PVH Corp. reported second-quarter revenue increased 1 percent (increased 3 percent on a constant currency basis) compared to the prior-year period and exceeded guidance. The company lowered its full year 2019 EPS outlook to reflect a more conservative view in part due to trade war tensions.

CEO Comments:

Commenting on these results, Emanuel Chirico, chairman and chief executive officer, noted, “We are pleased to report our second quarter results, which saw continued outperformance by our European businesses. However, our businesses in North America and across China experienced weak traffic trends, including the impact of protests in Hong Kong, resulting in a more promotional environment.

Although we are pleased with our second quarter and first half results, we have taken a conservative approach to our second half outlook. As such, we lowered our annual revenue and EPS outlook based on our current trends and our expectation that the volatility in the macro environment, the global retail landscape and the continuing escalation of the trade tensions between the U.S. and China will cause our business to remain under pressure, as will the ongoing impact of protests in Hong Kong.

We have great confidence in our diversified business model and the underlying power of Calvin Klein and Tommy Hilfiger , and believe we are positioning our businesses to succeed in the ever-changing consumer landscape. As we execute on our strategic priorities, our ongoing data and digital transformation, together with delivering the best product and consumer experience, should allow us to capture the heart of the consumer. We believe that with our two greatest assets, our people and our brands, we will unlock the long term brand growth opportunities we see and deliver sustainable long term returns for our stockholders.”

Second Quarter Business Review:

The company completed two previously announced acquisitions in the second quarter of 2019. The first was the company’s acquisition of the approximately 78 percent interest in Gazal Corporation Limited (“Gazal”) that it did not already own (the “Australia acquisition”), which closed on May 31, 2019. The company and Gazal jointly owned and managed a joint venture, PVH Brands Australia Pty. Limited (“PVH Australia”), which licensed and operated businesses under the “Tommy Hilfiger,” “Calvin Klein” and “Van Heusen” brands, along with other licensed and owned brands. PVH Australia came under the company’s full control as a result of the Australia acquisition. The second was the company’s acquisition of the Tommy Hilfiger retail business in Central and Southeast Asia from the company’s previous licensee in that market (the “TH CSAP acquisition”), which closed on July 1, 2019.

In addition, the company entered into agreements in the second quarter of 2019 to terminate early the licenses for the global Calvin Klein and Tommy Hilfiger North America socks and hosiery businesses (the “Socks and hosiery transaction”) in conjunction with the company’s plan to consolidate the socks and hosiery business for all company brands in North America in a newly formed joint venture, which is expected to begin operations in December 2019, and to bring in-house the international Calvin Klein socks and hosiery business.

Tommy Hilfiger

Revenue in the Tommy Hilfiger business for the quarter increased 8 percent to $1.1 billion (increased 10 percent on a constant currency basis) compared to the prior year period. Tommy Hilfiger International revenue increased 18 percent to $697 million (increased 22 percent on a constant currency basis) compared to the prior year period, primarily driven by outperformance experienced in Europe and the addition of revenue resulting from the Australia acquisition. International comparable store sales increased 9 percent. Tommy Hilfiger North America revenue decreased 5 percent to $413 million (decreased 5 percent on a constant currency basis) compared to the prior year period, driven by an 8 percent decline in North America comparable store sales due to weakness in traffic and consumer spending trends, especially in stores located in international tourist locations.

Earnings before interest and taxes on a GAAP basis for the quarter increased to $148 million, inclusive of a $3 million negative impact due to foreign currency translation, from $134 million in the prior year period. Included in earnings before interest and taxes for the current quarter were costs of (i) $8 million in connection with the Socks and hosiery transaction and (ii) $2 million related to the portion of the Australia acquisition costs attributable to the Tommy Hilfiger business and the TH CSAP acquisition costs, primarily consisting of noncash valuation adjustments. 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 the quarter increased to $158 million, inclusive of a $3 million negative impact due to foreign currency translation, from $141 million in the prior year period. The earnings increase was principally driven by strong outperformance in Europe offset, in part, by the revenue decline and gross margin pressure experienced in North America.

