PVH Corp. reported earnings or $35.2 million, or 45 cents a share, rebounding from a loss of $10.3 million, or 13 cents, a year ago.

Revenue was $1.964 billion, an increase of 4 percent on a non-GAAP basis as compared to the prior year amount excluding $47 million of revenue related to the Bass business (which was sold during the fourth quarter of 2013), despite revenue in the North American businesses being under significant pressure due to unseasonably cold weather across the region. On a GAAP basis, total revenue increased 3 percent as compared to prior year GAAP revenue of $1.910 billion. 2013 GAAP revenue was $30 million lower than revenue on a non-GAAP basis, attributable to sales returns for certain wholesale customers in the acquired Asia business in connection with an initiative to reduce excess inventory levels. The revenue increases over the prior year were principally driven by growth in the Company’s Tommy Hilfiger business of 6 percent and in the Company’s Calvin Klein business of 4 percent on a non-GAAP basis and 9 percent on a GAAP basis. These increases were partially offset by a revenue decline of 2 percent in the Company’s Heritage Brands business excluding the $47 million of 2013 Bass revenue, or 11 percent including such revenue.

CEO Comments:

Commenting on these results, Emanuel Chirico, Chairman and Chief Executive Officer, noted, “We are pleased with our first quarter results, which were in line with our expectations, despite the unseasonably cool weather in North America and the volatility experienced in the global retail environment in the first quarter. Unfortunately, the challenging macroeconomic environment has continued into the second quarter, with heightened promotional activity across the North American retail landscape. As such, we believe our North American businesses will experience margin pressure in the second quarter and we have lowered our full year earnings per share guidance to reflect this. We will continue to make the previously planned strategic investments, particularly in the acquired Calvin Klein businesses, in order to unlock the full global potential of the Calvin Klein businesses over the long-term.”

Chirico concluded, “I am pleased that the Warnaco integration is progressing well and we have achieved numerous milestones to date. 2014 continues to represent a year of two stories – the first half is pressured by our strategic investments, while Fall 2014 will be the first season we offer product by our newly established design and sourcing teams and presented in an enhanced retail environment. Despite first half pressures, we are well-positioned and have not changed our outlook for the second half of the year, for which we expect earnings per share to increase approximately 20 percent on a non-GAAP basis over last year’s second half. The power of our brands, led by Calvin Klein and Tommy Hilfiger, remains strong, and we believe that the investments we make during 2014 and the financial flexibility achieved by our continued debt repayment will enable us to capitalize on growth opportunities over the long-term.”

First Quarter Business Review:

Calvin Klein

Revenue in the Calvin Klein business increased 4 percent to $665 million from $638 million on a non-GAAP basis in the prior year. On a GAAP basis, total Calvin Klein revenue increased 9 percent as compared to the prior year revenue of $608 million, which was $30 million lower than revenue on a non-GAAP basis due to the sales returns discussed above. Revenue for the North American business increased 3 percent, driven by an additional ten days of operations for the businesses acquired with Warnaco on February 13, 2013, along with modest growth in both the wholesale and retail businesses. The Company’s North America retail comparable store sales were flat.

The Calvin Klein international business, which is principally comprised of the Asia, Europe and Brazil businesses acquired with Warnaco, posted revenue of $328 million, an increase of 6 percent on a non-GAAP basis, due principally to growth in Asia and the revenue for the additional ten days of operations in the first quarter of 2014 as discussed above. The absence in 2014 of the $30 million of sales returns discussed above resulted in a GAAP revenue increase for the Calvin Klein International business of 17 percent over prior year revenue of $280 million. The Company’s international retail comparable store sales declined 5 percent, primarily driven by the ongoing transitioning of the Europe jeans business and the absence of the Chinese New Year holiday in the first quarter of 2014. The jeans business in Europe remained under pressure due to the business’ concentration in Italy, where the economic environment remains weak, combined with the initiative to restructure the sales distribution mix. Royalty revenue of $45 million increased 13 percent in the first quarter, excluding a negative 10 percent impact related to the absence of royalty revenue from Warnaco in the current year, as the prior year’s first quarter royalty revenue of $44 million included $4 million from Warnaco for the ten days prior to the acquisition. Including such revenue from Warnaco in the prior year, royalty revenue increased 3 percent, primarily driven by strength in women’s apparel and handbags.

