PVH Corp., which recently acquired Speedo-parent Warnaco Group, reported earnings per share of $1.60 on a non-GAAP basis in the fourth quarter, representing a 34 percent increase over the prior year.
The results include a favorable impact related to the change in the companys method of accounting for retirement plans. Absent the change in accounting method, non-GAAP earnings per share would have been $1.54 for the fourth quarter, which exceeds the top end of the Companys previous guidance by $0.05, and compares to $1.18 for the fourth quarter of 2011.
GAAP earnings per share was $1.09, which includes a negative impact related to the change in the Companys method of accounting for retirement plans and represents a 127 percent increase over the prior year periods GAAP earnings per share of $0.48 (as adjusted for the change). The negative impact of the change was $0.17 in 2012 and
$0.63 in 2011.
Revenue of $1.636 billion increased 7 percent as compared to the prior year, including a 3 percent negative impact attributable to the exit from the Izod womens and Timberland wholesale sportswear businesses and foreign currency translation and a 3 percent benefit from an additional week of revenue, as the 2012 fiscal year included 53 weeks of operations.
Operating margin on a non-GAAP basis increased 250 basis points due to a 320 basis point gross margin increase, driven by continued faster growth in the higher-margin Calvin Klein and Tommy Hilfiger businesses, combined with decreased product costs across all of the Companys businesses. GAAP operating margin increased 440 basis points due to the gross margin increase discussed above, combined with a decrease in pension expense.
Change in Method of Accounting for Retirement Plans:
During the fourth quarter of 2012, the Company changed its method of accounting for its retirement plans to (i) calculate expected return on plan assets using the fair value of plan assets; and (ii) immediately recognize actuarial gains and losses in its operating results in the year in which they occur. The Company believes this change improves the transparency of its operational performance by recognizing the effects of current economic and interest rate trends on plan investments and assumptions in current period earnings, thus allowing the Company to highlight this impact to investors. In addition, this change aligns the Companys method of accounting for its retirement plans with the method used by The Warnaco Group, Inc. (Warnaco), which the Company acquired on February 13, 2013. This change avoids the post-acquisition Company having two methods of accounting for its retirement plans. The financial data for all prior periods presented has been retrospectively adjusted to reflect the effect of this accounting change. Refer to Appendix A later in this release for a summary of the impact of this change and the adjusted prior period quarterly financial results.
Fourth Quarter Business Review:
The Companys calculations of the comparable store sales percentages throughout this press release are based on comparable weeks and, therefore, exclude the extra week in 2012. The extra week in 2012 was worth approximately $40 million of revenue and approximately $0.05 of earnings per share.
Tommy Hilfiger
Revenue in the Tommy Hilfiger business increased 9 percent to $891.1 million from $815.8 million in the prior years fourth quarter, including a negative impact of approximately $10 million, or 1 percent, related to foreign currency translation. Revenue in the Tommy Hilfiger North America business increased 11 percent, with strong results in its retail business primarily attributable to (i) 5 percent comparable store sales growth; (ii) additional square footage expansion; and (iii) an increase due to the 53rd week of revenue (which increased overall Tommy Hilfiger North America revenue by 4 percent). Revenue in the Tommy Hilfiger International business increased 8 percent, driven by (i) a European retail comparable store sales increase of 9 percent; (ii) strength in the European wholesale business; and (iii) a 3 percent increase due to the extra week of revenue, partially offset by continued weakness in Japan, where the Company is currently in the process of strategically repositioning and investing in the brand, and a negative impact of 2 percent related to foreign currency translation.
On a non-GAAP basis, earnings before interest and taxes for the Tommy Hilfiger business increased 45 percent to $101.8 million from $70.2 million in the prior years fourth quarter, driven by the net revenue increase discussed above and a 290 basis point improvement in gross margin, driven by an increase in average unit retail selling prices and a decrease in product costs.
On a GAAP basis, earnings before interest and taxes for the Tommy Hilfiger business increased 73 percent to $96.1 million, as compared to $55.6 million in the prior years fourth quarter. This increase was due principally to the net impact of the overall revenue and gross margin increases noted above, combined with a decrease in integration and restructuring costs.
