Shares of PVH Corporation (PVH) gained 7.8% during yesterdays’ after hours trading session following the premium specialty apparel retailer’s better-than-expected second-quarter fiscal 2014 bottom-line results.
PVH Corp.’s second-quarter adjusted earnings of $1.51 per share not only came ahead of its own guidance range of $1.40 to $1.45 but also beat the Zacks Consensus Estimate of $1.43 per share. Moreover, the company’s adjusted earnings were 8.6% higher than the year-ago comparable period adjusted earnings of $1.39 per share.
Despite a difficult global retail environment and intense promotional situation, the company witnessed a year-over-year improvement in bottom-line results solely on strong performance at its Tommy Hilfiger brand, accompanied by square footage expansion and a stronger Euro.
Including one-time items, PVH Corp. reported earnings per share of $1.52, as against a loss of 7 cents in the comparable year-ago period.
Quarter in Detail
PVH Corp.’s total revenue inched up 0.5% to $1,975.6 million from $1,964.8 million in the prior-year quarter. The prior-year figure includes revenue of $62 million from the recently divested Bass business. Excluding the same, the company’s total revenue registered year-over-year growth of 4%. The year-over-year increase in revenue was mainly due to better contribution from the Tommy Hilfiger and Calvin Klein businesses. However, quarterly revenue fell short of the Zacks Consensus Estimate of $1,995 million.
Total adjusted gross profit improved nearly 1.3% year over year to $1,054.7 million while as a percentage of sales it expanded 40 basis points (bps) to 53.4%.
PVH Corp.’s adjusted operating profit declined 3.6% to $205.6 million from $213.3 million in the year-ago comparable quarter. Moreover, the company’s operating margin contracted 50 bps to 10.4% from the year-ago period. The year-over-year decline in operating margin was primarily due to higher selling, general and administrative (SG&A) expenses as a percentage of sales partially offset by improved gross margin.
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 inched up 0.6% to $674.6 million in the quarter from $670.5 million in the year-ago quarter. This year-over-year revenue growth was driven by an increase of 1% in the North American business. The North American operation improved due to a 2% rise in comparable-store sales (comps) and square footage growth, which were partially offset by soft performance at the wholesale jeans business.
The brand’s international business remains flat year over year. However, comps declined 4% primarily due to the ongoing transition in the European business and soft performance in Asia.
The segment’s adjusted operating profit declined 10.1% to $85.7 million from $95.3 million, mainly because of increased expenses related to strategic investments in the newly acquired businesses.
Revenue at the company’s Tommy Hilfiger segment increased 8.9% to $870.4 million from $799.3 million in the year-ago period backed by sales growth of 8% in the North American business and 9% in the international business along with square footage expansion. The segment’s North American business reflected 2% retail comps growth, while retail comps at the international business were up 3%. The segment’s international wing also benefitted from a stronger Euro.
The segment’s adjusted operating profit increased 18% to $117.9 million from $99.9 million in the second quarter of fiscal 2013. Increase in operating profit was due to higher revenue and lower operating expenses as a percentage of sales.
The Heritage Brands segment’s revenues declined 13% year over year to $430.6 million from $495 million in second-quarter fiscal 2013. The prior-year period revenue includes $62 million related to the Bass business. Excluding the same, segment’s revenue remains almost flat. Revenue was negatively impacted by a 4% comps decline.
The segment’s adjusted operating profit plunged 33.6% year over year to $29.5 million, due to lower decline in gross margin, as an increase in promotional activities was witnessed the second quarter.
Balance Sheet
The company ended the quarter with $461.1 million of cash and cash equivalents compared with $628.9 million at the end of second-quarter fiscal 2013. PVH Corp.’s long-term debt, excluding current maturities, was $3,642.9 million compared with $4,195.2 million as of Aug 4, 2013. The company’s shareholder’s equity was $4,530.3 million at the end of second quarter.
Guidance
Looking ahead, the company believes that the difficult macroeconomic environment will continue to impact the rest of fiscal 2014. Despite the observation, the company is cautiously optimistic about the remaining period of fiscal 2014 and therefore has reaffirmed its outlook.
For full-fiscal 2014, the company continues to expect adjusted earnings per share in the range of $7.30–$7.40 or a 4%–5% year-over-year improvement. Currently, the Zacks Consensus Estimate for the fiscal is pegged at $7.36 per share.
Revenue for fiscal 2014 is expected to come at $8.4 billion, up 4% from the year-ago period excluding revenues of the Bass business. On a segment basis, the company anticipates revenue from its Calvin Klein business to rise 3%, while revenue for Tommy Hilfiger and Heritage Brands are expected to rise 7% and 2%, respectively. However, including the impact of the sale of its Bass Business, Heritage Brands revenue is expected to decline 7%.
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 impact of debt repaid in fiscal 2013, 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% on a non-GAAP basis.
For third-quarter fiscal 2014, the company expects total revenue of $2.25 billion, representing a 3% rise from the prior-year quarter. Revenue projections are based on 1% growth at Calvin Klein business, 4% rise at Tommy Hilfiger and a 3% increase at the Heritage Brands segment. However, including the impact of the sale of its Bass Business, Heritage Brands revenue is expected to decline 9%.
Adjusted earnings per share for the third quarter are expected to be in the range of $2.45–$2.50 compared with $2.30 per share earned in the prior-year quarter. Currently, the Zacks Consensus Estimate for the quarter is pegged at $2.46 per share.
Net interest expense for the second quarter is expected to be $30 million, while the tax rate is projected to be approximately 24%.
Currently, PVH Corp. carries a Zacks Rank #4 (Sell). However, some better-ranked stocks in the apparel space include Vince Holding Corp. (VNCE), V.F. Corporation (VFC) and Michael Kors Holdings Limited (KORS), all carrying a Zacks Rank #2 (Buy).
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