PVH Corp. reported earnings per share in the third quarter was $2.30 a share on a non-GAAP basis, which exceeded the companys guidance of $2.25. The prior years third quarter non-GAAP earnings per share was $2.38.

GAAP earnings per share was $2.37 as compared to the prior years third quarter earnings per share of $2.27.

Revenue increased 38 percent to $2.259 billion, as compared to the prior years third quarter. The increase over the prior year was principally driven by the addition of approximately $503 million of revenue related to the Warnaco businesses acquired early in 2013, net of the reduction in licensing revenue attributable to Warnaco. Also contributing to the increase was revenue growth of $87 million, or 10 percent, in the Tommy Hilfiger business and $55 million, or 19 percent, in the pre-acquisition Calvin Klein businesses. Partially offsetting these increases was a revenue decrease of $29 million, or 6 percent, in the pre-acquisition Heritage Brands business.

Third Quarter Business Review:

Due to the 53rd week in 2012, third quarter 2013 comparable store sales are more appropriately compared with the thirteen week period ended November 4, 2012. All comparable store sales discussed in this release are presented on this shifted basis.

Calvin Klein

Revenue in the Calvin Klein business increased $480 million to $800 million from $320 million in the prior years third quarter. $425 million of the increase was attributable to the Warnaco businesses acquired, net of the reduction in licensing revenue attributable to Warnaco. Also driving the revenue increase was strong performance in the North America businesses due to a 3 percent comparable store sales increase, retail square footage expansion and a double-digit increase in the wholesale sportswear business. The North America underwear business exceeded expectations, while the North America jeans business continued to underperform as the company works to clear inventory and focus on the redesign and repositioning of its offerings in that product category.

Calvin Klein International comparable store sales decreased 1 percent. The Calvin Klein businesses in Brazil and Asia continued to perform well and exceed expectations, while the European business continued to underperform. Within Asia, the China business exhibited solid growth and the Korea business, although down compared to the prior year, showed improving trends over previous quarters. The Calvin Klein business in Europe remains under pressure primarily due to the companys current initiative to restructure the sales distribution mix in this region and its concentration in Southern Europe.

Royalty revenue in the third quarter decreased $21 million from the prior year amount, principally due to the loss of Warnaco royalties that were included in the prior year and the expiration of a long-term contractual agreement related to royalties in the North America womens sportswear business, which together totaled $28 million. Excluding the expiration of this contract and the loss of Warnaco royalties, royalty revenue increased 15 percent, driven by strength in womens sportswear, suits, performance wear and handbags and accessories, as well as mens and womens outerwear.

Earnings before interest and taxes for the Calvin Klein business increased to $144 million on a non-GAAP basis as compared to $92 million in the prior years third quarter (which was in accordance with GAAP), due principally to the addition of earnings related to the newly acquired businesses and the increase in revenue from the companys pre-acquisition North America businesses discussed above. Gross margin improvement in the North America retail business, resulting from higher average unit retail selling prices despite the highly competitive landscape, also contributed to the earnings increase.

GAAP earnings before interest and taxes for the Calvin Klein business was $112 million as compared to $92 million in the prior years third quarter. The increase was due principally to the earnings increases discussed above, partially offset by acquisition, integration and restructuring costs incurred during the third quarter associated with the Warnaco acquisition.

Tommy Hilfiger

The Tommy Hilfiger business posted revenue of $921 million, a 10 percent increase as compared to $834 million in the prior years third quarter. Revenue in the Tommy Hilfiger North America business increased 10 percent, principally driven by 3 percent retail comparable store sales growth, retail square footage expansion and double-digit growth in the wholesale sportswear business. Revenue in the Tommy Hilfiger International business increased 11 percent as compared to the prior years third quarter, driven by a double-digit increase in the European wholesale business and 4 percent European retail comparable store sales growth, coupled with retail square footage expansion. These increases were partially offset by a revenue decline in Japan, where the company continues its efforts to strategically reposition the brand.

