PVH Earnings Climb in Q1

PVH Corp., the parent of Speedo and Izod, reported first-quarter earnings exceeded its guidance.

Overview of First Quarter Results:

• Earnings per share was $1.50 on a non-GAAP basis, inclusive of a $0.27 negative impact primarily related to foreign currency exchange rates compared to the prior year. Earnings per share on a non-GAAP basis excluding the $0.27 negative impact primarily related to foreign currency exchange rates was $1.77, or an increase of 20 percent compared to the prior year’s first quarter earnings per share on a non-GAAP basis of $1.47.
• GAAP Earnings per share was $1.37 compared to $0.42 for the prior year’s first quarter.
• Revenue increased 3 percent on a constant currency basis (decreased 4 percent on a GAAP basis) compared to the prior year’s first quarter revenue of $1.96 billion. Revenue changes by business from the prior year’s first quarter were (i) a 5 percent increase in the Calvin Klein business on a constant currency basis (decreased 2 percent on a GAAP basis); (ii) a 1 percent increase in the Tommy Hilfiger business on a constant currency basis (decreased 11 percent on a GAAP basis); and (iii) a 5 percent increase in the Heritage Brands business.

CEO Comments:

Commenting on these results, Emanuel Chirico, Chairman and Chief Executive Officer, noted, “We are very pleased with our first quarter results, which exceeded our first quarter guidance, driven by the strength of our Calvin Klein business. Strong underlying fundamentals in our international Calvin Klein and Tommy Hilfiger businesses was partially offset by softness in our U.S. Calvin Klein and Tommy Hilfiger businesses, where a strong U.S. dollar negatively impacted international tourist spending.”

Chirico continued, “Looking ahead to the remainder of 2015, we are increasing our earnings guidance for the year, while continuing to take a prudent approach to planning our business, as foreign currency and global consumer spending remain unpredictable and volatile. We believe that our proven business model is well-positioned to navigate through this environment and we are implementing local initiatives to drive traffic and sales, while carefully managing our inventories and looking for continued efficiencies across our business.”

Chirico also noted, “We are pleased to announce the approval of a $500 million stock repurchase program, which reflects the Board and management’s confidence in our ability to generate strong free cash flow and achieve our long-term growth objectives. This program underscores our commitment to returning capital to stockholders. We also believe we will continue to have the financial flexibility, as we continue to pay down debt, to strategically invest in our business, to take more direct ownership in certain licensed Calvin Klein and Tommy Hilfiger businesses and for other strategic acquisitions as they arise in the future. We remain committed to maximizing the potential of our businesses and believe the strength of our brands, together with the strategic investments we have made in our businesses, will position us to deliver long-term global growth and stockholder value.”

First Quarter Business Review:

Calvin Klein

Revenue in the Calvin Klein business for the quarter increased 5 percent on a constant currency basis (decreased 2 percent on a GAAP basis) from $665 million in the prior year’s first quarter. Calvin Klein North America revenue increased 2 percent on a constant currency basis (was relatively flat on a GAAP basis) compared to the prior year’s first quarter. The North America wholesale business experienced overall modest growth, as an increase in sales to department stores more than offset a planned decline in sales to the off-price channel. Also favorably impacting wholesale revenue for the quarter was a shift of shipments into the first quarter from the second quarter. North America retail comparable store sales decreased 1 percent, as the strengthening United States dollar resulted in decreased traffic and spending in U.S. stores located in international tourist locations. Calvin Klein International revenue increased 8 percent on a constant currency basis (decreased 4 percent on a GAAP basis) compared to the prior year, with a 10 percent increase in retail comparable store sales. The international revenue increase on a constant currency basis was driven by strength in Asia, which included a benefit due to the Chinese New Year, as the first quarter of fiscal 2015 included a Chinese New Year while the first quarter of fiscal 2014 did not, and Europe, where our repositioning strategy has begun to gain traction.

Earnings before interest and taxes on a non-GAAP basis for the quarter increased to $96 million, inclusive of a $7 million negative impact due to foreign currency exchange rates, from $82 million in the prior year’s first quarter. The 25 percent earnings increase on a constant currency basis was principally driven by the constant currency revenue increase mentioned above and gross margin improvements, particularly in Asia and Europe.

Earnings before interest and taxes on a GAAP basis was $90 million compared to $74 million in the prior year’s first quarter. The increase was principally driven by a reduction in integration and restructuring costs, combined with the increase in earnings on a non-GAAP basis discussed above.