Calvin Klein
Revenue in the Calvin Klein business increased 14 percent to $317.4 million from $278.5 million in the prior years fourth quarter, driven primarily by (i) strong growth in the North American wholesale business; (ii) new store openings and store expansions within the Companys Calvin Klein outlet retail business; and (iii) a benefit of approximately 2 percent due to the extra week of revenue. These increases were partially offset by a 2 percent comparable store sales decline in the Companys Calvin Klein North American outlet retail business. Calvin Klein royalty revenue increased 5 percent from continued global growth in womens sportswear, dresses and handbags, which was partially offset by a decline in royalty revenue due to a reduction in the European bridge apparel and accessories business (relating to the Companys announcement in the first quarter of 2012 that it would bring the business back in-house) and continued weakness in jeans in the United States and womens underwear in Europe and the United States.
Earnings before interest and taxes for the Calvin Klein business increased 5 percent to $73.8 million as compared to the prior years fourth quarter amount of $70.1 million, driven principally by the revenue increases discussed above and increased gross margin in the North American apparel business due to product cost decreases. These increases were partially offset by increased advertising expense due, in large part, to the Calvin Klein Concept underwear commercial that was aired during the Super Bowl broadcast.
Heritage Brands
Total revenue for the Heritage Brands business decreased 2 percent to $427.7 million as compared to $438.5 million in the prior years fourth quarter due to a $30 million, or 7 percent, negative impact related to the exit from the Izod womens and Timberland wholesale sportswear businesses. Excluding the impact of exited businesses, revenue for the Heritage Brands business increased 4 percent, due principally to strong growth in the Companys ongoing wholesale sportswear businesses and a benefit of approximately 2 percent due to the extra week of revenue. 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 $26.6 million, an increase of 152 percent as compared to the prior years fourth quarter of $10.5 million on a non-GAAP basis and an increase of 178 percent as compared to the prior years fourth quarter of $9.6 million on a GAAP basis. The significant increase in earnings before interest and taxes was attributable to increases across the Companys Heritage Brands Dress Furnishings, Sportswear and Retail businesses, driven principally by an overall operating margin increase of 380 basis points that was fueled by strong gross margin improvement. The strong gross margin increase was driven by the Companys exit of the lower-margin Izod womens and Timberland wholesale sportswear businesses, coupled with an increase in average unit retail selling prices and lower product costs. The increase in earnings before interest and taxes on a GAAP basis was also attributable to the absence of approximately $1.0 million of costs incurred in the fourth quarter of 2011 in connection with the exit of businesses mentioned above.
Fourth Quarter Consolidated Earnings:
On a non-GAAP basis, earnings before interest and taxes increased 38 percent to $180.3 million from $130.3 million in the prior years fourth quarter. Driving the overall increase in non-GAAP earnings before interest and taxes was (i) an increase of $31.5 million in the Tommy Hilfiger business; (ii) an increase of $16.0 million in the Heritage Brands business; and (iii) an increase of $3.7 million in the Calvin Klein business.
On a GAAP basis, earnings before interest and taxes increased 217 percent to $109.9 million as compared to $34.7 million in the prior years fourth quarter. The increase was due principally to the net effect of the changes discussed above, combined with the net effect of (i) a $48.0 million decrease in recognized actuarial losses on retirement plans; (ii) a $13.4 million decrease in integration and restructuring costs associated with the Tommy Hilfiger acquisition and exit costs associated with the Izod womens and Timberland wholesale sportswear businesses; and (iii) $36.2 million of costs incurred in the current years fourth quarter related to the acquisition of Warnaco.
Full Year 2012 Consolidated Results:
Earnings per share on a non-GAAP basis was $6.58, which includes a $0.15 favorable impact related to the retirement plan accounting change and represents an increase of 21 percent as compared to the prior years earnings per share of $5.44 (as adjusted for the change). Absent the accounting change, non-GAAP earnings per share would have been $6.43 for 2012, which exceeded the top end of the Companys previous guidance by $0.05, and $5.38 for 2011.
GAAP earnings per share was $5.87, which includes a negative impact related to the accounting change and represents an increase of 55 percent as compared to the prior years earnings per share of $3.78 (as adjusted for the change). The negative impact of the change was $0.09 per share in 2012 and $0.58 per share in 2011.
