PVH Reports Lackluster Q4 Earnings - Analyst Blog

PVH Corporation PVH posted adjusted earnings per share of $1.44 for the fourth quarter, a penny below the Zacks Consensus Estimate while it surpassed its own guidance of $1.40. Quarterly earnings also fell 10.6% from the prior year earnings of $1.60 per share. The miss came on the back of a difficult retail environment.

However, the company benefited from strong performance at its pre-acquisition Calvin Klein and Tommy Hilfiger businesses, newly acquired Calvin Klein businesses in Asia and Brazil, and worldwide underwear business, offset by soft performance of its newly acquired Calvin Klein jeans business in North America and Europe.

Including one-time items, PVH Corp. reported loss per share of 46 cents, as against earnings of $1.09 in the comparable year-ago period.

Quarter in Detail

PVH Corp.'s total revenue rose 25.4% to $2,052.2 million from $1,636.2 million in the prior-year quarter. The year-over-year increase in revenue was mainly due to the inclusion of sales from the recently acquired Warnaco businesses as well as improved revenue contribution from the Tommy Hilfiger and pre-acquisition Calvin Klein businesses. However, quarterly revenue fell short of the Zacks Consensus Estimate of $2,072 million.

PVH Corp.'s adjusted operating profit rose 14.7% to $206.8 million from $180.3 million in the year-ago comparable quarter. However, the company's operating margin contracted 90 basis points (bps) to 10.1% from the year-ago period. The year-over-year decline in operating margin was primarily due to lower gross margin and higher selling, general and administrative (SG&A) expenses as a percentage of sales.

Segment Analysis

PVH Corp. reports its financial results under 3 business segments­: a) Calvin Klein, b) Tommy Hilfiger and c) Heritage Brands.

Calvin Klein's revenue increased more than twofold to $688.4 million in the quarter from $317.4 million in the year-ago quarter. This year-over-year revenue growth was driven by the recently acquired businesses, net of the reduction in licensing revenue attributable to Warnaco. Comparable-store sales (comps) for the retail business remained flat, while comps at the company's Calvin Klein International segment rose 1%.

The segment's adjusted operating profit rose 16.8% to $86.2 million from $73.8 million, primarily driven by the inclusion of revenue from newly acquired businesses, offset partly by the expenses related to strategic investments in those businesses.
 
Revenue at the company's Tommy Hilfiger segment increased 1.2% to $901.9 million from $891.1 million in the year-ago period due to sales growth of a marginal 0.2% in the North American business and 2% in international business. The segment's North American business reflected near to flat comps, while retail comps at the international business were up 7%. The segments international wing gained from about 10% increase in each of the European wholesale and European retail businesses.
 
The segment's adjusted operating profit grew 15.4% to $117.5 million from $101.8 million in the fourth quarter of fiscal 2012. Operating profit improvement was due to higher revenue, gross margin gains in Europe and lower operating expenses due to the synergies recognized in Europe from the Warnaco acquisition.

The Heritage Brands segment's revenues increased 8.0% year over year to $461.9 million from $427.7 million in fourth-quarter fiscal 2012. The rise was primarily driven by the newly acquired Speedo swim products and Warner's and Olga women's intimate apparel businesses, partially offset by the negative impact due to the sale of the Bass business in the fourth quarter. Moreover, revenue was negatively impacted by a 7% comps decline and loss of revenue due to the closing of underperforming stores in its retail wing.

The segment's adjusted operating profit rose 8.6% year over year to $28.9 million, due to higher revenue, offset by lower gross margin due to the increased promotional activity in the fourth quarter.

Fiscal 2013 Synopsis

For fiscal 2013, the company's adjusted earnings came at $7.03 per share, up 6.8% from 2012 and in line with the Zacks Consensus Estimate. Revenue for the year rose approximately 35.5% to $8,186.4 million. However, the company's top line missed the Zacks Consensus Estimate of $8,242 million.

Balance Sheet

The company ended the year with $593.2 million of cash and cash equivalents compared with $892.2 million at the end of fiscal 2012. PVH Corp.'s long-term debt excluding current maturities was $3,878.2 million compared with $2,211.6 million as of Feb 3, 2013. The company's shareholder equity was $4,335.2 million at the end of fiscal 2013.

Outlook

Following the mixed results at the end of transformational year, PVH Corp. anticipates the first half of fiscal 2014 to be impacted by incremental investments towards the integration of its newly acquired businesses, negative foreign currency movements primarily related to the Canadian Dollar and Brazilian Real and the sale of its Bass retail business.

For full-year 2014, the company expects adjusted earnings per share in the range of $7.40 – $7.50, a year-over-year improvement of 5%–7%. Revenue for fiscal 2014 is expected to rise 3% to $8.5 billion, including the impact of the sale of its Bass business.  On a segment basis, the company anticipates revenue from its Calvin Klein business to rise 5%, while revenue for Tommy Hilfiger and Heritage Brands are expected to rise 7% and 4%, respectively. However, including the impact of the sale of the Bass Business, Heritage Brands revenue is expected to decline 5%.

Fiscal 2014 net interest expense is projected to be $145 million, reflecting a decline from fiscal 2013 due to projected debt repayments of $400 million for the year, coupled with the impact from debt repaid in fiscal 2013 and the recent refinancing of its term loans and 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%–24.5%.

For first-quarter fiscal 2014, the company expects total revenue of $2.0 billion, representing a 2% rise from the prior-year quarter. Revenue projections are based on 4% growth at its Calvin Klein business, 6% rise at Tommy Hilfiger and an 8% decline at the Heritage Brands segment. Adjusted earnings per share for the quarter are expected to be in the range of $1.45 – $1.50 compared to $1.91 per share earned in the prior-year quarter.

Net interest expense for the first quarter is expected to be $40 million, while the tax rate is projected to be 24.5% – 25.5%.

Other Stocks to Consider

Currently, PVH Corp. carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the apparel space include Hanesbrands Inc. HBI, Joe's Jeans Inc. JOEZ and Michael Kors Holdings Limited KORS, all of which carry a Zacks Rank #1 (Strong Buy).