Tommy Hilfiger

Revenue in the Tommy Hilfiger business for the quarter increased 1 percent on a constant currency basis (decreased 11 percent on a GAAP basis) from $862 million in the prior year period. Tommy Hilfiger North America revenue decreased 1 percent on a constant currency basis (decreased 2 percent on a GAAP basis) compared to the first quarter of 2014 resulting from a 3 percent decrease in retail comparable store sales. As with Calvin Klein, there was a sharp decline in traffic and spending in U.S. stores located in international tourist locations. Tommy Hilfiger International revenue increased 2 percent on a constant currency basis (decreased 17 percent on a GAAP basis) from the prior year period. The increase on a constant currency basis was driven primarily by solid performance in our European business, including a 2 percent increase in retail comparable store sales, partially offset by weakness in our Russian business, which was expected.

Earnings before interest and taxes was $92 million, inclusive of a $16 million negative impact due to foreign currency exchange rates, compared to $115 million in the prior year’s first quarter. The earnings decrease on a constant currency basis was principally the result of a decline in the North America business due to weak international tourist traffic, which drove more promotional selling, resulting in lower gross margins.

Heritage Brands

Revenue for the Heritage Brands business for the quarter increased 5 percent from $436 million in the prior year’s first quarter. The increase was principally driven by a shift in the timing of wholesale shipments into the first quarter of 2015 from the second quarter and a retail comparable store sales increase of 14 percent in the Van Heusen business.

Earnings before interest and taxes on a non-GAAP basis increased to $34 million compared to $29 million in the prior year’s first quarter due principally to the revenue increase discussed above.

Earnings before interest and taxes on a GAAP basis was $30 million compared to $24 million in the prior year’s first quarter. The increase was mainly attributable to the revenue increase discussed above and a reduction in Warnaco integration and restructuring costs incurred compared to the prior year period, partially offset by $1 million of expenses incurred in connection with operating and exiting the Izod retail business.

First Quarter Consolidated Earnings:

Earnings before interest and taxes on a non-GAAP basis increased 8 percent on a constant currency basis (decreased 4 percent including foreign currency exchange rate impacts) from the prior year’s first quarter amount of $203 million due principally to strong performance in the Calvin Klein business and an improvement in the Heritage Brands business. Partially offsetting these increases was a 6 percent decline on a constant currency basis (20 percent decrease including foreign currency exchange rate impacts) in the Tommy Hilfiger business and a $3 million increase in corporate expenses attributable to associate-related benefits, primarily driven by pension expense.

Earnings before interest and taxes on a GAAP basis was $177 million compared to $85 million in the prior year’s first quarter. The increase was primarily due to the absence in 2015 of $93 million of debt modification and extinguishment costs and a reduction in Warnaco integration and restructuring costs compared to the prior year’s first quarter, partially offset by a negative impact due to foreign currency exchange rates.

Net interest expense decreased to $30 million from $41 million in the prior year’s first quarter due to lower average debt balances and interest rates, combined with the effect of the amendment and restatement of the company’s credit facility during the first quarter of 2014 and the related redemption of its 7 3/8 percent senior notes due 2020. Since the Warnaco acquisition, we have made payments of approximately $975 million on our long term debt.

The effective tax rate was 25.0 percent on a non-GAAP basis, which was flat to the prior year’s first quarter. On a GAAP basis, the effective tax rate increased to 22.4 percent from 19.7 percent in the prior year’s first quarter.

Stock Repurchase Program:

The company’s Board of Directors has authorized a $500 million three-year stock repurchase program. Stock repurchases under this 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 would be 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 stock repurchase program may be modified, including to increase or decrease the repurchase limitation or extend, suspend, or terminate the program, by the company at any time, without prior notice, including without making any repurchases.

2015 Guidance:

The company currently expects its full year earnings per share results to be negatively impacted versus the prior year by (i) approximately $1.15 per share from foreign currency exchange rates due to the significant strengthening of the United States dollar against other currencies in which the company transacts significant levels of business, and (ii) volatility in the global macroeconomic environment, particularly with respect to the company’s businesses in Russia. The company expects a negative impact of approximately $0.10 per share from its Russia businesses due to political and economic instability in the region.

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

Earnings per share for the full year 2015 is currently projected to be in a range of $6.85 to $6.95 on a non-GAAP basis, which reflects the expected $1.25 negative impact related to foreign currency exchange rates and pressures on the company’s Russia businesses, as described above. Excluding this negative impact, earnings per share on a non-GAAP basis is expected to increase 11 percent to 12 percent versus the prior year’s non-GAAP earnings per share of $7.30.

Revenue in 2015 is currently projected to increase approximately 3 percent on a constant currency basis (decrease approximately 3 percent on a GAAP basis) as compared to 2014. It is currently projected that revenue for the Calvin Klein business will increase approximately 6 percent on a constant currency basis (increase approximately 1 percent on a GAAP basis). Revenue for the Tommy Hilfiger business is currently expected to increase approximately 3 percent on a constant currency basis (decrease approximately 7 percent on a GAAP basis). Revenue for the Heritage Brands business is currently projected to decrease approximately 3 percent.