On a non-GAAP basis, earnings before interest and taxes for the Tommy Hilfiger business increased 6 percent to $143 million from $135 million in the prior years third quarter, driven principally by the revenue increases discussed above. Gross margin pressures due to a higher level of promotional activity in order to drive traffic partially offset the revenue increases.

GAAP earnings before interest and taxes for the Tommy Hilfiger business increased 30 percent to $168 million from $129 million in the prior years third quarter due to the non-GAAP earnings increase discussed above, combined with $24 million of income 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, and the absence in 2013 of costs incurred in connection with the Tommy Hilfiger integration and the related restructuring.

Heritage Brands

Total revenue for the Heritage Brands businesses increased 10 percent to $539 million, as compared to $490 million in the prior years third quarter. The newly acquired Speedo, Warners and Olga businesses contributed $78 million, while revenue for the pre-acquisition Heritage Brands businesses decreased 6 percent. The decrease was due principally to square footage contraction from closing underperforming stores in the Heritage Brands Retail business, a 3 percent decline in comparable store sales due, in large part, to weak performance at Bass, and a revenue decrease resulting from the 2012 exit from the Izod womens wholesale sportswear business. The Bass business was sold effective November 4, 2013, the first day of the fourth quarter.

Earnings before interest and taxes for the Heritage Brands business was $42 million on a non-GAAP basis, as compared to $47 million (which was in accordance with GAAP) in the prior years third quarter. The earnings decrease was due principally to the revenue decline for the pre-acquisition Heritage Brands businesses discussed above and lower gross margins experienced in the Bass retail business. Also negatively impacting earnings for the quarter was a shift into the quarter of advertising expense related to the Van Heusen brand, coupled with a loss in the Speedo business due to its seasonal nature.

On a GAAP basis, earnings before interest and taxes for the Heritage Brands business was $14 million as compared to $47 million in the prior years third quarter. This decrease was due to the non-GAAP earnings decrease discussed above, combined with costs incurred during the current years third quarter related to the Warnaco acquisition, integration and restructuring, and a $19 million loss recorded in the current years third quarter in connection with the sale of the Bass division.

Third Quarter Consolidated Earnings:

On a non-GAAP basis, earnings before interest and taxes increased 20 percent to $306 million from $254 million in the prior years third quarter driven by increases of $52 million and $8 million in the Calvin Klein and Tommy Hilfiger businesses, respectively, partially offset by a $6 million decrease in the Heritage Brands business and a $3 million increase in corporate expenses, due principally to the addition of Warnaco corporate expenses, net of savings and synergies realized from the acquisition.

Earnings before interest and taxes on a GAAP basis was $249 million as compared to $241 million in the prior years third quarter. The earnings increase was primarily due to (i) the net non-GAAP earnings increase discussed above; (ii) $24 million of income 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; and (iii) the absence in 2013 of $7 million of costs related to the integration of Tommy Hilfiger and the related restructuring; partially offset by (i) an increase over the prior year of $55 million of costs incurred related to the Warnaco acquisition, integration and restructuring; and (ii) the $19 million loss recorded in connection with the sale of the Bass division.

Net interest expense increased to $46 million as compared to $28 million in the prior years third quarter, due to an increase in the companys total indebtedness incurred in connection with the Warnaco acquisition. During the third quarter of 2013, the company made debt repayments totaling $21 million on its outstanding term loans, which brings the total 2013 debt repayments to $203 million.

On a non-GAAP basis, the effective tax rate was 26.5 percent as compared to 22.2 percent in the prior years third quarter. On a GAAP basis, the impact of the Warnaco acquisition on pre-tax income, combined with non-recurring discrete items recorded during the third quarter of 2013 related to the Warnaco integration, resulted in a decrease in the effective tax rate to 3.3 percent as compared to 21.2 percent in the prior years third quarter.

