PVH Corp., the parent of Speedo, reported earnings per share was $1.69 on a non-GAAP basis for the second quarter compared to $1.47 in the prior year period. Revenues increased 7 percent.
Commenting on these results, Emanuel Chirico, Chairman and Chief Executive Officer, noted, “Our better than expected second quarter results reflect the continued momentum and ongoing operating efficiencies across our diversified business model. Our results reflect a planned increase of approximately $25 million of marketing compared to the prior year related to Calvin Klein and Tommy Hilfiger, which we believe will continue to drive market share gains and allow us to capitalize on the brands’ significant international expansion opportunities over the next several years.”
Chirico continued, “We have raised our full year earnings outlook based on our second quarter outperformance, an improvement in foreign currency rates and our belief that the strength of our brands will continue to drive our second half performance, despite the ongoing volatility in the macroeconomic and geopolitical environment. In addition, in line with our projected full year sales increase, we are now planning to invest an additional $10 million in marketing during the second half of this year to capitalize on the continued momentum we are seeing in our Tommy Hilfiger and Calvin Klein businesses.”
Chirico concluded, “In today’s ever-changing consumer landscape, we are actively adapting our businesses to gain market share by finding innovative ways to engage consumers, while investing across our organization. We believe that we are well-positioned to execute our strategic priorities, while delivering long-term sustainable growth and stockholder value.”
Second Quarter Business Review:
There was no impact of foreign currency on the company’s revenue on a consolidated basis or for any of the company’s businesses. As such, the Second Quarter Business Review does not include a discussion of constant currency revenue performance.
Calvin Klein
Revenue in the Calvin Klein business for the quarter increased 8 percent to $786 million compared to the prior year period, which includes an approximate $15 million reduction resulting from the November 2016 deconsolidation of the company’s Calvin Klein business in Mexico (the “Mexico deconsolidation”). Calvin Klein International revenue increased 20 percent to $394 million compared to the prior year period. Outstanding performance in the wholesale business in Europe and China, as well as solid growth in the retail business due to a 6 percent increase in international comparable store sales and square footage expansion in company-operated stores, drove the revenue increase. Calvin Klein North America revenue decreased 1 percent to $392 million compared to the prior year period primarily as a result of the Mexico deconsolidation and a 2 percent decline in North America comparable store sales.
Earnings before interest and taxes for the quarter decreased to $96 million from $106 million in the prior year period. The earnings decrease was principally due to a $20 million planned increase over the prior year period in marketing and investments associated with the CALVIN KLEIN creative team leadership changes, which more than offset the revenue increase for the business discussed above.
Tommy Hilfiger
Revenue in the Tommy Hilfiger business for the quarter increased 4 percent to $892 million compared to the prior year period. Tommy Hilfiger International revenue increased 9 percent to $492 million compared to the prior year period, driven by continued strong performance in Europe and Asia. Tommy Hilfiger International comparable store sales increased 6 percent. Tommy Hilfiger North America revenue decreased 2 percent to $400 million compared to the prior year period. The decline was principally due to a reduction of approximately $20 million resulting from the discontinuation of the company’s directly operated womenswear wholesale business in the U.S. and Canada during the fourth quarter of 2016 in connection with the licensing of this business to G-III Apparel Group, Ltd. (the “G-III license”). Tommy Hilfiger North America comparable store sales were flat.
Earnings before interest and taxes on a GAAP basis for the quarter increased to $91 million from $76 million in the prior year period. Included in earnings for the quarter were costs of (i) $7 million incurred in connection with 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”) and (ii) $7 million incurred in connection with the relocation of the Tommy Hilfiger office in New York, including noncash depreciation expense. Included in earnings for the prior year period were costs of (i) $20 million incurred in connection with the TH China acquisition and (ii) $1 million incurred in connection with the G-III license. 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 $105 million from $97 million in the prior year period. The earnings increase was principally due to gross margin improvements attributable to less promotional selling, particularly in North America, as well as the strong Tommy Hilfiger International revenue increase noted above. Partially offsetting these increases was a $7 million increase in marketing over the prior year period, primarily in the international business.
