PVH Corp., which owns Speedo but whose main businesses are Calvin Klein and Tommy Hilfiger, reported first quarter results that came in above guidance and raised its full-year guidance.
Highlights include:
- Revenue increased 3 percent on a constant currency basis (increased 2 percent on a GAAP basis to $1.92 billion) compared to the prior year’s first quarter revenue of $1.88 billion. The Calvin Klein and Tommy Hilfiger businesses outperformed revenue expectations.
- EPS was $1.50 on a non-GAAP basis, inclusive of a $0.50 per share negative impact compared to the prior year related to foreign currency exchange rates, exceeding previous guidance of $1.40 to $1.45. EPS growth on a non-GAAP and constant currency basis was 33 percent compared to the prior year’s first quarter.
- EPS was $2.83 on a GAAP basis compared to $1.37 for the prior year’s first quarter.
- Company raises full year 2016 EPS guidance to $6.45 to $6.55 on a non-GAAP basis, which includes a negative impact of $1.55 per share related to foreign currency exchange rates. Previous guidance was $6.30 to $6.50, which included a $1.60 per share negative impact related to foreign currency exchange rates. 2016 EPS growth on a non-GAAP and constant currency basis is expected to be 13 percent to 15 percent.
CEO Comments:
Commenting on these results, Emanuel Chirico, Chairman and Chief Executive Officer, noted, “We are very pleased with our first quarter 2016 results, which exceeded our expectations despite the difficult retail environment experienced in the U.S. market. Our Calvin Klein and Tommy Hilfiger businesses were the highlight, with significant strength demonstrated by our international businesses. Outperformance in Europe and China further demonstrated the power of our brands in key markets and their ability to post growth against a challenging macroeconomic environment.”
Chirico continued, “Looking ahead to the remainder of 2016, we are increasing our earnings guidance on a non-GAAP basis for the year, while continuing to take a prudent approach to planning our business, as foreign currency and global consumer spending remain unpredictable and the U.S. retail market is increasingly volatile and promotional. We remain focused on the strategic opportunities recently announced, including the acquisition of the 55 percent interest in our Tommy Hilfiger China joint venture that we did not previously own, the formation of a joint venture in Mexico for all of our brands and the licensing of our Tommy Hilfiger wholesale womenswear businesses in the U.S. and Canada to G-III.”
Chirico concluded, “With the evolving retail landscape and more globally aware consumers, execution and differentiation are critical to driving a successful business model. We believe PVH has been at the forefront of this rapidly changing environment and that our proven business model and best-in-class teams are well positioned to navigate through this uncertain environment, while delivering stockholder value.”
First Quarter Business Review:
Calvin Klein
Revenue in the Calvin Klein business for the quarter increased 13 percent on a constant currency basis (increased 11 percent on a GAAP basis) from $654 million in the prior year’s first quarter. Calvin Klein North America revenue increased 14 percent on a constant currency basis (increased 12 percent on a GAAP basis) compared to $339 million in the first quarter of 2015 primarily driven by growth of over 20 percent in the North America wholesale business due to strong performance in all businesses, particularly underwear. Revenue in the North America retail business grew modestly as square footage expansion in company-operated stores was partially offset by a 4 percent comparable store sales decline driven by the continued weakness in traffic and consumer spending trends in Calvin Klein’s U.S. stores located in international tourist locations. Calvin Klein International revenue increased 13 percent on a constant currency basis (increased 9 percent on a GAAP basis) from $315 million in the prior year’s first quarter due principally to continued strong growth in Europe. The Asia business was negatively impacted by the timing of the Chinese New Year, as the first quarter of 2015 included the full Chinese New Year selling season, while the first quarter of 2016 included only part of the selling season. Calvin Klein International comparable store sales decreased 1 percent, as declines in Korea, Hong Kong and Brazil offset continued growth in Europe and China.
Earnings before interest and taxes for the quarter increased to $99 million on a non-GAAP basis, inclusive of a $16 million negative impact due to foreign currency exchange rates, as compared to $96 million on a non-GAAP basis in the prior year’s first quarter. Earnings on a constant currency basis increased 20 percent due principally to the revenue increase mentioned above, combined with continued gross margin improvement in Europe and Asia on a constant currency basis.
Earnings before interest and taxes for the quarter of $90 million on a GAAP basis was flat compared to the prior year’s first quarter, as the earnings increase described above on a non-GAAP basis and a reduction in Warnaco integration and restructuring costs compared to the prior year’s first quarter were offset by restructuring costs incurred in connection with the new global creative strategy for Calvin Klein announced in April 2016.
