PVH Corp. reported adjusted earnings in the fourth quarter rose 26.6 percent to $123.7 million, or $1.58 a share, from $97.7 million, or $1.23, a year ago.

Earnings per share on a GAAP basis were $108.5 million, or $1.39 for the fourth quarter of 2017, compared to $100.7 million, or $1.26, in the prior year period. Earnings per share on both a GAAP and non-GAAP basis for the fourth quarter of 2017 included a $0.04 positive impact related to foreign currency exchange rates.

Fourth quarter revenue increased 19 percent to $2.5 billion (increased 13 percent on a constant currency basis) compared to the prior year period.

Earnings before interest and taxes on a GAAP basis for the quarter decreased to $58 million from $154 million in the prior year period. Included in earnings before interest and taxes for the quarter were $119 million of net costs consisting of (i) $83 million incurred in connection with the Hilfiger amendment, (ii) $28 million incurred in connection with the company’s redemption and issuance of senior notes, including $24 million related to the early redemption of the company’s $700 million 4 1/2 percent senior notes and $4 million related to the company’s issuance of €600 million 3 1/8 percent senior notes, (iii) $7 million incurred related to the TH China acquisition, (iv) a $3 million actuarial loss recognized on retirement plans and (v) a $2 million net gain recorded in connection with the consolidation within the company’s warehouse and distribution network in North America, which included the impact of the sale of a warehouse and distribution center.

Included in earnings before interest and taxes for the prior year period was a $6 million net gain consisting of (i) a $39 million actuarial gain recognized on retirement plans, (ii) $15 million of costs incurred related to the TH China acquisition, (iii) $11 million of costs incurred in connection with the TH men’s tailored license termination and (iv) a $7 million non-cash loss recorded in connection with the Mexico de-consolidation. Earnings before interest and taxes on a non-GAAP basis discussed below exclude these amounts.

Earnings before interest and taxes on a non-GAAP basis for the quarter were $177 million compared to $147 million in the prior year period. The improvement in earnings was driven by growth in the Tommy Hilfiger and Calvin Klein businesses. Partially offsetting these increases was an earnings decrease in the Heritage Brands business, primarily attributable to an increase in marketing expenditures, an approximately $15 million increase in marketing expenditures in the Calvin Klein business and a $14 million increase in corporate expenses due, in part, to investments in digital and sourcing initiatives, including start-up costs associated with the company’s joint venture manufacturing facility.

Net interest expense increased to $33 million from $29 million in the prior year period, primarily attributable to increases in short-term borrowings and interest rates during the fourth quarter of 2017 and the net impact of the €600 million 3 1/8 percent senior notes issued in December 2017 and the $700 million 4 1/2 percent senior notes redeemed in January 2018. The effective tax rate on a GAAP basis was (329.9) percent, as compared to 19.6 percent in the prior-year period, as the fourth quarter of 2017 included a one-time net tax benefit recorded in connection with the Tax Legislation. The effective tax rate on a non-GAAP basis was 14.4 percent as compared to 17.8 percent in the prior year period, which included a favorable impact from the mix of earnings between tax jurisdictions in the fourth quarter of 2017 as compared to the prior year period.

CEO Comments

Commenting on these results, Emanuel Chirico, chairman and chief executive officer, noted, “We are very pleased with our fourth quarter and full year 2017 results, which exceeded our expectations. These results are ahead of our long-term targets, driven largely by strong momentum in our Tommy Hilfiger and Calvin Klein businesses.”

Chirico continued, “Our 2017 results demonstrate our strong execution and commitment to our long-term vision. We continued to make investments that centered around areas most impacted by the changing dynamics in the industry, the growing prominence of digital, the importance of having a nimble and responsive supply chain and our ever-present commitment to driving consumer engagement. We encouraged our associates to be forward-thinking, with a focus on adapting to the evolving consumer environment, enhancing our brands and their competitive positioning across product lines and geographies and better aligning our business to make it easier to initiate and effect change.”

