PVH Corp. on Thursday afternoon reported earnings per share for the third quarter of $3.21, beating Wall Street’s target by 7 cents and sparking the company to raise its EPS outlook for the year.

Third-Quarter Highlights:

  • Third quarter revenue increased 7 percent (increased 9 percent on a constant currency basis) compared to the prior year period, in line with previous guidance.
  • Third quarter EPS exceeded guidance and was:
    • GAAP basis: $3.15 compared to guidance of $3.03 to $3.06
    • Non-GAAP basis: $3.21 compared to guidance of $3.10 to $3.13
  • Full year 2018 EPS outlook:
    • GAAP basis: Raised to $9.10 to $9.12 from $8.96 to $9.01 previously
    • Non-GAAP basis: Raised to $9.33 to $9.35 from $9.20 to $9.25 previously
    • The strengthening U.S. dollar lowered the estimated positive impact of foreign currency translation to 3 cents per share, from 7 cents previously.

Commenting on these results, Emanuel Chirico, chairman and CEO, noted, “We are pleased with the strong earnings performance in the third quarter, which exceeded our expectations, driven by the power of our diversified global business model. We continue to over-deliver against our 2018 plan and are raising our full year earnings outlook based on our third quarter outperformance and our confidence in the opportunities for the fourth quarter, despite recent retailer bankruptcies in the U.S. and U.K. and increasing geopolitical volatility around the world.”

Chirico continued, “Our Tommy Hilfiger business truly outperformed, with strength across all regions, product lines and channels of distribution. The brand continues to gain meaningful market share, as our consumer-centric brand approach and consistent brand execution are driving global momentum. The CALVIN KLEIN brand continues to command strong brand health and desire in all markets; however, the business in the third quarter experienced softness. While many of the product categories performed well, we are disappointed by the lack of return on our investments in our Calvin Klein 205 W39 NYC halo business and believe that some of the CALVIN KLEIN JEANS relaunched product was too elevated and did not sell through as well as we planned. As we move into 2019, we believe the consumer will increasingly feel more connected to the brand as we offer a more commercial product and marketing experience to capture the long-term opportunity for our Calvin Klein business.”

Chirico concluded, “Overall, we remain confident that we are well positioned to execute our strategic priorities through the efforts of our talented associates, enabling us to deliver long-term stockholder value.”

Third Quarter Business Review:

Due to the 53rd week in 2017, third quarter 2018 comparable store sales are more appropriately compared with the thirteen week period ended November 5, 2017, instead of the thirteen week period ended October 29, 2017. All comparable store sales discussed in this release are presented on this one week shifted basis.

Tommy Hilfiger

Revenue in the Tommy Hilfiger business for the quarter increased 11 percent to $1.1 billion (increased 13 percent on a constant currency basis) compared to the prior year period. Tommy Hilfiger International revenue increased 16 percent to $708 million (increased 19 percent on a constant currency basis) compared to the prior year period, driven by continued strong performance across all regions and channels, including a 13 percent increase in comparable store sales. Tommy Hilfiger North America revenue increased 3 percent to $424 million (increased 4 percent on a constant currency basis) compared to the prior year period, primarily attributable to strength in the wholesale business, as comparable store sales were relatively flat.

Earnings before interest and taxes on a GAAP basis for the quarter increased to $177 million, inclusive of a $4 million negative impact due to foreign currency translation, from $147 million in the prior year period. Included in earnings before interest and taxes for the current quarter were costs of $6 million related to the April 2016 acquisition of the 55 percent interest in the company’s former Tommy Hilfiger joint venture in China (“TH China”) that it did not already own (the “TH China acquisition”), consisting of noncash amortization of short-lived assets. Included in earnings before interest and taxes for the prior year period were costs of (i) $6 million related to the TH China acquisition, primarily consisting of noncash amortization of short-lived assets, and (ii) $5 million in connection with the relocation of the Tommy Hilfiger office in New York, including noncash depreciation expense. Earnings before interest and taxes on a non-GAAP basis discussed below excludes these amounts.

Earnings before interest and taxes on a non-GAAP basis for the quarter increased to $183 million, inclusive of a $4 million negative impact due to foreign currency translation, from $158 million in the prior year period. The earnings increase was principally due to the revenue increase noted above, as well as gross margin improvements, particularly in North America, and a leveraging of expenses.

Calvin Klein

Revenue in the Calvin Klein business for the quarter increased 2 percent to$963 million (increased 4 percent on a constant currency basis) compared to the prior year period. Calvin Klein International revenue increased 3 percent to$482 million (increased 7 percent on a constant currency basis) compared to the prior year period, driven by growth in Europe. International comparable store sales increased 1 percent. Calvin Klein North America revenue increased 1 percent to $481 million (increased 2 percent on a constant currency basis) compared to the prior year period, as growth in the wholesale business was partially offset by a 2 percent comparable store sales decline.