Tommy Hilfiger
Revenue in the Tommy Hilfiger business for the quarter increased 4 percent on a constant currency basis (increased 3 percent on a GAAP basis) from $767 million in the prior year’s first quarter. Tommy Hilfiger North America revenue decreased 5 percent on both a constant currency and a GAAP basis compared to $354 million in the first quarter of 2015, due principally to continued softness in the retail business. North America comparable store sales declined 10 percent compared to the prior year’s first quarter, driven by continued weakness in traffic and consumer spending trends in Tommy Hilfiger’s U.S. stores located in international tourist locations, which represent a significant portion of the business. An 11 percent increase on both a constant currency and a GAAP basis in Tommy Hilfiger International revenue from $413 million in the prior year’s first quarter, was driven by continued momentum across Europe, including an 8 percent increase in comparable store sales and strong wholesale growth in the region. Additionally, the company’s acquisition of the 55 percent interest in TH Asia, Ltd. (“TH China”), its joint venture for Tommy Hilfiger in China, that it did not already own, closed in mid-April 2016 and contributed, in part, to the Tommy Hilfiger International revenue increase.
Earnings before interest and taxes for the quarter was $85 million on a non-GAAP basis, inclusive of a $26 million negative impact due to foreign currency exchange rates, compared to $92 million on a GAAP basis in the prior year’s first quarter. Earnings on a constant currency basis increased 20 percent driven by the Tommy Hilfiger International revenue increase noted above and gross margin improvement in Europe on a constant currency basis. Partially offsetting this increase was an earnings decline in North America, principally due to continued weak international tourist traffic and spending in Tommy Hilfiger’s U.S. stores and a deleveraging of expenses as compared to the prior year’s first quarter.
Earnings before interest and taxes for the quarter was $206 million on a GAAP basis compared to $92 million in the prior year’s first quarter. The increase was driven by the pre-tax noncash gain of $153 million recorded to write-up the company’s equity investment in TH China to fair value in connection with the acquisition in April 2016. Partially offsetting this gain were the acquisition costs incurred during the first quarter of 2016, a portion of which was noncash and related to valuation adjustments and amortization of short-lived assets, and the decrease described above in non-GAAP earnings.
Heritage Brands (Izod, Arrow, Speedo North America and the Caribbean license, Warner’s and Olga)
Revenue in the Heritage Brands business for the quarter decreased 12 percent from $458 million in the prior year’s first quarter, driven by the ongoing rationalization of the Heritage Brands business, including the exit from the Izod retail business (completed during the third quarter of 2015) and the discontinuation of several licensed product lines in the dress furnishings business, partially offset by a 12 percent increase in comparable store sales in the Van Heusen business.
Earnings before interest and taxes for the quarter was $33 million on a non-GAAP basis compared to $34 million in the prior year’s first quarter, as gross margin improvement in the ongoing businesses was more than offset by the overall revenue decline noted above, which resulted in a deleveraging of expenses as compared to the prior year’s first quarter.
Earnings before interest and taxes for the quarter of $30 million on a GAAP basis was flat compared to the prior year’s first quarter, as a decrease of costs incurred in connection with the Warnaco integration and restructuring and the exit from the Izod retail business compared to the prior year’s first quarter was offset by the costs incurred in connection with the discontinuation of licensed product lines in the Heritage Brands dress furnishings business.
First Quarter Consolidated Earnings:
Earnings before interest and taxes for the first quarter increased 18 percent on a non-GAAP and constant currency basis (decreased 4 percent including foreign currency exchange rate impacts) from $196 million in the prior year’s first quarter. Earnings before interest and taxes increased to $295 million on a GAAP basis compared to $177 million in the prior year’s first quarter, driven primarily by the net pre-tax gain recorded in connection with the TH China acquisition.
Net interest expense decreased to $29 million from $30 million in the prior year’s first quarter.
Inventory increased 9 percent over the prior year’s first quarter, including the inventory acquired as part of the TH China acquisition. The increase was principally driven by the planned investment in core replenishment inventory for the global underwear business.
Stock Repurchase Program:
The company repurchased during the first quarter of 2016 approximately 0.6 million shares of its common stock for $51 million (approximately 1.9 million shares for $177 million since inception) under the $500 million three-year stock repurchase program authorized by the Board of Directors in June 2015. 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 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 stock repurchase program may be modified, including to increase or decrease the repurchase limitation or extend, suspend, or terminate the program, at any time, without prior notice.
2016 Guidance:
The company currently expects its full year 2016 earnings per share results will be negatively impacted compared to 2015 by approximately $1.55 per share attributable to foreign currency exchange rates due to the stronger U.S. dollar against other currencies in which the company transacts significant levels of business. Approximately 90 percent of the $1.55 per share negative impact is expected to be on a transactional basis and approximately 10 percent is expected to be due to currency translation. The negative impact on a transactional basis is primarily due to our international businesses purchasing inventory in U.S. dollars, as the increased local currency value of inventory results in higher cost of goods in local currency when the goods are sold. The negative translation impact is attributable to the earnings generated in foreign markets, which will translate into fewer U.S. dollars.