Chirico concluded, “We believe that the incredible brand power behind Calvin Klein and Tommy Hilfiger positions us well in the marketplace against our competition and will drive continued momentum, as reflected in our 2018 outlook. While we, like many other global consumer companies, will continue to face geopolitical headwinds, the power of our brands, our businesses and, most importantly, our people should drive our company forward.”

U.S. Tax Legislation

The U.S. Tax Cuts and Jobs Act of 2017 (the “Tax Legislation”) was enacted on December 22, 2017. The Tax Legislation is comprehensive and significantly revises the U.S. tax code. The revisions expected to significantly impact the company are (i) the reduction of the corporate income tax rate from 35 percent to 21 percent, including the resulting remeasurement of the company’s deferred tax assets and liabilities and the recognition of a valuation allowance on the company’s foreign tax credits, (ii) the imposition of a one-time transition tax on earnings of foreign subsidiaries deemed to be repatriated and (iii) the implementation of a modified territorial tax system.

The Tax Legislation resulted in a one-time net tax benefit of $53 million recorded in the fourth quarter of 2017, consisting of a $265 million benefit primarily from the remeasurement of the company’s net deferred tax liabilities, partially offset by a $38 million valuation allowance on the company’s foreign tax credits and a $174 million transition tax on earnings of foreign subsidiaries deemed to be repatriated. The company’s effective tax rate on a GAAP basis for 2017 reflects provisional estimates for the Tax Legislation. These estimates are subject to adjustment in 2018 under the measurement period allowed by the Securities and Exchange Commission, as regulatory guidance needs to be issued in regard to the Tax Legislation and as the company completes its final analysis of the impacts of the Tax Legislation. The company’s effective tax rate on a non-GAAP basis excludes this one-time net tax benefit.

The company estimates that the 2018 effective tax rate will be in a range of 14.5 percent to 15.5 percent. This projection includes the company’s provisional estimates of the impact of the Tax Legislation in 2018 and is subject to adjustment, including as a result of changes in the provisional amounts recorded in the fourth quarter of 2017 during the measurement period.

Fourth Quarter Business Review

The company’s calculations of the comparable store sales percentages throughout this release are based on comparable weeks and, therefore, exclude the 53rd week in 2017.

Calvin Klein

Revenue in the Calvin Klein business for the quarter increased 23 percent to $977 million (increased 18 percent on a constant currency basis) compared to the prior year period. Calvin Klein International revenue increased 33 percent to $512 million (increased 23 percent on a constant currency basis) compared to the prior year period, driven by outstanding performance in Europe and Asia, including a 4 percent increase in international comparable store sales. The benefit of a 53rd week in 2017 was largely offset by a revenue reduction due to the timing of the Chinese New Year, as the fourth quarter of 2016 included the peak Chinese New Year selling season, while the fourth quarter of 2017 did not. Calvin Klein North America revenue increased 13 percent (also on a constant currency basis) to $464 million compared to the prior year period as a result of strong wholesale performance across all categories and a 4 percent increase in North America comparable store sales. The benefit of a 53rd week in 2017 was offset by a revenue reduction resulting from the November 2016 deconsolidation of the company’s Calvin Klein business in Mexico (the “Mexico deconsolidation”).

Earnings before interest and taxes on a GAAP basis for the quarter increased to $79 million from $69 million in the prior year period. Included in earnings before interest and taxes for the prior year period was a $7 million non-cash loss recorded in connection with the Mexico de-consolidation. Earnings before interest and taxes on a non-GAAP basis discussed below excludes this loss.

Earnings before interest and taxes on a GAAP basis for the quarter increased to $79 million (there were no non-GAAP exclusions in the current year period) from $75 million on a non-GAAP basis in the prior year period. The earnings increase was principally attributable to the strong revenue increase noted above, partially offset by an approximately $15 million increase in marketing expenditures over the prior year period.

Tommy Hilfiger

Revenue in the Tommy Hilfiger business for the quarter increased 22 percent to $1.1 billion (increased 15 percent on a constant currency basis) compared to the prior year period. Tommy Hilfiger International revenue increased 37 percent to $702 million (increased 24 percent on a constant currency basis) compared to the prior year period, driven by exceptional performance across all regions and channels, as well as the benefit of a 53rd week in 2017. Tommy Hilfiger International comparable store sales increased 6 percent. Tommy Hilfiger North America revenue increased 5 percent to $439 million (increased 4 percent on a constant currency basis) compared to the prior year period. The increase in revenue was principally attributable to a 10 percent increase in comparable store sales offset, in part, by a reduction in wholesale off-price distribution. The benefit of a 53rd week in 2017 offset the revenue reduction 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”).