Calvin Klein

Revenue in the Calvin Klein business for the quarter decreased 6 percent to $873 million (decreased 4 percent on a constant currency basis) compared to the prior year period, which includes an aggregate net reduction of approximately 2 percent resulting from (i) the winding down of the company’s directly operated women’s jeanswear wholesale business in the U.S. and Canada in connection with the licensing of this business to G-III Apparel Group, Ltd. (the “G-III license”), (ii) the closure of the CALVIN KLEIN 205 W39 NYC brand (formerly Calvin Klein Collection) (the “CK Collection closure”) and (iii) the addition of revenue resulting from the Australia acquisition. Calvin Klein International revenue increased 1 percent to $465 million (increased 5 percent on a constant currency basis) compared to the prior year period, driven by continued solid growth in Europe and revenue from the Australia acquisition, partially offset by a reduction of revenue as a result of the CK Collection closure and softness experienced across China. International comparable store sales were flat. Calvin Klein North America revenue decreased 13 percent to $409 million (decreased 12 percent on a constant currency basis) compared to the prior year period, principally due to the effect of the G-III license and a 3 percent decline in North America comparable store sales due to weakness in traffic and consumer spending trends, especially in stores located in international tourist locations.

Earnings before interest and taxes on a GAAP basis for the quarter decreased to $18 million, inclusive of a $2 million negative impact due to foreign currency translation, from $105 million in the prior year period. Included in earnings before interest and taxes for the current quarter were costs of (i) $52 million in connection with the Socks and hosiery transaction, (ii) $29 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 $11 million of inventory markdowns, $9 million of contract termination and other costs, $6 million of severance, and $3 million of noncash asset impairments, and (iii) $1 million related to the portion of the Australia acquisition costs attributable to the Calvin Klein business, primarily consisting of noncash valuation adjustments.

Earnings before interest and taxes on a non-GAAP basis for the quarter decreased to $101 million, inclusive of a $2 million negative impact due to foreign currency translation, from $105 million on a GAAP basis in the prior year period (there were no non-GAAP exclusions in the prior year period). The earnings decline was principally due to the revenue decrease noted above.

Heritage Brands

Revenue in the Heritage Brands business for the quarter of $381 million was flat compared to the prior year period. Comparable store sales declined 2 percent.

Earnings before interest and taxes on a GAAP basis for the quarter decreased to $17 million from $33 million in the prior year period, principally due to gross margin pressure in both the wholesale and retail businesses attributable to a more promotional U.S. retail environment.

Heritage brands include Van Heusen, IZOD, ARROW, Speedo(1), Warner’s, Olga and Geoffrey Beene brands, as well as the digital-centric True&Co. intimates brand.

Second Quarter Consolidated Results:

Second quarter revenue increased 1 percent to $2.4 billion (increased 3 percent on a constant currency basis) compared to the prior year period.

Earnings per share on a GAAP basis was $2.58 for the second quarter of 2019 compared to $2.12 in the prior year period.

Earnings per share on a non-GAAP basis was $2.10 for the second quarter of 2019 compared to $2.18 in the prior year period. Earnings per share on both a GAAP and non-GAAP basis for the second quarter of 2019 included a $0.06 negative impact related to foreign currency translation.

Earnings before interest and taxes on a GAAP basis for the quarter increased to $250 million, inclusive of a $5 million negative impact due to foreign currency translation, from $231 million in the prior year period. Included in earnings before interest and taxes for the current quarter was an aggregate net gain of $17 million consisting of (i) a noncash gain of $113 million to write up the company’s equity investments in Gazal and PVH Australia to fair value in connection with the Australia acquisition, (ii) costs of $60 million in connection with the Socks and hosiery transaction, (iii) costs of $29 million related to the Calvin Klein restructuring and (iv) costs of $7 million related to the Australia and TH CSAP acquisitions. 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 the quarter decreased to $232 million, inclusive of a $5 million negative impact due to foreign currency translation, compared to $238 million in the prior year period, as growth in the Tommy Hilfiger business was more than offset by earnings declines in the Calvin Klein and Heritage Brands businesses and a $4 million increase in corporate expenses.

Net interest expense decreased to $27 million from $29 million in the prior year period. The effective tax rate on a GAAP basis was 13.3 percent as compared to 18.6 percent in the prior year period. The decrease includes the favorable impact in the current year period of the tax-exempt noncash gain recorded to write up the company’s equity investments in Gazal and PVH Australia to fair value in connection with the Australia acquisition. The effective tax rate on a non-GAAP basis was 23.5 percent as compared to 18.8 percent in the prior year period.

