PVH Corp. (PVH) Beats on Q3 Earnings, Cuts 2014 Outlook

PVH Corporation’s (PVH) third-quarter adjusted earnings of $2.56 per share not only came ahead of its own guidance range of $2.45–$2.50 but also the Zacks Consensus Estimate of $2.48 per share. Moreover, the company’s adjusted earnings were nearly 11% higher than the year-ago comparable period figure of $2.30 per share.

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Despite a difficult global retail environment and intense promotional scenario, the company’s bottom-line results improved year over year on strong performance at its Tommy Hilfiger and Calvin Klein brands.

Including one-time items, PVH Corp. reported earnings per share of $2.71, surging 14% from $2.37 earned in the comparable year-ago period.

Though the company posted better-than-expected bottom line results in the third quarter, its sales results failed to meet expectations. Moreover, the company provided a cautious guidance for the fourth quarter and at the same time lowered its forecast for 2014 as it expects continued impact from foreign currency translation in the year ahead. Consequently, the shares of this premium specialty apparel retailer fell 1.9% during yesterdays’ after hours trading session.

Quarter in Detail

PVH Corp.’s total revenue fell 1.2% to $2,233.1 million from $2,259.1 million in the prior-year quarter. The prior-year figure includes revenue of $67 million from the divestment of Bass business on the first day of fourth-quarter 2013. Excluding the same, the company’s total revenue registered year-over-year growth of nearly 2%. The year-over-year increase in revenue was attributed to decent sales contributions from all three business segments. However, quarterly revenue fell short of the Zacks Consensus Estimate of $2,260 million.

Total adjusted gross profit improved year over year by a marginal 0.2% to $1,170.4 million while as a percentage of sales it expanded 70 basis points (bps) to 52.4%.

PVH Corp.’s adjusted operating profit rose 1.1% to $309 million from $305.5 million in the year-ago comparable quarter. Moreover, the company’s operating margin expanded 30 bps to 13.8% from the year-ago period. The improvement in operating margin is primarily due to the ongoing strength in its Tommy Hilfiger business, partially offset by investment in the recently acquired Warnaco businesses and gross margin erosion in the Heritage Brands business.

Segment Analysis

PVH Corp. reports its financial results under three business segments: a) Calvin Klein, b) Tommy Hilfiger and c) Heritage Brands.

Calvin Klein’s revenue jumped 2% to $816 million in the quarter from $800 million in the year-ago quarter, including a 1% negative impact from foreign currency translation. The growth was driven by a 5% increase in the North American business and a 2% increase in total Calvin Klein royalty revenue, offset by 1% decline in the brand’s international business.

The North American operation improved due to a 5% rise in retail comparable-store sales (comps) and square footage growth, coupled with a moderate growth in the North America wholesale business. Futher, the brand’s international performance was impacted by a 2% decline in comps stemming from weakness in Asia along with negative effects of 2% from foreign currency translation. Royalty revenue primarily gained from an ongoing strength in womenswear.

The segment’s adjusted operating profit fell 1.4% to $142 million from $144 million, mainly because of increased expenses related to strategic investments in the newly acquired businesses and advertising expenditures.

Revenue at the company’s Tommy Hilfiger segment increased 1% to $930 million from $921 million in the year-ago period, backed by sales growth of 3% in the North American business, partly offset by a 1% decline in the international business. Growth at the segment’s North American business was driven by 1% retail comps growth along with square footage expansion. Meanwhile, the international revenue was pulled down by a 5% fall in retail comps in Europe due to significant traffic decline in the region in the middle of the quarter as well as lesser promotional activity. Moreover, the segment’s international wing suffered a 3% negative currency translation impact due to a weaker Euro.

The segment’s adjusted operating profit increased 9% to $155 million from $143 million in the third quarter of fiscal 2013. Increase in operating profit was due to higher revenue coupled with gross margin improvement in both North America and Europe due to relatively lesser promotional activity from last year.

The Heritage Brands segment’s revenues rose 3% year over year to $487 million, excluding $67 million revenue related to the Bass business in the prior-year quarter. Including the same, segment’s revenue fell nearly 10% year over year. Revenue growth during the quarter is attributed to a 6% rise in wholesale revenues, partly offset by a 6% decline in retail comps.

The segment’s adjusted operating profit plunged 14.3% year over year to $36 million, due to lower decline in gross margin that stemmed from an increase in promotional activities to drive sales and traffic.

Balance Sheet

The company ended the quarter with cash and cash equivalents of $365.1 million, long-term debt, excluding current maturities of $3,618.7 million and shareholder’s equity of $4,583.8 million.

Guidance

Significant strengthening of the U.S. dollar against several currencies in the last three months, especially the Euro, has forced PVH’s management to become cautious in planning its forecast for the fourth quarter.

As a result, the company has lowered its 2014 adjusted earnings per share guidance range to $7.25–$7.30 from $7.30–$7.40 projected earlier. The new guidance represents 3%–4% growth compared with $7.03 earned in 2013. Currently, the Zacks Consensus Estimate for the quarter is pegged at $7.37 per share, which may witness a downward revision following the company’s guidance update.

Revenue for fiscal 2014 is now expected to come at $8.3 billion, up 3% from the year-ago period, excluding revenues of the Bass business and reflecting the negative currency translation impact, compared with the last year as well as the previous revenue forecast of $8.4 billion. Including the Bass revenue, the company’s total revenue for 2014 is expected to increase nearly 1%.

On a segment basis, the company anticipates revenue from its Calvin Klein and Tommy Hilfiger businesses to increase 2% and 5%, respectively, while revenue for Heritage Brands is expected to remain relatively flat with the prior-year quarter, excluding the Bass revenue. However, including the Bass revenue, Heritage Brands revenue is expected to decline 8%.

Fiscal 2014, net interest expense is projected to be $140 million, reflecting a decline from fiscal 2013, due to projected debt repayments of $400 million for the year, coupled with the refinancing of its credit facility and the related redemption of its 7 3/8% senior notes in the first quarter of 2014. Effective tax rate is expected to be in the range of 23.5% on a non-GAAP basis.

For fourth-quarter fiscal 2014, the company expects total revenue of $2.1 billion, representing a 3% rise from the prior-year quarter. Revenue projections for the quarter include a 3% negative impact from foreign currency translations, primarily due to a weak Euro. Further, the company anticipates revenue growth of 2% at the Calvin Klein business, 5% at Tommy Hilfiger and a 1% at the Heritage Brands.

Adjusted earnings per share for the fourth quarter are expected to be in the range of $1.71–$1.76, reflecting 20%–23% growth from $1.43 per share earned in the prior-year quarter. Currently, the Zacks Consensus Estimate for the quarter is pegged at $1.90 per share, which may witness a downward revision following the company’s guidance update.

Net interest expense for the second quarter is expected to be $33 million, while tax rate is projected to be approximately 19.5%.

Currently, PVH Corp. carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the apparel space include Columbia Sportswear Company (COLM), Hanesbrands Inc. (HBI) and Michael Kors Holdings Limited (KORS). While Columbia Sportswear has a Zacks Rank #1 (Strong Buy), Hanesbrands and Michael Kors carry a Zacks Rank #2 (Buy).

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