Earnings before interest and taxes on a GAAP basis for the quarter decreased to $47 million from $66 million in the prior year period. Included in earnings before interest and taxes for the quarter were costs of (i) $83 million incurred in connection with an amendment to Tommy Hilfiger’s employment agreement pursuant, to which the company made a cash buyout of a portion of future payments to Hilfiger (the “Hilfiger amendment”) and (ii) $7 million incurred related to 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”), primarily consisting of non-cash amortization of short-lived assets. Included in earnings before interest and taxes for the prior year period were costs of (i) $15 million incurred related to the TH China acquisition, primarily consisting of non-cash valuation adjustments and amortization of short-lived assets and (ii) $11 million incurred in connection with the early termination of the previous license agreement for the Tommy Hilfiger men’s tailored clothing business in North America (the “TH men’s tailored license termination”). 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 $137 million from $92 million in the prior year period. The earnings increase was principally due to the strong revenue increase noted above, as well as gross margin improvements, particularly in North America.

Heritage Brands

Revenue in the Heritage Brands business for the quarter was flat compared to the prior year period. Comparable store sales increased 1 percent.

Earnings before interest and taxes for the quarter decreased to $8 million from $13 million in the prior year period, primarily driven by an increase in marketing expenditures as compared to the prior year period.

Heritage Brands includes dress shirts and neckwear under various owned and licensed brand names, including several private label brands; men’s sportswear principally under the brand names Van Heusen, Izod and Arrow; swimwear, fitness apparel, swim accessories and related products under the brand name Speedo and women’s intimate apparel under the brand names Warner’s and Olga. Licensed brands include Geoffrey Beene, Kenneth Cole, Sean John, Michael Kors and Chaps.

Full Year 2017 Consolidated Results

Earnings per share on a GAAP basis were $6.84 for 2017 compared to $6.79 in the prior year. These results include the items described under the heading “Non-GAAP Exclusions.” Earnings per share on a non-GAAP basis for these periods, as discussed below, exclude these items.

Earnings per share on a non-GAAP basis were $7.94 for 2017 compared to $6.80 in the prior year. Earnings per share on both a GAAP and non-GAAP basis for 2017 included a $0.15 negative impact related to foreign currency exchange rates.

Revenue for 2017 increased 9 percent to $8.9 billion (increased 7 percent on a constant currency basis) compared to the prior year. The revenue increase was due to:

  • A 10 percent increase (9 percent increase on a constant currency basis) in the Calvin Klein business compared to the prior year, driven by continued strength in Europe and China. International comparable store sales increased 6 percent. North America comparable store sales decreased 1 percent.
  • An 11 percent increase (9 percent increase on a constant currency basis) in the Tommy Hilfiger business compared to the prior year, driven principally by outstanding performance across Europe and Asia, as well as the inclusion of a full first quarter of revenue from the China business as a result of the TH China acquisition in April 2016. Tommy Hilfiger
  • International comparable store sales increased 8 percent. North America comparable store sales increased 3 percent.
  • Revenue in the Heritage Brands business was flat compared to the prior year. Comparable store sales increased 2 percent.

Earnings before interest and taxes on a GAAP basis for 2017 decreased to $632 million, inclusive of a $15 million negative impact due to foreign currency exchange rates, from $789 million in the prior year. These results include the amounts described under the heading “Non-GAAP Exclusions” later in this release. Earnings before interest and taxes on a non-GAAP basis for these periods, as discussed below, exclude those amounts.

