PVH Corp., which recently announced plans to acquire Warnaco Group, the parent of Speedo, reported earnings per share reached $2.34 on a non-GAAP basis in the third quarter, which exceeded the company’s guidance and represents a 24 percent increase over the prior year period’s non-GAAP earnings per share of $1.89.

GAAP earnings per share was $2.24 and represents a 45 percent increase over the prior year period’s GAAP earnings per share of $1.54.

Revenue of $1.643 billion decreased 1 percent as compared to the prior year period due to a 5 percent negative impact attributable to the exit from the Izod women’s and Timberland wholesale sportswear businesses (worth approximately $50 million) and foreign currency translation (worth approximately $40 million). On a constant currency basis and excluding the impact of exited businesses, revenue increased 4 percent.

Operating margin on a non-GAAP basis increased 150 basis points due to a 260 basis point gross margin increase, driven by the higher-margin Calvin Klein and Tommy Hilfiger businesses growing faster, combined with higher average unit retail selling prices and decreased product costs across the Company’s businesses. GAAP operating margin increased 260 basis points.

Third Quarter Business Review:

Tommy Hilfiger

Revenue in the Tommy Hilfiger business increased 1 percent to $833.6 million from $826.6 million in the prior year’s third quarter, including a negative impact of approximately $40 million, or 5 percent, related to foreign currency translation. On a constant currency basis, Tommy Hilfiger revenue increased 6 percent. Within the Tommy Hilfiger North America business, revenue increased 8 percent, principally driven by retail comparable store sales growth of 9 percent. Revenue in the Tommy Hilfiger International business decreased 4 percent, due to a negative impact of 8 percent related to foreign currency translation. On a constant currency basis, revenue for the Tommy Hilfiger International business increased 4 percent, driven by European retail comparable store sales growth of 14 percent, partially offset by continued weakness in Japan, where the Company is currently in the process of strategically repositioning and investing in the brand.

On a non-GAAP basis, earnings before interest and taxes for the Tommy Hilfiger business increased 16 percent to $135.1 million from $116.2 million in the prior year’s third quarter, due to the net revenue increase discussed above and a significant improvement in gross margin driven by an increase in average unit retail selling prices and a decrease in product costs. Partially offsetting this increase was the negative impact of approximately $10 million related to foreign currency translation.

On a GAAP basis, earnings before interest and taxes for the Tommy Hilfiger business increased 42 percent to $128.8 million, as compared to $90.6 million in the prior year’s third quarter. This increase was due principally to the net impact of the overall revenue and gross margin increases noted above, combined with the absence of expenses incurred in connection with the Company’s buyout of the perpetual license for Tommy Hilfiger in India and a decrease in integration and restructuring costs.

Calvin Klein

Revenue in the Calvin Klein business increased 6 percent to $319.6 million from $301.2 million in the prior year’s third quarter, driven primarily by a 9 percent increase in comparable store sales within the Company’s Calvin Klein outlet retail business and an 11 percent increase in the North American wholesale business. These increases were partially offset by Calvin Klein royalty revenue, which was relatively flat to the prior year period. Fragrance, women’s sportswear, dresses, footwear and handbags continued to experience strong growth globally during the quarter, but were offset by a decline in royalty revenue related to the upcoming reacquisition of the European bridge apparel and accessories business and continued weakness in jeans and women’s underwear in Europe and the United States.

Earnings before interest and taxes for the Calvin Klein business increased 7 percent to $92.4 million as compared to the prior year’s third quarter amount of $86.2 million, driven principally by the revenue increases discussed above, combined with an improvement in gross margin in the Company’s Calvin Klein apparel business and a shift in advertising expenses.