The 2016 guidance reflects the company’s acquisition of the 55 percent interest in TH China that it did not already own, which closed in mid-April 2016. The acquisition is expected to add approximately $120 million of revenue and be slightly accretive to 2016 earnings per share on a non-GAAP basis. The 2016 guidance also assumes a revenue reduction of approximately $55 million in conjunction with the proposed transaction announced in May 2016 to form a joint venture in Mexico, to which the company would contribute its wholly owned subsidiary that operates and manages its Calvin Klein and Heritage Brands businesses in Mexico. The company expects this transaction to close early in the third quarter of 2016 and to be neutral to 2016 earnings per share on a non-GAAP basis.
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 2016 earnings per share will be in a range of $6.45 to $6.55 on a non-GAAP basis, which includes approximately $1.55 per share negative impact 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 13 percent to 15 percent compared to earnings per share of $7.05 on a non-GAAP basis in 2015.
Revenue in 2016 is currently projected to increase approximately 2 percent on both a constant currency and a GAAP basis as compared to 2015. This guidance reflects that the proposed joint venture for Mexico is expected to close early in the third quarter of 2016. As such, the company expects a revenue reduction of approximately $55 million compared to previous guidance, which will impact the second half of the year, primarily in the Calvin Klein business. It is currently projected that revenue for the Calvin Klein business will increase approximately 5 percent on a constant currency basis (increase approximately 4 percent on a GAAP basis). Revenue for the Tommy Hilfiger business is currently projected to increase approximately 5 percent on a constant currency basis (increase approximately 4 percent on a GAAP basis). Revenue for the Heritage Brands business is currently projected to decrease approximately 8 percent on a GAAP basis principally due to the continued rationalization of the business, including the loss of revenue from the Izod retail business and from several licensed product lines in the dress furnishings business that were discontinued in 2015 or will be discontinued in 2016.
Net interest expense in 2016 is expected to be in a range of $117 million to $120 million compared to $113 million in 2015, primarily due to the negative impact of the interest rate swap that commenced in February 2016 to convert a portion of the company’s variable rate debt under its term loans to fixed rate debt, partially offset by the effect of the amendment of the company’s credit facility in the second quarter of 2016. The company currently estimates that the 2016 effective tax rate will be approximately 20 percent.
The company currently expects to generate approximately $500 million of free cash flow in 2016. The company used a portion of this free cash flow and existing cash on hand to fund the acquisition of the 55 percent interest that it did not already own in TH China and expects to use the remaining free cash flow to make similar levels of debt repayments and stock repurchases as in 2015.
The company’s 2016 earnings per share estimate on a non-GAAP basis excludes approximately $30 million of pre-tax costs expected to be incurred in connection with the Warnaco integration and related restructuring, the discontinuation of several licensed product lines in the Heritage Brands dress furnishings business, the licensing to G-III Apparel Group, Ltd. of the Tommy Hilfiger womenswear wholesale business in the U.S. and Canada, which will result in the discontinuation of the company’s directly operated Tommy Hilfiger North America womenswear wholesale business in the fourth quarter of 2016 and the restructuring associated with the new global creative strategy for Calvin Klein announced in April 2016, and approximately $15 million of pre-tax costs expected to be incurred in connection with the amendment of the company’s credit facility in the second quarter of 2016. Also excluded is a net pre-tax gain of approximately $65 million in connection with the TH China acquisition, primarily related to the noncash gain recorded to write-up the company’s equity investment in TH China to fair value, partially offset by acquisition costs, primarily consisting of noncash valuation adjustments and amortization of short-lived assets.
Second Quarter Guidance
The company currently expects its second quarter 2016 earnings per share results will be negatively impacted compared to the second quarter of 2015 by approximately $0.45 per share attributable to foreign currency exchange rates due to the stronger U.S. dollar against other currencies in which the company transacts significant levels of business.
Second quarter 2016 earnings per share is currently projected to be in a range of $1.25 to $1.30 on a non-GAAP basis, which includes approximately $0.45 per share negative impact related to foreign currency exchange rates, as described above. Earnings per share is expected to increase 24 percent to 28 percent on a non-GAAP basis compared to earnings per share of $1.37 on a non-GAAP basis in the second quarter of 2015, excluding this negative impact.
