on a GAAP basis.

The revenue increase was due to:

• A 2 percent, or $31 million, increase in the Calvin Klein business on a non-GAAP basis, driven principally by the ten additional days of operations in 2014 of the acquired Calvin Klein businesses and an increase in royalty revenue, partially offset by a decline in the jeans business due to the initiatives to reduce off-price sales and reposition the European business. Comparable store sales in the companys retail stores increased 1 percent in North America and decreased 5 percent internationally. Revenue on a GAAP basis in the Calvin Klein business increased 5 percent, or $61 million, due to the increase discussed above, combined with the absence of $30 million of sales returns recorded in 2013 for certain wholesale customers in the acquired Asia business in connection with an initiative to reduce excess inventory levels.
• An 8 percent, or $122 million, increase in the Tommy Hilfiger business. Revenue in the Tommy Hilfiger North America business increased 6 percent, principally due to mid-single digit wholesale growth, retail comparable store sales growth of 2 percent and square footage expansion in the companys retail stores. Revenue in the Tommy Hilfiger International business increased 8 percent, driven by European retail comparable store sales growth of 5 percent and square footage expansion in the companys retail stores. Also contributing to the revenue growth was the positive impact of foreign currency translation resulting from a stronger Euro in the first half of 2014 as compared to the prior year.
• A 1 percent, or $10 million, decline in the Heritage Brands business from the prior year period excluding $109 million of revenue related to the Bass business. Relatively flat wholesale revenue was more than offset by a 7 percent comparable stores sales decline in the companys retail stores. Including the Bass 2013 revenue, revenue decreased 12 percent, or $119 million, from the prior year period revenue of $986 million.

Earnings before interest and taxes on a non-GAAP basis decreased to $409 million from $455 million in the prior years first half, principally due to:

• A $33 million decline in the Calvin Klein business, driven principally by investments in the businesses acquired with Warnaco.
• A $15 million increase in the Tommy Hilfiger business, principally driven by the revenue increase mentioned above.
• A $25 million decline in the Heritage Brands business, principally driven by the revenue decrease discussed above, combined with a gross margin decline attributable to increased promotional activity resulting from the continued competitive environment across the moderate tier.

GAAP earnings before interest and taxes increased to $244 million from $104 million in the prior year period. The earnings increase was primarily due to a decrease of $186 million of costs from the prior year period, principally related to the Warnaco acquisition, integration and restructuring costs and debt modification and extinguishment charges, partially offset by the investments and gross margin decline that caused the net non-GAAP earnings decrease discussed above.

Net interest expense decreased to $74 million from $92 million on a non-GAAP basis and $93 million on a GAAP basis in the prior year period due to lower average debt balances, combined with the effect of the amendment and restatement of the companys credit facility during the first quarter of 2014 and the redemption of its 7 3/8 percent senior notes due 2020 in connection therewith. During the first half of 2014, the company made debt repayments totaling $220 million on its outstanding term loans, most of which were voluntary, and the company expects to make additional term loan repayments of approximately $180 million during the remainder of 2014.

2014 Guidance:

Please see the section entitled Full Year and Quarterly Reconciliations of GAAP to Non-GAAP Amounts at the end of this release for further detail and reconciliations of GAAP to non-GAAP amounts discussed in this section.

Full Year Guidance

The company is reaffirming its earnings per share guidance of $7.30 to $7.40 on a non-GAAP basis, as compared to $7.03 in 2013, an increase of 4 percent to 5 percent. Second half earnings per share on a non-GAAP basis is expected to increase in excess of 15 percent over the prior year period.

Revenue is currently projected to be approximately $8.4 billion, an increase of approximately 4 percent from the prior year amount excluding revenue of $176 million related to the Bass business. Including Bass revenue in 2013, the revenue increase is expected to be approximately 2 percent over the prior year amounts of $8.22 billion on a non-GAAP basis and $8.19 billion on a GAAP basis. It is currently projected that revenue for the Tommy Hilfiger business will increase approximately 7 percent. Revenue for the Calvin Klein business is currently projected to increase approximately 3 percent. Revenue for the Heritage Brands business is currently projected to increase approximately 2 percent excluding revenue attributable to Bass, and decrease approximately 7 percent including the Bass revenue.

Net interest expense is expected to decrease to approximately $140 million, from $185 million in the prior year, due to lower average debt balances, combined with the effect of the amendment and restatement of the companys credit facility and the redemption of its 7 3/8 percent senior notes in the first quarter of 2014. The company expects to make term loan payments of approximately $400 million in 2014, of which $180 million is expected to be paid in the second half of the year.

The company estimates that its effective tax rate will be between 23.5 percent and 24.0 percent on a non-GAAP basis.