Earnings before interest and taxes on a non-GAAP basis for the Calvin Klein business was $82 million as compared to $106 million in the prior year’s first quarter. This decrease was driven principally by strategic investments in the acquired Calvin Klein businesses and the ongoing transitioning of the Europe jeans business, combined with a decrease in gross margin in North America attributable to higher promotional activity intended to drive traffic and sales due to the unseasonably cold weather.

GAAP earnings before interest and taxes for the Calvin Klein business was $74 million as compared to a loss of $(24) million in the prior year’s first quarter. The increase was principally driven by a reduction in acquisition and integration costs incurred during the first quarter of 2014 as compared to 2013, partially offset by the earnings decrease on a non-GAAP basis discussed above.

Tommy Hilfiger

Revenue in the Tommy Hilfiger business increased 6 percent to $862 million as compared to $811 million in the prior year. Revenue in the Tommy Hilfiger North America business increased 5 percent, due principally to low single-digit wholesale growth, 2 percent retail comparable store sales growth and retail square footage expansion. Revenue in the Tommy Hilfiger International business increased 8 percent over the prior year, driven by 6 percent comparable store sales growth in Europe and square footage expansion in the Company’s own retail stores. Also contributing to the revenue growth was the positive impact of foreign currency translation resulting from a stronger Euro in the first quarter of 2014 as compared to the prior year.

Earnings before interest and taxes for the Tommy Hilfiger business decreased 2 percent to $115 million from $118 million in the prior year’s first quarter, principally driven by a decrease in gross margin in North America attributable to higher promotional activity intended to drive traffic and sales due to the unseasonably cold weather, partially offset by an increase in European earnings.

Heritage Brands

Revenue for the Heritage Brands businesses was $436 million, a 2 percent decrease compared to the prior year period excluding $47 million of revenue related to the Bass business, as relatively flat sales in the wholesale business were more than offset by an 11 percent decline in retail comparable store sales. Including the Bass revenue in 2013, revenue decreased 11 percent as compared to the prior year period revenue of $491 million.

Earnings before interest and taxes for the Heritage Brands business was $29 million on a non-GAAP basis, as compared to $39 million in the prior year’s first quarter. The decrease was principally driven by a gross margin decline attributable to higher promotional activity in the business in the first quarter of 2014 in response to the heightened competitive environment in the moderate tier. Partially offsetting these declines was the absence of losses incurred in 2013 attributable to the exited Bass business.

On a GAAP basis, earnings before interest and taxes for the Heritage Brands business was $24 million as compared to $22 million in the prior year’s first quarter, as the decrease in earnings before interest and taxes on a non-GAAP basis discussed above was more than offset by a reduction in acquisition and integration costs incurred in 2014 as compared to the prior year.

First Quarter Consolidated Earnings:

On a non-GAAP basis, earnings before interest and taxes decreased to $203 million from $241 million in the prior year’s first quarter, driven principally by investments in the businesses acquired with Warnaco and underperformance in certain other businesses, as discussed above.

Earnings before interest and taxes on a GAAP basis was $85 million as compared to $18 million in the prior year’s first quarter. The earnings increase was primarily due to a decrease in acquisition, integration and restructuring costs as compared to the first quarter of 2013, partially offset by the decrease in earnings before interest and taxes discussed above.