Revenue in the second quarter of 2016 is currently projected to increase approximately 5 percent on a constant currency basis (increase approximately 4 percent on a GAAP basis) compared to the second quarter of 2015. Revenue for the Calvin Klein business in the second quarter is currently projected to increase approximately 13 percent on a constant currency basis (increase approximately 11 percent on a GAAP basis). Revenue for the Tommy Hilfiger business in the second quarter is currently projected to increase approximately 7 percent on a constant currency basis (increase approximately 6 percent on a GAAP basis). Revenue for the Heritage Brands business in the second quarter is currently projected to decrease approximately 12 percent on a GAAP basis, principally due to the continued rationalization of the business, as discussed earlier in this release.
The company currently projects that second quarter 2016 net interest expense will be in a range of $26 million to $28 million. The company currently estimates that the second quarter effective tax rate will be in a range of 24 percent to 25 percent.
The company’s second quarter earnings per share estimate on a non-GAAP basis excludes approximately $5 million of pre-tax costs expected to be incurred in connection with the Warnaco integration and related restructuring, the discontinuation of several licensed product lines in the Heritage Brands dress furnishings business and the licensing to G-III of the Tommy Hilfiger womenswear wholesale business in the U.S. and Canada, and approximately $15 million of pre-tax costs expected to be incurred in connection with the amendment of the company’s credit facility. Also excluded are approximately $20 million of pre-tax costs expected to be incurred in connection with the acquisition of TH China, primarily consisting of noncash amortization of short-lived assets.
Non-GAAP Exclusions:
The discussions in this release that refer to non-GAAP amounts exclude the following:
- Pre-tax costs of approximately $15 million expected to be incurred in 2016 in connection with the integration of Warnaco and the related restructuring, of which $7 million was incurred in the first quarter and approximately $3 million is expected to be incurred in the second quarter.
- Pre-tax costs of approximately $4 million expected to be incurred in 2016 related to the discontinuation of several licensed product lines in the Heritage Brands dress furnishings business, of which $3 million was incurred in the first quarter and approximately $1 million is expected to be incurred in the second quarter.
- Pre-tax costs of approximately $5 million expected to be incurred in 2016 in connection with the licensing to G-III of the Tommy Hilfiger womenswear wholesale business in the U.S. and Canada, of which $1 million was incurred in the first quarter and approximately $1 million is expected to be incurred in the second quarter.
- Pre-tax costs of $6 million incurred in the first quarter of 2016 in connection with the restructuring associated with the new global creative strategy for Calvin Klein announced in April 2016.
- Pre-tax noncash gain of $153 million recorded in the first quarter of 2016 to write-up the company’s equity investment in TH China to fair value in connection with the acquisition of the 55 percent interest that it did not already own, which was completed in mid-April 2016. Partially offsetting the pre-tax gain are pre-tax costs of approximately $88 million expected to be incurred in 2016, which primarily consist of noncash charges related to valuation adjustments and amortization of short-lived assets. Of these pre-tax costs, $30 million was incurred in the first quarter and approximately $20 million is expected to be incurred in the second quarter.
- Pre-tax costs of approximately $15 million expected to be incurred in the second quarter of 2016 in connection with the amendment of the company’s credit facility.
- Discrete tax benefits of $6 million recorded in the first quarter of 2016 related to the resolution of uncertain tax positions.
- Pre-tax costs of $73 million incurred in 2015 in connection with the integration of Warnaco and the related restructuring, of which $19 million was incurred in the first quarter, $13 million was incurred in the second quarter, $19 million was incurred in the third quarter and $23 million was incurred in the fourth quarter.
- Pre-tax costs of $17 million incurred in 2015 principally related to the discontinuation of several licensed product lines in the Heritage Brands dress furnishings business, of which $3 million was incurred in the second quarter, $13 million was incurred in the third quarter and less than $1 million was incurred in the fourth quarter.
- Pre-tax costs of $10 million incurred in 2015 related to the operation of and exit from the Izod retail business, of which $1 million was incurred in the first quarter, $6 million was incurred in the second quarter, $3 million was incurred in the third quarter and $1 million was incurred in the fourth quarter.
- Pre-tax costs of $3 million incurred in the fourth quarter of 2015 in connection with the licensing to G-III of the Tommy Hilfiger womenswear wholesale business in the U.S. and Canada.
- A pre-tax gain of $2 million recorded in the second quarter of 2015 on the company’s equity investment in Kingdom Holding 1 B.V., the parent company of the Karl Lagerfeld brand.
- A pre-tax gain of $20 million recorded in the fourth quarter of 2015 related to recognized actuarial gains on retirement plans.
- Discrete tax benefits of $35 million recorded in 2015 primarily related to the resolution of uncertain tax positions and the impact of recently enacted tax law and tax rate changes on deferred taxes, of which $2 million was recorded in the first quarter, $1 million was recorded in the second quarter, $19 million was recorded in the third quarter and $13 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.
Photo courtesy Calvin Klein