Shares of PVH Corporation PVH gained 3% in the after-market trading session yesterday, after the company delivered better-than-expected earnings for third-quarter fiscal 2015, keeping its positive streak alive in each quarter of the fiscal so far.
The company’s adjusted earnings per share of $2.66 not only beat the Zacks Consensus Estimate of $2.49, but also exceeded its own guidance range of $2.45–$2.50. Further, the bottom line jumped 3.9% year over year, despite the prevalent foreign currency headwinds. On a currency neutral basis, adjusted earnings soared 21% to $3.10 per share.
Including one-time items, PVH Corp. reported earnings of $2.67 per share, compared with $2.71 earned in the year-ago quarter.
Quarter in Detail
PVH Corp.’s total revenue dropped about 3% to $2,164.5 million, reflecting the adverse impact of foreign currency translations. Further, quarterly revenue fell short of the Zacks Consensus Estimate of $2,170.1 million.
On a constant currency basis, however, the company’s total revenue grew 3%, meeting management’s expectations. This was mainly driven by strong revenue growth at its Tommy Hilfiger and Calvin Klein brands, on a currency neutral basis.
Total adjusted gross profit fell 5.4% year over year to $1,106 million, while as a percentage of sales it contracted 130 basis points (bps), to 51.1%.
PVH Corp.’s adjusted operating profit declined 6.7% to $288.4 million, with the adjusted operating margin contracting 50 bps to 13.3% in the quarter.
Segment Analysis
PVH Corp. reports its financial results under three business segments: Calvin Klein, Tommy Hilfiger and Heritage Brands.
Calvin Klein’s revenue remained flat year over year at $814.1 million, while on a currency neutral basis, it advanced 7%, driven by a 7% jump each, in the brand’s North American and International business, on a currency neutral basis.
North American operations gained strength from store expansions, along with Izod’s conversion into Calvin Klein Accessory and Calvin Klein Underwear stores. However, comparable-store sales (comps) in the region dipped 3% year over year owing to weak traffic and decreased spending trends across the company’s U.S. stores in international tourist locations together with warm weather.
The brand’s international business witnessed a 3% improvement in comps, backed by continued strength in European and Chinese operations. International comps climbed 2%, benefitting from this strength, partly offset by weakness noted in Hong Kong and Korea.
Revenue at the company’s Tommy Hilfiger segment fell 5% to $887.6 million, though it rose 4% on a constant currency basis, backed by sales growth of 2% and 6% in the brand’s North American and International businesses, respectively.
At Tommy Hilfiger North America, wholesale operations growth was largely offset by softness witnessed in retail operations. Consequently, comps in the brand’s North American business tumbled 7%, attributable to persistent slow traffic and a decline in spending trends among customers at stores in international tourist locations, along with unexpected warm weather.
International revenues improved on the back of solid European results, with comps increasing 10% year over year.
The Heritage Brands segment’s revenues dropped 5% year over year to $462.8 million, as a result of the ongoing rationalization of this business by exiting various lines of business, closing the Izod retail division and realigning focus on more profitable areas. However, this decline was somewhat offset by an 11% jump in its Van Heusen comps.
Financials
The company ended the quarter with cash and cash equivalents of $369.9 million, long-term debt, excluding current maturities of $3,215.5 million, and shareholders’ equity of $4,545.6 million.
Also, during the first three quarters of fiscal 2015, the company repurchased about 0.7 million shares for roughly $75 million of common stock under its newly authorized share repurchase program of $500 million, extending over a three-year period. This includes 0.6 million shares, which were repurchased during the third quarter, for about $60 million.
Fiscal 2015 Guidance
Though PVH Corp. faced sluggish tourist traffic due to currency headwinds, management remains pleased with the quarterly performance which outdid the company’s own expectations. PVH Corp. expects volatility in the consumer environment and currency headwinds to prevail throughout the fiscal year and also linger in fiscal 2016.
Consequently, revenue for fiscal 2015 is now expected to dip 3% year over year and jump roughly 3% on a currency neutral basis. The company’s previous guidance included a 2% sales decline, while excluding the currency impact, revenue was expected to rise 4%.
Also, PVH Corp. anticipated the holiday season to be highly promotional and competitive. However, it remains confident of sailing through these headwinds, given its solid financial status, strength of its Calvin Klein and Tommy Hilfiger brands, constant endeavors to efficiently manage inventories and enhance sales by driving local traffic. Consequently, the company reiterated its earnings guidance for fiscal 2015
The company still envisions fiscal 2015 earnings per share in the range of $6.90–$7.00. However, this guidance now includes an expected $1.35 per share negative impact from currency headwinds and pressure from its Russian businesses, up from $1.30 per share projected earlier. Excluding this, however, the company now anticipates adjusted earnings per share to increase 13%–14% from the fiscal 2014 level, up from the previous projection of 12%–14% growth.
However, free cash flow for fiscal 2015 is still anticipated to be $450 million, which will be allocated toward repaying a debt of $350 million (out of which $200 million has already been repaid) and share repurchases.
Q4 Guidance
For the fourth quarter of fiscal 2015, the company expects total revenue to remain in line with last year, while currency neutral revenue is anticipated to increase 5% year over year.
Adjusted earnings per share for the fourth quarter are expected to be in the range of $1.37–$1.47, including a 33 cents negative impact from currency translations. However, this lies below the current Zacks Consensus Estimate, which is currently pegged at $1.60 per share. On a currency neutral basis, year-over-year adjusted earnings growth is expected in a band of a 3% fall to 2% increase.
Zacks Rank
PVH Corp. currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the same industry include Hanesbrands Inc. HBI and Ralph Lauren Corporation RL, each carrying a Zacks Rank #2 (Buy). Another well-ranked stock in the broader consumer discretionary sector is NIKE, Inc. NKE, with a Zacks Rank #1 (Strong Buy).
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