Heritage Brands

Total revenue for the Heritage Brands business decreased 7 percent to $489.5 million as compared to $526.3 million in the prior year’s third quarter due to a $50 million, or 10 percent, negative impact related to the exit from the Izod women’s and Timberland wholesale sportswear businesses. Excluding the impact of exited businesses, revenue for the Heritage Brands business increased 3 percent, principally attributable to strong growth in the Company’s ongoing wholesale sportswear businesses. Comparable store sales for the Heritage Brands retail business were relatively flat to the prior year.

Earnings before interest and taxes for the Heritage Brands business was $47.4 million, an increase of 3 percent as compared to the prior year’s third quarter of $46.1 million on a non-GAAP basis and an increase of 4 percent as compared to the prior year’s third quarter of $45.6 million on a GAAP basis. The increase in earnings before interest and taxes was due principally to strength in the wholesale dress furnishings and wholesale sportswear businesses, partially offset by continued weakness in the retail business, particularly Bass. The increase in earnings before interest and taxes on a GAAP basis was also attributable to the absence of $0.5 million of costs incurred in 2011 in connection with the Company’s termination of its license to market sportswear under the Timberland brand.

Third Quarter Consolidated Earnings:

On a non-GAAP basis, earnings before interest and taxes increased 10 percent to $250.4 million from $227.3 million in the prior year’s third quarter, including the negative impact of approximately $10 million related to foreign currency translation and a $3.3 million increase in corporate expenses due principally to an increase in pension expense resulting from a decrease in discount rates. Driving the overall increase in non-GAAP earnings before interest and taxes was (i) an increase of $18.9 million in the Tommy Hilfiger business, inclusive of approximately $10 million negative impact due to foreign currency translation; (ii) an increase of $6.3 million in the Calvin Klein business; and (iii) an increase of $1.3 million in the Heritage Brands business.

On a GAAP basis, earnings before interest and taxes increased 21 percent to $237.4 million as compared to $196.8 million in the prior year’s third quarter. The increase was due principally to the net effect of the changes discussed above, combined with the net effect of (i) the absence of $20.7 million of expenses incurred in connection with the Company’s buyout of the perpetual license for Tommy Hilfiger in India; (ii) a $2.7 million decrease in integration and restructuring costs associated with the Tommy Hilfiger acquisition; and (iii) $6.4 million of costs incurred in the current year’s third quarter related to the pending acquisition of The Warnaco Group, Inc.

Net interest expense decreased $3.3 million to $28.3 million as compared to the prior year’s third quarter, due principally to lower debt levels in the current quarter.

The effective tax rate was 21.9 percent on a non-GAAP basis as compared to 29.4 percent on a non-GAAP basis in the prior year’s third quarter. The effective tax rate was 20.9 percent on a GAAP basis, as compared to 32.1 percent on a GAAP basis in the prior year’s third quarter. Continuing to positively impact the Company’s 2012 tax rates is an increase in the proportion of earnings attributable to foreign jurisdictions that are subject to favorable tax rates, as well as the continuation of the tax synergies resulting from the Tommy Hilfiger acquisition. In addition, positively impacting the third quarter 2012 GAAP effective tax rate was a benefit resulting from previously unrecognized tax credits.

The non-GAAP effective tax rate in the third quarter was lower than the Company’s previous guidance due to the timing of certain discrete tax items, which benefited the Company’s third quarter non-GAAP earnings per share by approximately $0.03 and were originally planned to occur in the fourth quarter of the current year.

Nine Months Consolidated Results:

Earnings per share on a non-GAAP basis was $4.90 as compared to $4.20 for the prior year.

GAAP earnings per share was $4.70 as compared to $3.25 for the prior year.

Revenue increased 1 percent to $4.407 billion, including a negative impact of 4 percent attributable to foreign currency translation and the exited sportswear businesses. The overall increase in revenue was due to the net impact of:

A 4 percent, or $90.9 million, increase in the Tommy Hilfiger business, including a negative impact of approximately $100 million, or 4 percent, related to foreign currency translation. Within the Tommy Hilfiger North America business, revenue increased 10 percent, principally driven by retail comparable store sales growth of 11 percent. Revenue in the Tommy Hilfiger International business was relatively flat to the prior year period, including a negative impact of 7 percent related to foreign currency translation. On a constant currency basis, revenue for the Tommy Hilfiger International business increased 7 percent, driven by European retail comparable store sales growth of 12 percent, partially offset by continued weakness in Japan, where the Company is currently in the process of strategically repositioning and investing in the brand.