Earnings before interest and taxes for the quarter decreased to $121 million, inclusive of a $4 million negative impact due to foreign currency translation, from $142 million in the prior year period. The earnings decrease was primarily attributable to an approximately $10 millionincrease in creative and marketing expenditures compared to the prior year period, as well as gross margin pressure principally due to more promotional selling in the CALVIN KLEIN JEANS business, particularly in North America.

Heritage Brands

Revenue in the Heritage Brands business for the quarter increased 8 percent to$429 million compared to the prior year period, as solid growth in the wholesale business was partially offset by a 1 percent comparable store sales decline.

Earnings before interest and taxes for the quarter decreased to $24 million from $30 million in the prior year period, as the revenue increase noted above was offset by a planned increase in marketing expenditures compared to the prior year period, as well as the negative impact resulting from Sears’ bankruptcy.

Third Quarter Consolidated Results:

Third quarter revenue increased 7 percent to $2.5 billion (increased 9 percent on a constant currency basis) compared to the prior year period.

Earnings per share on a GAAP basis was $3.15 for the third quarter of 2018 compared to $3.05 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, as discussed below, exclude these amounts.

Earnings per share on a non-GAAP basis was $3.21 for the third quarter of 2018 compared to $3.02 in the prior year period. Earnings per share on both a GAAP and non-GAAP basis for the third quarter of 2018 included a $0.09 negative impact related to foreign currency translation.

Earnings before interest and taxes on a GAAP basis for the quarter increased to $282 million, inclusive of a $7 million negative impact due to foreign currency translation, from $281 million in the prior year period. Included in earnings before interest and taxes for the current quarter were costs of $6 million related to the TH China acquisition. Included in earnings before interest and taxes for the prior year period were $14 million of costs consisting of (i) $6 million related to the TH Chinaacquisition, (ii) $5 million in connection with the relocation of the Tommy Hilfiger office in New York, including noncash depreciation expense, and (iii) $3 million in connection with the consolidation within the company’s warehouse and distribution network in North America. Earnings before interest and taxes on a non-GAAP basis for these periods, as discussed below, exclude these amounts.

Earnings before interest and taxes on a non-GAAP basis for the quarter decreased to $289 million, inclusive of a $7 million negative impact due to foreign currency translation, compared to $295 million in the prior year period. Excluding the negative impact of foreign currency translation, earnings on a non-GAAP basis increased slightly, as earnings growth in the Tommy Hilfiger business was mostly offset by earnings decreases in the Calvin Klein and Heritage Brands businesses. Included in earnings for the quarter was an approximately $5 million negative impact resulting from recent retailer bankruptcies in the U.S. and U.K.

Net interest expense decreased to $29 million from $31 million in the prior year period. The effective tax rate on a GAAP basis was 4.1 percent as compared to 4.4 percent in the prior year period. The effective tax rate on a non-GAAP basis was 4.6 percent as compared to 10.2 percent in the prior year period, as the current year period included a higher overall benefit from discrete tax items as compared to the prior year period.

Nine Months Consolidated Results:

Revenue for the first nine months of 2018 increased 12 percent to $7.2 billion(increased 10 percent on a constant currency basis) compared to the prior year period. The revenue increase was due to:

  • A 15 percent increase (12 percent increase on a constant currency basis) in theTommy Hilfiger business compared to the prior year period, driven principally by continued strong performance across all regions and channels. International comparable store sales increased 11 percent. North America comparable store sales increased 4 percent.
  • A 12 percent increase (10 percent increase on a constant currency basis) in the Calvin Klein business compared to the prior year period, driven by strong performance in Europe and Asia, as well as in the North Americawholesale business. International comparable store sales increased 5 percent.North America comparable store sales increased 2 percent.
  • A 3 percent increase in the Heritage Brands business compared to the prior year period. Comparable store sales increased 1 percent.

Earnings per share on a GAAP basis was $7.56 for the first nine months of 2018 compared to $5.45 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, as discussed below, exclude these amounts.

Earnings per share on a non-GAAP basis was $7.75 for the first nine months of 2018 compared to $6.36 in the prior year period. Earnings per share on both a GAAP and non-GAAP basis for the first nine months of 2018 included a $0.14 positive impact related to foreign currency translation.