Revenue increased 3 percent to $6.043 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 5 percent, or $166.2 million, increase in the Tommy Hilfiger business, including a negative impact of approximately $110 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 10 percent. Revenue in the Tommy Hilfiger International business increased 2 percent, including a negative impact of 6 percent related to foreign currency translation. On a constant currency basis, revenue for the Tommy Hilfiger International business increased 8 percent, driven by European retail comparable store sales growth of 11 percent and strength in the European wholesale business, partially offset by continued weakness in Japan, where the Company is currently in the process of strategically repositioning and investing in the brand.
An 8 percent, or $85.1 million, increase in the Calvin Klein business, driven primarily by (i) a 12 percent increase in the Companys Calvin Klein outlet retail business, which was attributable to new store openings, store expansions and a 5 percent increase in comparable store sales; and (ii) a 16 percent increase in the North American wholesale business. Royalty revenue increased 2 percent as compared to the prior year period, including a negative impact of 1 percent related to foreign currency translation. Continued global growth in womens sportswear, dresses, footwear and handbags was partially offset by a decline in royalty revenue related to a reduction in the European bridge apparel and accessories business (relating to the Companys announcement in the first quarter of 2012 that it would bring the business back in-house) and continued weakness in jeans and womens underwear in Europe and the United States.
A 6 percent, or $98.9 million, decrease in the Heritage Brands business, including the negative impact of 6 percent related to the exited sportswear businesses. The Companys ongoing Heritage Brands wholesale sportswear businesses experienced strong growth, while the dress furnishings business experienced a 7 percent decline due principally to a reduction in sales to J.C. Penney. Comparable store sales in the Heritage Brands retail business were relatively flat.
On a non-GAAP basis, earnings before interest and taxes increased $69.7 million to $751.6 million. This change resulted from:
An $84.1 million increase in the Tommy Hilfiger business due principally to the revenue increase mentioned above combined with gross margin improvement 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 $6.9 million increase in the Calvin Klein business attributed to the revenue increase discussed above, partially offset by a planned gross margin decline resulting principally from the impact of higher product costs experienced in the first half of the year.
A $12.0 million decrease in the Heritage Brands business due principally to the revenue decline mentioned above, combined with the negative impact of higher product costs principally in the first half of the year.
GAAP earnings before interest and taxes increased $169.2 million to $660.4 million. This change resulted from:
An increase of $139.1 million in the Tommy Hilfiger business due to the items described above, combined with the absence of $20.7 million of expenses incurred in connection with the Companys buyout of the perpetual license for Tommy Hilfiger in India and a $34.3 million decrease in integration and restructuring costs.
An increase of $6.9 million in the Calvin Klein business as described above.
A $27.1 million decrease in corporate expenses due principally to the net impact of (i) a decrease of $48.0 million in recognized actuarial losses on retirement plans and (ii) a net $30.9 million decrease in integration, restructuring and debt modification costs; partially offset by (iii) $42.6 million of costs incurred in the current year related to the acquisition of Warnaco.
A $3.9 million decrease in the Heritage Brands business due to the items described above, partially offset by the absence of $8.1 million of business exit costs.
On a non-GAAP basis, the effective tax rate was 23.8 percent as compared to 28.3 percent in the prior year period. The GAAP effective tax rate was 20.1 percent as compared to 24.1 percent for the prior year period. The Companys 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 achieved from the Tommy Hilfiger acquisition. In addition, positively impacting the 2012 GAAP effective tax rate was a benefit resulting from the recognition of previously unrecognized net operating loss assets and tax credits. Positively impacting the 2011 GAAP effective tax rate was the revaluation of certain deferred tax liabilities in connection with a fourth quarter decrease in the statutory tax rate in Japan.
CEO Comments:
Commenting on these results, Emanuel Chirico, Chairman and Chief Executive Officer, noted, 2012 marked another year of strong performance and sustained growth for PVH, exceeding our expectations. The strength of our brand portfolio, led by Calvin Klein and Tommy Hilfiger, enabled us to navigate successfully through the global macroeconomic pressures and associated difficult consumer spending environment, which also included higher product costs and foreign currency volatility during the first half of the year.