A 6 percent, or $46.2 million, increase in the Calvin Klein business, driven primarily by a 7 percent increase in comparable store sales within the Company’s Calvin Klein outlet retail business and an 8 percent increase in the North American wholesale business. Royalty revenue increased 1 percent as compared to the prior year, including a negative impact of 2 percent related to foreign currency translation.
A 7 percent, or $88.1 million, decrease in the Heritage Brands business, including the negative impact of 5 percent related to the exited sportswear businesses. The Company’s dress furnishings business experienced a 9 percent decrease due to a reduction in sales to a mid-tier department store retailer. Comparable store sales in the Heritage Brands retail business were relatively flat.

On a non-GAAP basis, earnings before interest and taxes increased $14.4 million to $560.2 million. This change resulted from:
A $52.5 million increase in the Tommy Hilfiger business due principally to the revenue increase mentioned above combined with an increase in gross margin due primarily to higher average unit retail selling prices globally. Partially offsetting this increase was the negative impact of approximately $15 million related to foreign currency translation.

A $3.2 million increase in the Calvin Klein business attributed to the revenue increase discussed above, partially offset by a planned decrease in gross margin resulting principally from the impact of higher product costs experienced in the first half of the year.

A $28.1 million decrease in the Heritage Brands business due principally to the revenue decrease mentioned above, combined with a planned decrease in gross margin rates resulting principally from the impact of higher product costs experienced in the first half of the year.
A $13.2 million decrease attributable to an increase in corporate expenses due principally to additional pension expense resulting from lower discount rates.

GAAP earnings before interest and taxes increased $88.6 million to $539.3 million. Earnings increased $98.5 million and $3.2 million in the Tommy Hilfiger and Calvin Klein businesses, respectively, while earnings in the Heritage Brands business decreased $21.0 million and corporate expenses decreased $7.8 million. These earnings changes were due to the above-mentioned items combined with lower integration, restructuring and debt modification costs, partially offset by the $6.4 million of costs incurred in the current year’s third quarter related to the acquisition of Warnaco.

On a non-GAAP basis, the effective tax rate was 23.9 percent as compared to 31.9 percent in the prior year period. The GAAP effective tax rate was 23.6 percent as compared to 33.3 percent for the prior year period. The Company’s 2012 tax rates were positively impacted by an increase in the proportion of earnings attributable to foreign jurisdictions that are subject to favorable tax rates, as well as the continuation of the tax synergies resulting from the Tommy Hilfiger acquisition. In addition, positively impacting the 2012 GAAP effective tax rate was a benefit resulting from previously unrecognized tax credits.

Balance Sheet:

The Company ended the quarter with a net debt position of $1.597 billion, comprised of $1.874 billion of debt, net of $276.6 million of cash. During the third quarter, the Company made payments totaling $77.7 million on its outstanding term loans, for total term loan payments of approximately $170 million during the first nine months of 2012 and approximately $870 million since the date of the Tommy Hilfiger acquisition, the majority of which were voluntary. The Company currently plans to make term loan payments of approximately $130 million during the remainder of 2012.

Ending inventories increased 2 percent to $855.4 million over the prior year’s third quarter. The Company continues to remain very comfortable with the quality of its inventory.

2012 Guidance:

Please see the section entitled “Full Year and Fourth Quarter 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.

Warnaco Acquisition

The Company announced in the fourth quarter of 2012 that it had entered into a definitive agreement to acquire The Warnaco Group, Inc., with an expected closing date early in 2013. The following provides guidance for the Company’s full year and fourth quarter 2012, which does not give effect to the Warnaco acquisition and assumes the Company continues on a standalone basis.