Earnings before interest and taxes on a non-GAAP basis for 2017 were $864 million, inclusive of a $15 million negative impact due to foreign currency exchange rates, compared to $794 million in the prior year. The improvement in earnings was driven by strong earnings growth in the Tommy Hilfiger business and a slight improvement in earnings in the Heritage Brands business. Partially offsetting these increases were a decrease in earnings in the Calvin Klein business due to the planned increase in marketing expenditures and investments associated with the CALVIN KLEIN creative team leadership changes and a $29 million increase in corporate expenses due, in part, to investments in digital and sourcing initiatives, including start-up costs associated with the company’s joint venture manufacturing facility.

Net interest expense for 2017 increased to $122 million from $115 million in the prior year primarily due to the net impact of the issuance of €350 million of senior notes in June 2016 and increases in short-term borrowings and interest rates as compared to the prior year, partially offset by long-term debt repayments made during 2016 and 2017. The effective tax rate on a GAAP basis for 2017 was (5.1) percent as compared to 18.6 percent in the prior year, as the current year included a one-time net tax benefit recorded in connection with the Tax Legislation. The effective tax rate on a non-GAAP basis for 2017 was 16.0 percent as compared to 19.0 percent in the prior year, which includes a favorable impact from the mix of earnings between tax jurisdictions in the current year as compared to the prior year.

Inventory levels increased 21 percent as compared to 2016 due to a shift in the timing of inventory receipts into 2017 as a result of the 53rd week and an expected increase in first quarter of 2018 sales as compared to the prior year period.

Stock Repurchase Program:

During 2017, the company repurchased 2.2 million shares of its common stock for $250 million (6.8 million shares for $692 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.

2018 Outlook

Full Year Guidance

The company projects that 2018 earnings per share on a GAAP basis will be in a range of $8.76 to $8.86 compared to $6.84 in 2017. The company projects that 2018 earnings per share on a non-GAAP basis will be in a range of $9.00 to $9.10 compared to $7.94 in 2017. Both projections include the expected positive impact of approximately $0.35 per share related to foreign currency translation.

Revenue in 2018 is projected to increase approximately 7 percent (increase approximately 4 percent on a constant currency basis) as compared to 2017. Revenue for the Calvin Klein business is projected to increase approximately 9 percent (increase approximately 7 percent on a constant currency basis). Revenue for the Tommy Hilfiger business is projected to increase approximately 8 percent (increase approximately 4 percent on a constant currency basis). Revenue for the Heritage Brands business is projected to be relatively flat.

Net interest expense in 2018 is projected to decrease to approximately $120 million from $122 million in 2017. The company estimates that the 2018 effective tax rate will be in a range of 14.5 percent to 15.5 percent, which includes the estimated impact of the Tax Legislation.

The company’s estimate of 2018 earnings per share on a non-GAAP basis excludes approximately $25 million of pre-tax costs to be incurred related to the TH China acquisition, consisting of noncash amortization of short-lived assets and the resulting estimated tax effect.

First Quarter Guidance

First quarter 2018 earnings-per-share on a GAAP basis are projected to be in the range of $2.13 to $2.18 compared to $0.89 in the prior year period. The company projects that first quarter 2018 earnings per share on a non-GAAP basis will be in a range of $2.20 to $2.25 compared to $1.65 in the prior year period. Both projections include the expected positive impact of approximately $0.20 per share related to foreign currency translation.

Revenue in the first quarter of 2018 is projected to increase approximately 15 percent (increase approximately 9 percent on a constant currency basis) compared to the prior year period. Revenue for the Calvin Klein business in the first quarter is projected to increase approximately 17 percent (increase approximately 12 percent on a constant currency basis). Revenue for the Tommy Hilfiger business in the first quarter is projected to increase approximately 19 percent (increase approximately 10 percent on a constant currency basis). Revenue for the Heritage Brands business in the first quarter is projected to increase approximately 2 percent.

Net interest expense in the first quarter of 2018 is projected to be relatively flat compared to $29 million in the prior year period. The company estimates that the first quarter 2018 effective tax rate will be in a range of 16 percent to 17 percent, which includes the estimated impact of the Tax Legislation.

The company’s estimate of first quarter 2018 earnings per share on a non-GAAP basis excludes approximately $7 million of pre-tax costs to be incurred related to the TH China acquisition, consisting of non-cash amortization of short-lived assets and the resulting estimated tax effect.