Earnings before interest and taxes on a GAAP basis for the first nine months of 2018 increased to $758 million, inclusive of a $13 millionpositive impact due to foreign currency translation, from $574 million in the prior year period. Included in earnings before interest and taxes for the first nine months of 2018 were costs of $20 million related to the TH China acquisition. Included in earnings before interest and taxes for the prior year period were $113 million of costs consisting of (i) $54 millionin connection with the agreements to restructure the company’s supply chain relationship with Li & Fung Trading Limited (“Li & Fung”), under which the company terminated its non-exclusive buying agency agreement with Li & Fung during 2017 (the “Li & Fung termination”), (ii) $20 million related to the TH China acquisition, (iii) $19 million in connection with the relocation of the Tommy Hilfiger office in New York, including noncash depreciation expense, (iv) $10 million in connection with the consolidation within the company’s warehouse and distribution network in North America, and (v) $9 million in connection with the noncash settlement of certain of the company’s retirement plan benefit obligations. Earnings before interest and taxes on a non-GAAP basis for these periods, as discussed below, exclude these amounts.

Earnings before interest and taxes on a non-GAAP basis for the first nine months of 2018 was $778 million, inclusive of a $13 million positive impact due to foreign currency translation, compared to $687 million in the prior year period. The improvement in earnings was driven by growth across all businesses, particularly Tommy Hilfiger, despite an approximately $8 million negative impact resulting from recent retailer bankruptcies in the U.S. and U.K.

Net interest expense for the first nine months of 2018 decreased to $87 million from $89 million in the prior year period. The effective tax rate on a GAAP basis for the first nine months of 2018 was 12.7 percent as compared to 11.7 percent in the prior year period. The effective tax rate on a non-GAAP basis for the first nine months of 2018 was 13.0 percent as compared to 16.4 percent in the prior year period.

Inventory levels increased 15 percent as compared to the prior year period primarily due to the fiscal calendar misalignment in 2018 as compared to 2017 as a result of the 53rd week in 2017, or 8 percent on an aligned calendar basis. Inventory levels include an acceleration of receipts in advance of potential tariffs.

Stock Repurchase Program:

During the first nine months of 2018, the company repurchased approximately 1.7 million shares of its common stock for $247 million(8.5 million shares for $939 million since inception) under the $1.250 billion stock repurchase program authorized by the Board of Directors through June 3, 2020. 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.

2018 Outlook:

The company’s effective tax rate projections for 2018 include estimates of the impacts of the U.S. Tax Cuts and Jobs Act of 2017 (the “Tax Legislation”) enacted on December 22, 2017, including (i) the reduction of the corporate income tax rate from 35 percent to 21 percent, (ii) the implementation of a modified territorial tax system, (iii) the introduction of a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations (known as “GILTI”) and (iv) the introduction of a base erosion anti-abuse tax measure (known as “BEAT”) that taxes certain payments between U.S. corporations and their subsidiaries. These projections are subject to adjustment in 2018, including as a result of changes in the provisional net tax benefit of $53 million recorded in the fourth quarter of 2017, during the measurement period allowed by theSecurities and Exchange Commission, as regulatory guidance needs to be issued in regard to the Tax Legislation and as the company completes its final analysis of the impacts of the Tax Legislation.

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 currently projects that 2018 earnings per share on a GAAP basis will be in a range of $9.10 to $9.12 compared to $6.84 in 2017. The company currently projects that 2018 earnings per share on a non-GAAP basis will be in a range of $9.33 to $9.35 compared to $7.94 in 2017. Both the GAAP and non-GAAP projections include the estimated positive impact of approximately $0.03 per share related to foreign currency translation.

Revenue in 2018 is projected to increase approximately 7 percent (also on a constant currency basis) as compared to 2017. Revenue for the Tommy Hilfiger business is projected to increase approximately 10 percent (increase approximately 9 percent on a constant currency basis). Revenue for the Calvin Klein business is projected to increase approximately 7 percent (also on a constant currency basis). Revenue for the Heritage Brands business is projected to increase approximately 2 percent.

Net interest expense in 2018 is projected to decrease to approximately$117 million from $122 million in 2017. The company estimates that the 2018 effective tax rate will be in a range of 13.0 percent to 14.0 percent, which includes the estimated impact of the Tax Legislation.

The company’s estimate of 2018 earnings per share on a non-GAAP basis excludes approximately $24 million of pre-tax costs to be incurred related to the TH China acquisition, consisting of noncash amortization of short-lived assets, and the resulting estimated tax effect.

Fourth Quarter Guidance

Revenue in the fourth quarter of 2018 will be negatively impacted compared to the prior year period as a result of a 53rd week in 2017. The total negative impact in the fourth quarter of 2018 compared to the prior year period is approximately $125 million, comprised of (i) approximately$80 million due to one fewer week of revenue in the fourth quarter of 2018 as compared to the fourth quarter of 2017 and (ii) approximately$45 million that shifted out of the fourth quarter of 2018 due to the fiscal calendar misalignment in 2018 as compared to 2017.