Net interest expense decreased to $41 million from $45 million on a non-GAAP basis in the prior year’s first quarter due to lower average debt balances, combined with the effect of the amendment and restatement of the Company’s credit facility during the first quarter of 2014 and the redemption of its 7 3/8 percent senior notes due 2020 in connection therewith. GAAP net interest expense was $46 million in the prior year’s first quarter.

The effective tax rate was on plan at 25.0 percent on a non-GAAP basis as compared to 20.6 percent on a non-GAAP basis in the prior year’s first quarter. The effective tax rate was 19.7 percent on a GAAP basis as compared to 62.7 percent in the prior year’s first quarter.

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

Earnings per share is currently projected to be in a range of $7.30 to $7.40 on a non-GAAP basis, as compared to $7.03 in 2013, or an increase of 4 percent to 5 percent. This guidance reflects an expected $10 million increase in Calvin Klein advertising expenses over the prior year, primarily in the second quarter. Second half earnings per share on a non-GAAP basis is expected to increase approximately 20 percent, with the majority of the growth expected in the fourth quarter.

Revenue is currently projected to increase to approximately $8.5 billion, an increase of approximately 5 percent compared to 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 3 percent over the prior year amounts of $8.216 billion on a non-GAAP basis and $8.186 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 expected to increase approximately 4 percent. Revenue for the Heritage Brands business is currently projected to increase approximately 4 percent excluding revenue attributable to Bass, and decrease approximately 6 percent including the Bass revenue.

Net interest expense is expected to be in a range of $140 million to $145 million, due to lower average debt balances and the amendment and restatement of the Company’s credit facility and redemption of its 7 3/8 percent senior notes in the first quarter of 2014. The Company expects to pay down debt by approximately $400 million in 2014.

The Company continues to estimate that the effective tax rate will be between 23.5 percent and 24.5 percent on a non-GAAP basis.

The Company’s earnings per share estimate on a non-GAAP basis excludes approximately $100 million of pre-tax costs associated with the Warnaco integration and related restructuring and the sale of the Bass business, and $93 million of pre-tax costs associated with the amendment and restatement of the Company’s 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.)

Second Quarter Guidance

Earnings per share for the second quarter is currently projected to be in a range of $1.40 to $1.45 on a non-GAAP basis, as compared to $1.39 in the prior year’s second quarter. This guidance reflects an expected $10 million increase in Calvin Klein advertising expenses over the prior year.

Revenue in the second quarter is currently expected to be approximately $2.0 billion, an increase of approximately 4 percent compared to the prior year amount excluding revenue of $62 million related to the Bass business. Including Bass revenue in 2013, the revenue increase is expected to be approximately 1 percent over the prior year amount of $1.965 billion. It is currently projected that revenue for the Tommy Hilfiger business in the second quarter will increase approximately 9 percent. Revenue for the Calvin Klein business in the second quarter is currently expected to be relatively flat to the prior year. Revenue for the Heritage Brands business in the second quarter is currently expected to increase approximately 2 percent excluding revenue attributable to Bass, and decrease approximately 11 percent including the Bass revenue.

The Company projects that second quarter net interest expense will be approximately $35 million. The Company currently estimates that the second quarter tax rate will be between 26.5 percent and 27.5 percent.

The Company’s second quarter earnings per share estimate excludes approximately $30 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 $100 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 the Company’s previously consolidated Calvin Klein joint venture in India; and (ii) the sale of the Bass business, which closed in the fourth quarter of 2013. Of the $100 million of expected costs, $26 million was incurred in the first quarter and approximately $30 million is expected to be incurred in the second quarter.
  • 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 redemption of its 7 3/8 percent senior notes due 2020 in connection therewith.
  • 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 Company’s 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 Company’s previously-established liability for an uncertain tax position related to European and U.S. transfer pricing arrangements.
  • A tax expense of $5 million recorded in the fourth quarter of 2013 associated with various Warnaco integration activities and various adjustments to liabilities for changes in estimates in uncertain tax positions.
  • 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 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.