The companys earnings per share estimate on a non-GAAP basis excludes approximately $110 million of pre-tax costs associated primarily with the Warnaco integration and related restructuring and $93 million of pre-tax costs associated with the amendment and restatement of the companys credit facility and the redemption of its 7 3/8 percent senior notes due 2020. (Please see section entitled Non-GAAP Exclusions for details on these pre-tax items.)

Third Quarter Guidance

Earnings per share on a non-GAAP basis for the third quarter is currently projected to be in a range of $2.45 to $2.50 as compared to $2.30 in the prior years third quarter.

Revenue in the third quarter is currently expected to be approximately $2.25 billion, an increase of approximately 3 percent compared to the prior year amount excluding revenue of $67 million related to the Bass business. Including Bass revenue in 2013, third quarter revenue is expected to be relatively flat to the prior year period amount of $2.26 billion. It is currently projected that revenue for the Tommy Hilfiger business in the third quarter will increase approximately 4 percent. It is currently projected that revenue for the Calvin Klein business in the third quarter will increase approximately 1 percent. Revenue for the Heritage Brands business in the third quarter is currently expected to increase approximately 3 percent excluding revenue attributable to Bass, and decrease approximately 9 percent including the Bass revenue.

The company projects that third quarter net interest expense will be approximately $30 million and that the third quarter tax rate will be approximately 24.0 percent.

The companys third quarter earnings per share estimate excludes approximately $20 million of pre-tax costs associated with the integration and related restructuring of Warnaco. (Please see section entitled Non-GAAP Exclusions for details on these pre-tax costs.)

Non-GAAP Exclusions:

The discussions in this release that refer to non-GAAP amounts exclude the following:

• Pre-tax costs of approximately $110 million expected to be incurred in 2014 in connection with (i) the integration of Warnaco and the related restructuring, including a pre-tax gain resulting from the deconsolidation of certain Calvin Klein subsidiaries in Australia and New Zealand and the companys previously consolidated Calvin Klein joint venture in India; (ii) the sale of the Bass business, which closed in the fourth quarter of 2013; and (iii) the impairment of certain Tommy Hilfiger stores in North America in the second quarter of 2014. Of the total expected costs, $26 million was incurred in the first quarter, $46 million was incurred in the second quarter and approximately $20 million is expected to be incurred in the third quarter.
• Pre-tax costs of $93 million recorded in the first quarter of 2014 associated with the amendment and restatement of the companys credit facility and the related redemption of its 7 3/8 percent senior notes due 2020.
• A $30 million discrete tax benefit in the second quarter of 2014 related to the favorable resolution of uncertain tax positions.
• A revenue reduction of $30 million in the first quarter of 2013, due to sales returns accepted from certain Warnaco Asia wholesale customers to reduce excess inventory levels.
• Pre-tax costs of $511 million incurred in 2013 in connection with the acquisition, integration and related restructuring of Warnaco, including costs associated with the companys debt modification and extinguishment completed at the time of the Warnaco acquisition, and the sales returns mentioned above, of which $224 million was incurred in the first quarter, $128 million was incurred in the second quarter, $61 million was incurred in the third quarter and $99 million was incurred in the fourth quarter. Approximately $215 million of the acquisition, integration and related restructuring charges incurred in 2013 were non-cash charges, the majority of which were short-lived valuation adjustments and amortization.
• Pre-tax income of $24 million recorded in the third quarter of 2013 due to the amendment of an unfavorable contract, which resulted in the reduction of a liability recorded at the time of the Tommy Hilfiger acquisition.
• A pre-tax loss of $20 million, including related costs, incurred in 2013 in connection with the sale of substantially all of the assets of the Bass business, which closed on November 4, 2013, of which $19 million was incurred in the third quarter and $1 million was incurred in the fourth quarter.
• Pre-tax income of $53 million recorded in the fourth quarter of 2013 related to recognized actuarial gains on retirement plans.
• A tax expense of $120 million recorded in the fourth quarter of 2013 in connection with an increase to the companys previously established liability for an uncertain tax position related to European and U.S. transfer pricing arrangements.
• A net tax expense of $5 million recorded in 2013 associated with various Warnaco integration activities and various adjustments to liabilities for changes in estimates in uncertain tax positions, of which an expense of $28 million was recorded in the second quarter, a benefit of $28 million was recorded in the third quarter and an expense of $5 million was recorded in the fourth quarter.
• Estimated tax effects associated with the above pre-tax items, which are based on the companys assessment of deductibility. In making this assessment, the company evaluated each item that it has identified above as a non-GAAP exclusion to determine if such item is taxable or tax deductible, and if so, in what jurisdiction the tax expense or tax deduction would occur. All items above were identified as either primarily taxable or tax deductible, with the tax effect taken at the statutory income tax rate of the local jurisdiction, or as non-taxable or non-deductible, in which case the company assumed no tax effect.