The company currently projects that fourth quarter 2018 earnings per share on a GAAP basis will be in a range of $1.54 to $1.56 compared to$1.39 in the prior year period. The company projects that fourth quarter 2018 earnings per share on a non-GAAP basis will be in a range of $1.58to $1.60 compared to $1.58 in the prior year period. Both the GAAP and non-GAAP projections include an estimated negative impact of approximately $0.11 per share related to foreign currency translation.

Revenue in the fourth quarter of 2018 is projected to decrease approximately 4 percent (decrease approximately 1 percent on a constant currency basis) compared to the prior year period, including a 5 percent negative impact due to the 53rd week in 2017 as described above. Revenue for the Tommy Hilfiger business in the fourth quarter is projected to decrease approximately 4 percent (to be flat on a constant currency basis). Revenue for the Calvin Klein business in the fourth quarter is projected to decrease approximately 6 percent (decrease approximately 3 percent on a constant currency basis). Revenue for the Heritage Brands business in the fourth quarter is projected to decrease approximately 2 percent.

Net interest expense in the fourth quarter of 2018 is projected to decrease to approximately $30 million compared to $33 million in the prior year period. The company estimates that the fourth quarter 2018 effective tax rate will be in a range of 13 percent to 19 percent.

The company’s estimate of fourth quarter 2018 earnings per share on a non-GAAP basis excludes approximately $4 million of pre-tax costs to be incurred related to the TH China acquisition, consisting of noncash amortization of short-lived assets, and the resulting estimated tax effect.

Non-GAAP Exclusions:

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

  • Pre-tax costs of approximately $24 million incurred and to be incurred in 2018 related to the TH China acquisition, consisting of noncash amortization of short-lived assets, of which $7 million was incurred in the first quarter, $7 million was incurred in the second quarter, $6 million was incurred in the third quarter and approximately $4 millionis to be incurred in the fourth quarter.
  • Pre-tax costs of $83 million incurred in the fourth quarter of 2017 in connection with an amendment to Mr. Tommy Hilfiger’s employment agreement pursuant to which the company made a cash buyout of a portion of the future payments to Mr. Hilfiger.
  • Pre-tax costs of $54 million incurred in the first quarter of 2017 in connection with the Li & Fung termination.
  • Pre-tax costs of $28 million incurred in the fourth quarter of 2017 in connection with the company’s redemption and issuance of senior notes, including $24 million related to the early redemption of the $700 million 4 1/2 percent senior notes and $4 million related to the issuance of €600 million 3 1/8 percent senior notes.
  • Pre-tax costs of $27 million incurred in 2017 related to the TH China acquisition, primarily consisting of noncash amortization of short-lived assets, of which $7 million was incurred in the first quarter, $7 millionwas incurred in the second quarter, $6 million was incurred in the third quarter and $7 million was incurred in the fourth quarter.
  • Pre-tax costs of $19 million incurred in 2017 in connection with the relocation of the Tommy Hilfiger office in New York, including noncash depreciation expense, of which $7 million was incurred in the first quarter, $7 million was incurred in the second quarter and $5 millionwas incurred in the third quarter.
  • Pre-tax costs of $9 million incurred in the first quarter of 2017 in connection with the noncash settlement of certain of the company’s benefit obligations related to its retirement plans as a result of an annuity purchased for certain participants, under which such obligations were transferred to an insurer.
  • Pre-tax net costs of $8 million incurred in 2017 in connection with the consolidation within the company’s warehouse and distribution network in North America, of which $2 million of costs were incurred in the first quarter, $6 million of costs were incurred in the second quarter, $3 million of costs were incurred in the third quarter and a net gain of $2 million was recorded in the fourth quarter, which included the impact of the sale of a warehouse and distribution center.
  • Pre-tax loss of $3 million recorded in the fourth quarter of 2017 related to the recognized actuarial loss on retirement plans.
  • Discrete tax benefits of $23 million recorded in 2017 primarily related to the resolution of uncertain tax positions, of which $13 million was recorded in the third quarter and $10 million was recorded in the fourth quarter.
  • Discrete net tax benefit of $53 million recorded in the fourth quarter of 2017 in connection with the Tax Legislation, consisting of a $265 million benefit primarily from the remeasurement of the company’s net deferred tax liabilities, partially offset by a $38 million valuation allowance on the company’s foreign tax credits and a $174 million transition tax on earnings of foreign subsidiaries deemed to be repatriated.
  • Discrete tax benefit of $15 million recorded in the fourth quarter of 2017 related to an excess tax benefit from the exercise of stock options by the company’s Chief Executive Officer.
  • Estimated tax effects associated with the above pre-tax items, which are based on the company’s assessment of deductibility. In making this assessment, the company evaluated each item that it had 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.