2019 Outlook:

The company’s revised 2019 guidance is based on the assumption that current trends in the business continue for the remainder of the year. Specifically, the reductions in revenue and margins reflect the trade tensions between the U.S. and China, the ongoing protests in Hong Kong and the increasingly promotional U.S. retail environment.

The 2019 guidance incorporates the impact on certain of the company’s products of tariffs imposed and expected to be imposed by the U.S. on goods imported from China into the U.S., including (i) $250 billion of total goods imported from China into the U.S. (Tranches 1, 2 and 3) currently at 25 percent, with an expected increase to 30 percent in October 2019, and (ii) $300 billion of total goods imported from China into the U.S. (Tranche 4) at 15 percent expected to be imposed in September 2019 and December 2019. These tariffs are expected to have a negative impact of approximately $0.20 per share in 2019.

The company’s 2019 guidance also reflects the Australia acquisition and the TH CSAP acquisition that closed in the second quarter of 2019, and the impact of the CK Collection closure and the G-III license. These transactions are expected to result in a net addition to revenue of approximately $75 million in 2019.

Full Year Guidance

The company currently projects that 2019 earnings per share on a GAAP basis will be in a range of $7.95 to $8.05 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 $9.30 to $9.40 compared to $9.60 in 2018. Previously guidance called for non-GAAP earnings in the range of $10.20 to $10.30.

Both the GAAP and non-GAAP projections include the estimated negative impact of approximately $0.35 per share related to foreign currency translation.

Revenue in 2019 is projected to increase approximately 1 percent (increase approximately 3 percent on a constant currency basis) as compared to 2018. Revenue for the Tommy Hilfiger business is projected to increase approximately 5 percent (increase approximately 8 percent on a constant currency basis). Revenue for the Calvin Klein business is projected to decrease approximately 2 percent (flat on a constant currency basis). Revenue for the Heritage Brands business is projected to decrease approximately 1 percent.

Net interest expense in 2019 is projected to decrease to approximately $110 million compared to $116 million in 2018. The company estimates that the 2019 effective tax rate will be in a range of 11.5 percent to 12.5 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 $138 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) $60 million of pre-tax costs incurred in connection with the Socks and hosiery transaction, (iii) $55 million of pre-tax costs 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, (iv) $6 million of pre-tax costs incurred in connection with the refinancing of the company’s senior credit facilities, (v) a pre-tax gain of $113 million recorded to write up the company’s equity investments in Gazal and PVH Australia to fair value in connection with the Australia acquisition and (vi) $25 million of pre-tax costs expected to be incurred in connection with the Australia and TH CSAP acquisitions, primarily consisting of noncash valuation adjustments, and the resulting estimated tax effects of these pre-tax items.

Third Quarter Guidance

The company currently projects that third quarter 2019 earnings per share on a GAAP basis will be in a range of $2.70 to $2.75 compared to $3.15 in the prior year period. The company currently projects that third quarter 2019 earnings per share on a non-GAAP basis will be in a range of $2.95 to $3.00 compared to $3.21 in the prior year period. Both the GAAP and non-GAAP projections include an estimated negative impact of approximately $0.09 per share related to foreign currency translation.

Revenue in the third quarter of 2019 is projected to increase approximately 1 percent (increase approximately 3 percent on a constant currency basis) compared to the prior year period. Revenue for the Tommy Hilfiger business in the third quarter is projected to increase approximately 5 percent (increase approximately 8 percent on a constant currency basis). Revenue for the Calvin Klein business in the third quarter is projected to be flat (increase approximately 2 percent on a constant currency basis). Revenue for the Heritage Brands business in the third quarter is projected to decrease approximately 10 percent.

Net interest expense in the third quarter of 2019 is projected to decrease to approximately $27 million compared to $29 million in the prior year period. The company estimates that the third quarter 2019 effective tax rate will be in a range of 8 percent to 9 percent on a GAAP basis and in a range of 6.5 percent to 7.5 percent on a non-GAAP basis.

The company’s estimate of third quarter 2019 earnings per share on a non-GAAP basis excludes approximately $16 million of pre-tax costs, consisting of (i) $12 million of pre-tax costs expected to be incurred in connection with the Australia and TH CSAP acquisitions, and (ii) $4 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.