Nine Months Consolidated Results:

On a non-GAAP basis, earnings per share was $5.60 as compared to $4.99 for the prior year.
GAAP earnings per share was $1.95 as compared to $4.79 for the prior year.

Revenue on a non-GAAP basis increased $1.757 billion, or 40 percent, to $6.164 billion as compared to the prior years amount of $4.407 billion (which was in accordance with GAAP). The increase was due to:

  • A $1.275 billion increase in the Calvin Klein business, driven by (i) the addition of $1.162 billion attributable to the Warnaco businesses acquired, which generally exceeded plan, net of the reduction in licensing revenue attributable to Warnaco; (ii) a 3 percent increase in comparable store sales and square footage expansion in the North America retail business; and (iii) a 16 percent increase in the pre-acquisition North America wholesale sportswear business. Royalty revenue decreased 31 percent as compared to the prior year, due principally to the loss of Warnaco royalties that were included in the prior year and the expiration of a long-term contractual agreement related to royalties in the North America womens sportswear business, which together totaled $76 million. Excluding the expiration of this contract and the loss of Warnaco royalties, royalty revenue increased 10 percent, driven by strength in womens sportswear, handbags and accessories and suits, as well as mens and womens outerwear.
  • A 9 percent, or $205 million, increase in the Tommy Hilfiger business. Revenue in the Tommy Hilfiger North America business increased 11 percent, driven by 5 percent comparable store sales growth, retail square footage expansion and double-digit growth in the North America wholesale business. Revenue in the Tommy Hilfiger International business increased 7 percent, driven by 5 percent European retail comparable store sales growth, retail square footage expansion and a 9 percent increase in the Europe wholesale business, partially offset by continued underperformance in Japan, where the company continues its efforts to strategically reposition the brand.
  • A 22 percent, or $277 million, increase in the Heritage Brands business, driven by the addition of $335 million attributable to the newly acquired Speedo, Warners and Olga businesses and an $11 million increase in the pre-acquisition ongoing wholesale sportswear and dress furnishings businesses, partially offset by the negative impact of $42 million, or 3 percent, related to the exited Izod womens and Timberland wholesale sportswear businesses and a comparable store sales decline of 7 percent in the retail business due principally to weak performance at Bass.
  • GAAP revenue of $6.134 billion was $30 million lower than non-GAAP revenue due to sales returns accepted from certain Warnaco wholesale customers in Asia during the first quarter in connection with an initiative to reduce excess inventory levels.
  • On a non-GAAP basis, earnings before interest and taxes increased $189 million to $760 million due to:
  • A $134 million increase in the Calvin Klein business, driven primarily by the addition of earnings related to the Warnaco businesses acquired and strong performance in the companys pre-acquisition businesses.
  • A $26 million increase in the Tommy Hilfiger business, due principally to the revenue increase mentioned above.
  • A $37 million increase in the Heritage Brands business, driven by (i) the addition of earnings related to the newly acquired Speedo, Warners and Olga businesses; and (ii) growth in the companys pre-acquisition wholesale sportswear and dress furnishings businesses, partially offset by weakness in the Heritage Brands Retail business, particularly in the Bass division.
  • A $9 million increase in corporate expenses, due principally to the addition of Warnaco corporate expenses, net of savings and synergies realized from the acquisition.
  • GAAP earnings before interest and taxes decreased $221 million to $330 million as compared to the prior year. The earnings decrease was primarily due to (i) an increase over the prior year of $429 million of costs related to the acquisition, integration, restructuring and debt modification and extinguishment charges related to the Warnaco acquisition; and (ii) a $19 million loss recorded in connection with the sale of the Bass division; partially offset by (i) $24 million of income 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; (ii) the absence in 2013 of $14 million of costs related to the integration of Tommy Hilfiger and the related restructuring; and (iii) the net non-GAAP earnings increase discussed above. Of the $435 million of acquisition, integration, restructuring and debt modification and extinguishment charges related to the Warnaco acquisition incurred during the current year nine month period, $225 million were non-cash, most of which relate to short-lived valuation adjustments and amortization.
  • On a non-GAAP basis, net interest expense increased to $138 million as compared to $86 million in the prior year period (which was in accordance with GAAP), due to an increase in the companys total indebtedness incurred in connection with the Warnaco acquisition. GAAP net interest expense was $139 million. During the first nine months of 2013, the company made debt repayments totaling $203 million on its outstanding term loans.
  • On a non-GAAP basis, the effective tax rate was 25.7 percent as compared to 24.2 percent in the prior year period. The GAAP effective tax rate was 15.5 percent as compared to 24.0 percent for the prior year period. The impact of the Warnaco acquisition on pre-tax income resulted in a decrease in the GAAP effective tax rate as compared to the prior year.