Net interest expense for the full year 2015 is expected to be approximately $120 million to $125 million compared to the 2014 amount of $139 million, mainly due to lower average debt balances.

The company currently expects to generate approximately $450 million of free cash flow in 2015, which will be used primarily to repay approximately $350 million of debt and leverage opportunistic stock repurchases.

The company currently estimates that the 2015 effective tax rate will be between 21.5 percent and 22.0 percent.

The company’s earnings per share estimate on a non-GAAP basis excludes approximately $50 million of pre-tax costs associated primarily with the Warnaco integration and related restructuring and $20 million of pre-tax costs associated with operating and exiting the Izod retail business. (Please see section entitled “Non-GAAP Exclusions” for details on these pre-tax costs.)

Second Quarter Guidance

The company expects its second quarter 2015 earnings per share results to be negatively impacted versus the prior year period by approximately $0.30 per share primarily from foreign currency exchange rates due to the significant strengthening of the United States dollar against other currencies in which the company transacts meaningful levels of business. Also expected to impact the second quarter earnings per share results versus the prior year period is a shift in the timing of wholesale shipments in North America, which were planned for the second quarter but moved into the first quarter of 2015.

Second quarter 2015 earnings per share on a non-GAAP basis is currently projected to be in a range of $1.25 to $1.30, which reflects an expected $0.30 per share negative impact primarily related to foreign currency exchange rates as described above. Excluding this negative impact, earnings per share on a non-GAAP basis is expected to increase 3 percent to 6 percent versus the prior year’s second quarter non-GAAP earnings per share of $1.51.

Revenue in the second quarter of 2015 is currently projected to be relatively flat on a constant currency basis (decrease approximately 8 percent on a GAAP basis) compared to the prior year’s second quarter. It is currently projected that revenue for the Calvin Klein business in the second quarter will be relatively flat on a constant currency basis (decrease approximately 7 percent on a GAAP basis). Revenue for the Tommy Hilfiger business in the second quarter is currently expected to increase approximately 3 percent on a constant currency basis (decrease approximately 9 percent on a GAAP basis). Revenue for the Heritage Brands business in the second quarter is currently projected to decrease approximately 8 percent.

The company currently projects that second quarter 2015 net interest expense will be approximately $30 million, a reduction of $4 million compared to the second quarter of 2014, mainly due to lower average debt balances.

The company currently estimates that the second quarter tax rate will be between 19 percent and 20 percent.

The company’s second quarter earnings per share estimate on a non-GAAP basis excludes approximately $15 million of pre-tax costs associated with the integration and related restructuring of Warnaco and $10 million of pre-tax costs associated with operating and exiting the Izod retail business. (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 $20 million expected to be incurred in 2015 related to operating and exiting the Izod retail business, of which $1 million was incurred in the first quarter and approximately $10 million is expected to be incurred in the second quarter.
• Pre-tax costs of approximately $50 million expected to be incurred in 2015 in connection with the integration of Warnaco and the related restructuring, of which $19 million was incurred in the first quarter and approximately $15 million is expected to be incurred in the second quarter.
• Discrete tax benefits of $2 million recorded in the first quarter of 2015 related to the resolution of uncertain tax positions.
• Pre-tax costs of $138 million 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, which were transferred to the company’s joint venture there, and the previously consolidated Calvin Klein joint venture in India, which the company effectively no longer controls; (ii) the sale of the G.H. Bass & Co. business, which closed in the fourth quarter of 2013 (as certain costs related to the sale were incurred in 2014); (iii) the impairment of certain Tommy Hilfiger stores in North America in the second quarter of 2014; and (iv) costs incurred in connection with the exit of a discontinued product line in the Tommy Hilfiger Japan business. Of the total costs, $26 million was incurred in the first quarter, $46 million was incurred in the second quarter, $29 million was incurred in the third quarter and $37 million was incurred in the fourth quarter.
• Pre-tax costs of $21 million incurred in the fourth quarter of 2014 related to the exit of the Izod retail business, which includes $18 million of noncash charges related to asset impairments.
• Pre-tax costs of $93 million recorded in the first quarter of 2014 associated with the amendment and restatement of the company’s credit facility and the related redemption of its 7 3/8 percent senior notes due 2020.
• A pre-tax expense of $139 million recorded in the fourth quarter of 2014 related to recognized actuarial losses on retirement plans.
• Discrete tax benefits of $92 million in 2014 primarily related to various Warnaco integration activities and the resolution of uncertain tax positions, of which $30 million was recorded in the second quarter, $25 million was recorded in the third quarter and $37 million was recorded in the fourth quarter.
• 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.