Heritage Brands
Revenue in the Heritage Brands business for the quarter increased 13 percent to $392 million compared to the prior year period, principally due to a shift in the timing of shipments from both the first and third quarters into the second quarter as compared to the prior year. Comparable store sales increased 1 percent.
Earnings before interest and taxes for the quarter increased to $35 million from $12 million in the prior year period driven by the revenue increase noted above, as well as gross margin improvements. The segments brands include Van Heusen, Izod, Arrow, Speedo, Warner’s, Olga and True&Co.
Second Quarter Consolidated Results:
Earnings per share was $1.52 on a GAAP basis for the second quarter of 2017 compared to $1.11 in the prior year period. Earnings per share was $1.69 on a non-GAAP basis for the second quarter of 2017 compared to $1.47 in the prior year period. Earnings per share on both a GAAP and non-GAAP basis for the second quarter of 2017 included a $0.05 negative impact related to foreign currency exchange rates.
Second quarter revenue increased 7 percent to $2.1 billion compared to the prior year period.
Earnings before interest and taxes on a GAAP basis for the quarter increased to $181 million from $143 million in the prior year period. Included in earnings for the quarter were $19 million of costs consisting of (i) $7 million incurred in connection with the relocation of the Tommy Hilfiger office in New York, including noncash depreciation expense, (ii) $7 million incurred in connection with the TH China acquisition and (iii) $6 million incurred in connection with the consolidation of the company’s warehouse and distribution network in North America. Included in earnings for the prior year period were $39 million of costs consisting of (i) $20 million incurred in connection with the TH China acquisition, (ii) $16 million incurred in connection with the amendment of the company’s credit facility, (iii) $2 million incurred in connection with the Warnaco integration and restructuring and (iv) $1 million incurred in connection with the G-III license. 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 was $200 million compared to $183 million in the prior year period. The improvement in earnings was primarily due to an increase in earnings in the Tommy Hilfiger and Heritage Brands businesses. Partially offsetting these increases were an earnings decrease in the Calvin Klein business due to a planned increase in marketing and investments associated with the CALVIN KLEIN creative team leadership changes, which more than offset the revenue increase in the Calvin Klein business, as well as a $4 million planned increase in corporate expenses.
Net interest expense increased to $30 million from $28 million in the prior year period, primarily due to the impact of the issuance of €350 million of senior notes in June 2016, partially offset by the impact of debt repayments made during 2016 and the first half of 2017. The effective tax rate on a GAAP basis was 20.8 percent as compared to 21.2 percent in the prior year period. The effective tax rate on a non-GAAP basis was 21.9 percent as compared to 22.5 percent in the prior year period.
Six Months Consolidated Results:
Earnings per share was $2.41 on a GAAP basis for the first six months of 2017 compared to $3.95 in the prior year period. The prior year period included a 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 TH China acquisition. In addition, the current and prior year periods include other costs as described below.
Earnings per share was $3.34 on a non-GAAP basis for the first six months of 2017 compared to $2.97 in the prior year period. Earnings per share on both a GAAP and non-GAAP basis for the first six months of 2017 included a $0.16 negative impact related to foreign currency exchange rates.
Revenue for the first six months of 2017 increased 5 percent (increased 6 percent on a constant currency basis) to $4.1 billion compared to the prior year period. The revenue increase was due to:
- A 6 percent increase (7 percent increase on a constant currency basis) in the Calvin Klein business compared to the prior year period, driven by continued strength in Europe and China, partially offset by a reduction in revenue resulting from the Mexico deconsolidation. International comparable store sales increased 5 percent. North America comparable store sales decreased 3 percent.
- A 5 percent increase (6 percent increase on a constant currency basis) in the Tommy Hilfiger business compared to the prior year period, driven principally by outstanding performance in Europe and the inclusion of a full first quarter of revenue from the China business as a result of the April 2016 TH China acquisition. Tommy Hilfiger International comparable store sales increased 9 percent. Partially offsetting these increases was a decrease in North America revenue due to a reduction of approximately $40 million resulting from the G-III license and a 1 percent comparable store sales decline.