Mr. Chirico continued, We completed our acquisition of Warnaco on February 13, 2013, and believe that the long term opportunities from this acquisition are significant. Having now owned the business for about 45 days, we believe that additional investments above our initial expectations are required to achieve our goal of rebuilding the global Calvin Klein jeanswear and underwear businesses. Therefore, we see 2013 as a year of investment and transition for the Warnaco business. These investments include: (i) enhancing the existing infrastructure (systems and supply chain), (ii) upgrading Calvin Klein jeanswear product design and quality with an emphasis on geographic differentiation, (iii) investing in in-store marketing and the in-store customer experience, (iv) adding appropriate talent to fill key design, marketing and merchandising positions, (v) rationalizing global excess inventory levels, and (vi) reducing and restructuring the off-price and club sales distribution in Europe and North America. Given these additional investments, we now project that the overall impact of the Warnaco transaction will be dilutive to 2013 earnings per share on a non-GAAP basis by approximately $0.25.
Mr. Chirico concluded, At the core of our success and our opportunity is the power of our global designer lifestyle brands, Calvin Klein and Tommy Hilfiger. 2013 will be a transitional year for PVH, during which we will build the foundation for long-term sustainable growth for our businesses across the world. I believe we will emerge stronger and the investments we will make this year will help drive the Calvin Klein business going forward. Further, we believe they will pave the way for enhanced profitability and stockholder value, translating into expected earnings per share growth in excess of 15 percent per year for 2014 and beyond.
2013 Preliminary Guidance:
Please see the section entitled 2013 Full Year and First 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
On February 13, 2013, the Company completed its acquisition of Warnaco. The following provides guidance for the Companys full year and first quarter 2013, inclusive of the operations of the acquired Warnaco business starting from the acquisition date.
Preliminary Full Year Guidance
Revenue in 2013 is currently projected to be approximately $8.2 billion. This amount reflects the elimination of approximately $200 million of revenue generated, in the aggregate, by the Company and Warnaco in 2012 through transactions between each other and approximately $100 million of additional lost revenue from the absence of the 53rd week in 2013 and the revenue generated by Warnaco for the first ten days of the Companys 2013 fiscal year, since the acquisition did not close until February 13, 2013. The Companys expectation for revenue from the acquired Warnaco businesses is approximately $2.15 billion, which is relatively flat as compared to Warnacos 2012 revenue (excluding approximately $230 million of revenue related to the Chaps mens sportswear business, which Ralph Lauren Corporation is reacquiring).
Non-GAAP earnings per share is currently projected to be approximately $7.00, as compared to the $6.58 in 2012, reflecting approximately $0.25 per share of dilution as a result of the Warnaco acquisition.
The Company estimates the earnings before interest and taxes on a non-GAAP basis from the acquired Warnaco businesses will be approximately 20 percent lower than the Companys original plan, driven by the incremental investments required in the business as discussed above. The Company projects synergies to be realized in 2013 to be approximately $25 million versus the initial expectation of approximately $50 million as a result of additional time needed to realize some of the projected savings. Given the additional time required to effect the upgrade of Warnacos systems and supply chain, overall synergies of approximately $100 million are now expected to be realized over the next four years. The Company now believes the overall impact of the transaction will be dilutive to 2013 earnings per share on a non-GAAP basis by approximately $0.25.
Additionally, the Calvin Klein licensing business is contending with approximately $20 million of reduced revenue and operating income in 2013 as a direct result of the expiration or termination of certain long-term contractual agreements that guaranteed revenue relating to the European bridge business, the North American womens sportswear business and the Calvin Klein Collection business.
The Company currently projects that 2013 interest expense will be approximately $200 million and that the 2013 full year tax rate will be approximately 25.5 percent to 26.5 percent.
The Companys 2013 earnings per share estimate excludes approximately $125 million of pre-tax costs associated with the acquisition and integration of Warnaco. (Please see section entitled Non-GAAP Exclusions for details on these pre-tax costs.)
Preliminary First Quarter Guidance
Revenue in the first quarter of 2013 is expected to be approximately $1.9 billion. On a non-GAAP basis, earnings per share for the first quarter is currently projected to be relatively flat as compared to $1.33 in the prior years first quarter. The Companys first quarter 2013 earnings per share estimate excludes approximately $50 million of pre-tax costs associated with the acquisition and integration of Warnaco. (Please see section entitled Non-GAAP Exclusions for details on these pre-tax costs.)