Full Year Guidance

Revenue in 2012 is projected to increase approximately 2 percent as compared to $5.891 billion in 2011. On a constant currency basis and excluding the impact of the exited businesses, 2012 revenue is projected to increase approximately 6 percent. Foreign currency translation is expected to have a negative revenue impact of approximately $120 million, or 2 percent, while the exit from the Izod women’s and Timberland wholesale sportswear businesses is expected to reduce revenue by approximately $100 million, or 2 percent, for a total decrease in revenue of approximately 4 percent related to these items.

Revenue for the Tommy Hilfiger business is expected to increase approximately 4 percent as compared to $3.051 billion in 2011, including a negative foreign currency translation impact of approximately 4 percent. Revenue for the Calvin Klein business is expected to grow approximately 7 percent as compared to $1.065 billion in 2011. Calvin Klein royalty revenue is expected to be negatively impacted by foreign currency translation, the upcoming reacquisition of the ck Calvin Klein European apparel and accessories licenses and the ongoing challenging business for the jeans and underwear product categories in Europe and the United States. Revenue for the Heritage Brands business is expected to decrease approximately 5 percent as compared to $1.775 billion in 2011, attributable to a 6 percent negative impact related to the previously mentioned exited sportswear businesses.

On a non-GAAP basis, earnings per share in 2012 is currently projected to be in the range of $6.37 to $6.38, an increase of 18 percent to 19 percent over the 2011 amount of $5.38. The Company estimates that the 2012 effective tax rate will be approximately 23.5 percent.

Fourth Quarter Guidance

Fourth quarter revenue in 2012 is currently projected to increase 4 percent to 5 percent as compared to the prior year’s fourth quarter amount of $1.533 billion. On a constant currency basis and excluding the impact of the exited businesses, fourth quarter revenue in 2012 is projected to increase 7 percent to 8 percent. Foreign currency translation is expected to have a negative revenue impact of approximately $20 million, or 1 percent, while the exit from the Izod women’s and Timberland wholesale sportswear businesses is expected to reduce revenue by approximately $30 million, or 2 percent, for a total decrease in revenue of approximately 3 percent related to these items.

Revenue for the Tommy Hilfiger business is expected to increase approximately 5 percent as compared to the fourth quarter of 2011, which includes a negative impact of approximately 2 percent related to foreign currency translation. Revenue for the Calvin Klein business is expected to grow approximately 10 percent as compared to the fourth quarter of 2011. Revenue for the Heritage Brands business is expected to be relatively flat as compared to the fourth quarter of 2011, inclusive of a 7 percent negative impact related to the exited sportswear businesses.

On a non-GAAP basis, earnings per share for the fourth quarter is currently projected to be in the range of $1.48 to $1.49, including the negative impact Hurricane Sandy had on business in the first half of November. This represents an increase of 25 percent to 26 percent over $1.18 in the prior year’s fourth quarter. The Company does not expect that foreign currency translation will have a material impact on earnings in the fourth quarter as compared to the prior year. The Company currently estimates that the fourth quarter 2012 effective tax rate will be approximately 22.0 percent, which reflects the timing of certain discrete tax benefits moving out of the fourth quarter and into the third quarter, as previously mentioned.

CEO Comments:

Commenting on these results, Emanuel Chirico, Chairman and Chief Executive Officer, noted, “We are very pleased with our third quarter and year-to-date performance, which was primarily driven by the Tommy Hilfiger and Calvin Klein businesses continuing to exhibit strong global growth, allowing us to exceed our previous earnings guidance. The Heritage Brands business saw some modest improvement in the quarter, which we believe demonstrates that this business is on the path to return to its historic profitability levels. Taking into account the third quarter outperformance across our businesses, coupled with the impact of Hurricane Sandy, we have once again raised our full year earnings guidance, despite the uncertain global economic and market conditions.”