- A 4 percent increase in the Heritage Brands business compared to the prior year period, principally driven by a shift in the timing of shipments into the second quarter of 2017 from the third quarter as compared to the prior year period. Comparable store sales were flat.
Earnings before interest and taxes on a GAAP basis for the first six months of 2017 decreased to $294 million from $438 million in the prior year period, principally driven by an increase in costs including (i) the noncash gain of $153 million recorded in the prior year period to write-up the company’s equity investment in TH China to fair value in connection with the TH China acquisition, (ii) $54 million of costs incurred in the first quarter of 2017 in connection with the agreements entered into during the first quarter of 2017 for a transaction to restructure the company’s supply chain relationship with Li & Fung Trading Limited (“Li & Fung”), which also provides for the termination of the company’s non-exclusive buying agency agreement with Li & Fung (the “Li & Fung termination”), (iii) $14 million of costs incurred in the first six months of 2017 in connection with the relocation of the Tommy Hilfiger office in New York, including noncash depreciation expense, (iv) $9 million of costs 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 and (v) $8 million of costs incurred in the first six months of 2017 in connection with the consolidation of the company’s warehouse and distribution network in North America. These cost increases were partially offset by a $37 million decrease in costs incurred in connection with the TH China acquisition compared to the prior year period and the absence of (i) $16 million of costs incurred in the prior year period in connection with the amendment of the company’s credit facility, (ii) $10 million of costs incurred in the prior year period in connection with the Warnaco integration and restructuring, (iii) $6 million of costs incurred in the prior year period in connection with the restructuring associated with the new global creative strategy for CALVIN KLEIN, (iv) $3 million of costs incurred in the prior year period in connection with the discontinuation of several licensed product lines in the Heritage Brands dress furnishings business and (v) $3 million of costs incurred in the prior year period in connection with the G-III license. 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 first six months of 2017 was $392 million, inclusive of a $17 million negative impact due to foreign currency exchange rates, compared to $371 million in the prior year period. The improvement in earnings was primarily due to an increase in earnings in the Tommy Hilfiger and Heritage Brands businesses, partially offset by a decrease in earnings in the Calvin Klein business due to a $27 million planned increase in marketing and investments associated with the CALVIN KLEIN creative team leadership changes, which more than offset the revenue increase in the Calvin Klein business, as well as a $10 million planned increase in corporate expenses.
Net interest expense for the first six months of 2017 increased to $58 million from $57 million in the prior year period. The effective tax rate on a GAAP basis for the first six months of 2017 increased to 19.5 percent compared to 15.3 percent in the prior year period, principally due to the benefit of certain discrete items in the prior year period, including the lower tax rate applicable to the pre-tax gain recorded to write-up the company’s equity investment in TH China to fair value in connection with the TH China acquisition. The effective tax rate on a non-GAAP basis for the first six months of 2017 decreased to 21.3 percent compared to 22.8 percent in the prior year period.
Stock Repurchase Program:
During the first six months of 2017, the company repurchased 1.2 million shares of its common stock for $124 million (5.8 million shares for $565 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.
2017 Guidance:
The company expects its full year 2017 earnings per share results will be negatively impacted compared to 2016 by $0.20 per share attributable to foreign currency exchange rates due to fluctuations of the U.S. dollar against other currencies in which the company transacts significant levels of business.
Full Year Guidance
The company currently projects that 2017 earnings per share on a GAAP basis will be in a range of $6.44 to $6.54 compared to $6.79 in 2016. The company currently projects that 2017 earnings per share on a non-GAAP basis will be in a range of $7.60 to $7.70 compared to $6.80 in 2016. Both projections include the expected negative impact of $0.20 per share related to foreign currency exchange rates. These projections also reflect an additional $10 million of marketing in the second half of 2017 as compared to previous guidance.