CEO Comments:

Commenting on these results, Emanuel Chirico, Chairman and Chief Executive Officer, noted, Despite the difficult market environment, our third quarter results exceeded our expectations, driven by the strength of our Calvin Klein and Tommy Hilfiger businesses. In the third quarter, we continued to be pleased with the performance of our newly acquired Calvin Klein businesses in Asia and Brazil, as well as our global underwear business. However, our Calvin Klein jeans business, particularly in North America and Europe, continues to underperform and be an area of management focus, investment and repositioning.

Chirico continued, Despite our better than expected third quarter results, we believe the current holiday season will be very competitive and highly promotional. As a result, we believe it is prudent to maintain our full year earnings per share guidance of $7.00.

Chirico concluded, Over the last nine months, we have made significant progress in our efforts to integrate the Warnaco businesses and to build a solid foundation for our future. Investments in the newly acquired businesses, which will continue into 2014, will further focus on enhancing the existing operating infrastructure; leveraging the investments in our people, including filling a significant number of key open positions; restructuring our customer distribution in various regions; upgrading the quality and design of the Calvin Klein jeans product; and elevating and enhancing the retail presentation of the Calvin Klein businesses. We firmly believe that these investments being made in 2013 and 2014 will fuel the global expansion of our Calvin Klein and Tommy Hilfiger brands and deliver long-term growth and stockholder value.

2013 Guidance:

2013 non-GAAP revenue guidance does not include fourth quarter revenue for the Bass division, which was sold on November 4, 2013, the first day of the fourth quarter. Revenue for the Bass division in the fourth quarter of 2012 was approximately $75 million.

Full Year Guidance

The company continues to project that earnings per share on a non-GAAP basis will be $7.00 as compared to $6.58 in 2012.

The company projects that revenue on a non-GAAP basis in 2013 will be approximately $8.24 billion.

It is currently projected that revenue for the Calvin Klein business in 2013 on a non-GAAP basis will increase to approximately $2.79 billion as compared to the 2012 amount of $1.15 billion (which was in accordance with GAAP), principally due to the newly acquired businesses. Revenue for the Tommy Hilfiger business in 2013 is currently expected to be approximately $3.44 billion as compared to the 2012 amount of $3.22 billion. Revenue for the Heritage Brands business in 2013 is currently projected to increase to approximately $2.01 billion as compared to the 2012 amount of $1.68 billion due principally to the addition of revenue related to the newly acquired Speedo, Warners and Olga businesses.

The company currently projects that 2013 net interest expense will be approximately $190 million and that the non-GAAP 2013 full year tax rate will be approximately 26.0 percent. The company currently plans to make additional term loan payments to bring the total for 2013 to approximately $450 million, the majority of which would be voluntary.

The companys non-GAAP 2013 earnings per share estimate excludes approximately $500 million of pre-tax costs associated with the Warnaco acquisition and the related integration, restructuring and debt modification and extinguishment, of which approximately $240 million are expected to be non-cash charges, the majority of which is expected to relate to short-lived valuation adjustments and amortization. Also excluded from the companys non-GAAP 2013 earnings per share estimate is a $19 million loss recorded in the third quarter of 2013 in connection with the companys sale of the Bass division and $24 million of income 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. (Please see section entitled Non-GAAP Exclusions for details on these pre-tax items.)