Mr. Chirico continued, “The worldwide consumer appeal for Calvin Klein and Tommy Hilfiger has allowed us to successfully expand our market share penetration and global reach of our designer lifestyle brands, despite the macroeconomic headwinds. We believe we can continue to grow our businesses profitably in the future by identifying and executing additional strategic opportunities for all of our brands, including the recently announced acquisition of Warnaco and formation of a joint venture in Brazil for the Tommy Hilfiger brand.”

Mr. Chirico concluded, “Both the PVH and Warnaco management teams are working diligently to consummate the Warnaco acquisition. We currently expect this transaction to close in early 2013. As we highlighted when we announced the acquisition, this is a unique opportunity to reunite the “House of Calvin Klein” to ensure a single global brand vision. This acquisition also allows us to align our strong operating platforms in North America and Europe with Warnaco’s operations in Asia and Latin America, which will give the combined company strong established operations in every major consumer market worldwide. This will pave the way for enhanced revenue and earnings growth, while also improving operating margins in the future. As we head into the important holiday selling season, we remain firm in our belief that the strength of our brands, the sound execution of our business strategies, continued investment in our world-class brands and our strong credit profile will continue to drive long-term growth and will position us to deliver strong earnings results in the fourth quarter of 2012 and beyond.”

Non-GAAP Exclusions:

The discussions in this release that refer to non-GAAP amounts exclude the following:

Pre-tax costs of $69.5 million incurred in 2011 in connection with the integration of Tommy Hilfiger and the related restructuring, of which $30.5 million was incurred in the first quarter, $11.2 million was incurred in the second quarter, $9.3 million was incurred in the third quarter, and $18.6 million was incurred in the fourth quarter.
Pre-tax costs of $16.2 million incurred in the first quarter of 2011 in connection with the amendment and restatement of the Company’s credit facility.

Pre-tax costs of $8.1 million incurred in 2011 in connection with the Company’s negotiated early termination of its license to market sportswear under the Timberland brand and the Company’s 2012 exit from the Izod women’s wholesale sportswear business, of which $6.7 million was incurred in the second quarter, $0.5 million was incurred in the third quarter and $1.0 million was incurred in the fourth quarter.
A pre-tax expense of $20.7 million incurred in the third quarter of 2011 in connection with the Company’s reacquisition of the rights in India to the Tommy Hilfiger trademarks that had been subject to a perpetual license, as under accounting rules, the Company was required to record an expense due to settling the preexisting license agreement, which was unfavorable to the Company.

A tax benefit of $5.4 million recorded in the fourth quarter of 2011 resulting from revaluing certain deferred tax liabilities in connection with a decrease in the statutory tax rate in Japan.

Pre-tax costs of approximately $15 million expected to be incurred in 2012 principally in connection with the integration of Tommy Hilfiger and the related restructuring, of which $3.3 million was incurred in the first quarter, $4.5 million was incurred in the second quarter, $6.6 million was incurred in the third quarter, and approximately $1 million is expected to be incurred in the fourth quarter.

Pre-tax costs of approximately $36 million expected to be incurred in 2012 in connection with the acquisition of Warnaco, of which $6.4 million was incurred in the third quarter and approximately $30 million is expected to be incurred in the fourth quarter.

A tax benefit of $4.5 million recorded in the third quarter of 2012 resulting from previously unrecognized tax credits.

Estimated tax effects associated with the above pre-tax costs, which are based on the Company’s assessment of deductibility. In making this assessment, the Company evaluated each item that it has recorded as an acquisition, integration, restructuring or debt modification cost to determine if such cost is tax deductible, and if so, in what jurisdiction the deduction would occur. All items above were identified as either primarily tax deductible in the United States, in which case the Company assumed a combined federal and state tax rate of 38.0 percent, or as non-deductible, in which case the Company assumed no tax benefit.