Revenue in 2017 is projected to increase approximately 6 percent (increase approximately 5 percent on a constant currency basis) as compared to 2016. Negatively impacting revenue in 2017 as compared to 2016 is a reduction in revenue due to the effects of the Mexico deconsolidation and the G-III license. Revenue for the Calvin Klein business is projected to increase approximately 8 percent (increase approximately 7 percent on a constant currency basis), which includes the negative impact of the Mexico deconsolidation. Revenue for the Tommy Hilfiger business is projected to increase approximately 6 percent (increase approximately 5 percent on a constant currency basis), which includes the negative impact of the G-III license. Revenue for the Heritage Brands business is projected to be flat compared to the prior year.
Net interest expense in 2017 is projected to increase to approximately $120 million from $115 million in 2016, primarily due to the impact of the issuance of €350 million of senior notes in June 2016, partially offset by the impact of debt repayments made during 2016 and those expected to be made in 2017 and the amendment of the company’s credit facility in the second quarter of 2016. The company estimates that the 2017 effective tax rate will be in a range of 15.0 percent to 15.5 percent on a GAAP basis and in a range of 17.0 percent to 17.5 percent on a non-GAAP basis.
The company’s estimate of 2017 earnings per share on a non-GAAP basis excludes $124 million of pre-tax costs expected to be incurred in connection with (i) the Li & Fung termination; (ii) the TH China acquisition, primarily consisting of noncash amortization of short-lived assets; (iii) the relocation of the Tommy Hilfiger office in New York, including noncash depreciation expense; (iv) 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; and (v) the consolidation of the company’s warehouse and distribution network in North America. Also excluded from the company’s estimate of 2017 earnings per share on a non-GAAP basis are the estimated tax effects of the above pre-tax items.
Third Quarter Guidance
The company expects its third quarter 2017 earnings per share results will be negatively impacted compared to the third quarter of 2016 by approximately $0.06 per share related to foreign currency exchange rates due to fluctuations of the U.S. dollar against other currencies in which the company transacts significant levels of business.
Third quarter 2017 earnings per share on a GAAP basis is projected to be in a range of $2.74 to $2.78 compared to $1.56 in the prior year period. The prior year period included a pre-tax noncash loss of $77 million recorded in connection with the Mexico deconsolidation. The company projects that third quarter 2017 earnings per share on a non-GAAP basis will be in a range of $2.88 to $2.92 compared to $2.60 in the prior year period.
Revenue in the third quarter of 2017 is projected to increase approximately 4 percent (increase approximately 3 percent on a constant currency basis) compared to the prior year period. Negatively impacting revenue in the third quarter of 2017 as compared to the prior year period is a reduction in revenue due to the effects of the Mexico deconsolidation and the G-III license. Revenue for the Calvin Klein business in the third quarter is projected to increase approximately 5 percent (increase approximately 4 percent on a constant currency basis), which includes the negative impact of the Mexico deconsolidation. Revenue for the Tommy Hilfiger business in the third quarter is projected to increase approximately 8 percent (increase approximately 7 percent on a constant currency basis), which includes the negative impact of the G-III license. Revenue for the Heritage Brands business in the third quarter is projected to decrease approximately 8 percent, due principally to a planned shift in the timing of wholesale shipments into the second quarter from the third quarter as compared to the prior year period.
Net interest expense in the third quarter of 2017 is projected to increase to approximately $31 million from $29 million in the prior year period, primarily due to the impact of the issuance of €350 million of senior notes in June 2016, partially offset by the impact of debt repayments made during 2016 and those expected to be made in the first nine months of 2017. The company estimates that the third quarter 2017 effective tax rate will be approximately 10 percent on a GAAP basis and approximately 12 percent on a non-GAAP basis.
The company’s estimate of third quarter 2017 earnings per share on a non-GAAP basis excludes $18 million of pre-tax costs expected to be incurred in connection with (i) the TH China acquisition, primarily consisting of noncash amortization of short-lived assets; (ii) the relocation of the Tommy Hilfiger office in New York, including noncash depreciation expense; and (iii) the consolidation of the company’s warehouse and distribution network in North America. Also excluded from the company’s estimate of third quarter 2017 earnings per share on a non-GAAP basis are the estimated tax effects of the above pre-tax items.