Fourth Quarter Guidance

On a non-GAAP basis, earnings per share for the fourth quarter is projected to be approximately $1.40 as compared to $1.60 in the prior years fourth quarter. The fourth quarter of 2013 is expected to be negatively impacted by $0.10 due to the inclusion of the additional (53rd) week in 2012 and the resulting shift in the 2013 fiscal calendar, which caused the fourth quarter of 2013 to begin one week later into the holiday selling season than the fourth quarter of 2012. Also negatively impacting non-GAAP earnings per share in the fourth quarter of 2013 is a decrease of approximately $0.10 due to an increase in the projected tax rate over the prior years fourth quarter.

Revenue in the fourth quarter of 2013 is currently expected to be approximately $2.08 billion.

It is currently projected that revenue for the Calvin Klein business in the fourth quarter of 2013 will increase to approximately $680 million as compared to the 2012 amount of $317 million, principally due to the newly acquired businesses. Revenue for the Tommy Hilfiger business in the fourth quarter of 2013 is currently expected to be approximately $910 million as compared to the 2012 amount of $891 million. Revenue for the Heritage Brands business in the fourth quarter of 2013 is currently projected to increase to approximately $490 million as compared to the 2012 amount of $428 million, principally due to the addition of revenue related to the newly acquired Speedo, Warners and Olga businesses, partially offset by the sale of the Bass retail business.

The company projects that fourth quarter 2013 net interest expense will be approximately $50 million and that the 2013 fourth quarter tax rate will be approximately 27.0 percent. The company currently plans to make term loan payments of approximately $250 million during the fourth quarter of 2013, the majority of which would be voluntary.

The companys fourth quarter 2013 earnings per share estimate excludes approximately $63 million of pre-tax costs associated with the acquisition, 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:

  • A revenue reduction of $30 million in the first quarter of 2013, due to sales returns accepted from certain Warnaco wholesale customers in Asia in connection with an initiative to reduce excess inventory levels.
  • Pre-tax costs of approximately $500 million expected to be incurred in 2013 in connection with the acquisition, integration and related restructuring of Warnaco, including costs associated with the companys debt modification and extinguishment and the sales returns mentioned above, of which $236 million was incurred in the first quarter, $140 million was incurred in the second quarter, $61 million was incurred in the third quarter and approximately $63 million is expected to be incurred in the fourth quarter. Approximately $240 million of the acquisition, integration and related restructuring charges expected to be incurred in 2013 are non-cash charges, the majority of which are short-lived valuation adjustments and amortization.
  • Pre-tax income of $24 million 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 approximately $19 million incurred in the third quarter of 2013 in connection with the sale of substantially all of the assets of the Bass division, which closed on November 4, 2013.
  • A tax expense of $28 million recorded in the second quarter of 2013 associated with non-recurring discrete items related to the Warnaco integration.
  • A tax benefit of $28 million recorded in the third quarter of 2013 associated with non-recurring discrete items related to the Warnaco integration.
  • Pre-tax costs of $21 million incurred in 2012 principally in connection with the integration of Tommy Hilfiger and the related restructuring, of which $3 million was incurred in the first quarter, $5 million was incurred in the second quarter, $7 million was incurred in the third quarter and $6 million was incurred in the fourth quarter.
  • Pre-tax costs of $46 million incurred in 2012 in connection with the acquisition of Warnaco, of which $6 million was incurred in the third quarter and $40 million was incurred in the fourth quarter.
  • A pre-tax expense of $28 million recorded in the fourth quarter of 2012 related to recognized actuarial losses on retirement plans.
  • A tax benefit of $14 million in 2012 related to the recognition of previously unrecognized net operating loss assets and tax credits, of which $5 million was recorded in the third quarter and $9 million was recorded in the fourth quarter.
  • Estimated tax effects associated with the above pre-tax items, which are based on the companys 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.