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PVH Corp. Reports 2016 Second Quarter EPS above Guidance and Raises Full Year EPS Guidance

NEW YORK--(BUSINESS WIRE)--PVH Corp. (NYSE:PVH) reported 2016 second quarter results.

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Non-GAAP Amounts:

Amounts stated to be on a non-GAAP basis exclude the items that are described below under the heading “Non-GAAP Exclusions.” Amounts stated on a constant currency basis are also non-GAAP financial measures. Reconciliations of amounts on a GAAP basis to amounts on a non-GAAP basis are presented later in this release and identify and quantify all excluded items.

CEO Comments:

Commenting on these results, Emanuel Chirico, Chairman and Chief Executive Officer, noted, “Our strong performance year to date exceeded our expectations and demonstrated our ability to deliver against our 2016 plan, despite the challenging macroeconomic environment. We experienced strong momentum in our Calvin Klein and Tommy Hilfiger International businesses and have seen improvement across our North America wholesale businesses, but we continue to be pressured by weakness in traffic and consumer spending trends at our Tommy Hilfiger and Calvin Klein U.S. stores located in international tourist locations.”

Mr. Chirico continued, “Our strong first half results allow us to continue to reinvest in our brands and the business. We are excited by the marketing investments and commercial initiatives each of our brands are launching over the next six months, from our creative team leadership change at Calvin Klein to our launch of the Gigi Hadid capsule collection and Fall 2016 womenswear campaign for Tommy Hilfiger, as well as our ongoing digital commerce efforts.”

Mr. Chirico concluded, “Looking ahead to the remainder of 2016, we are increasing our earnings guidance for the year, while continuing to take a prudent approach to planning our business, as we expect the macroeconomic and geopolitical volatility around the world to continue to impact the consumer. We believe our proven business model and talented associates will enable us to execute our strategic initiatives in an ever-changing retail environment and deliver stockholder value.”

Second Quarter Business Review:

Calvin Klein

Revenue in the Calvin Klein business for the quarter increased 12% to $726 million on a GAAP basis (increased 15% on a constant currency basis) compared to the prior year period. Calvin Klein North America revenue increased 11% to $398 million on a GAAP basis (increased 12% on a constant currency basis) compared to the prior year period primarily driven by continued healthy performance across the North America wholesale businesses. Revenue in the North America retail business grew modestly, as square footage expansion in Company-operated stores was partially offset by a 4% comparable store sales decline driven by continued weakness in traffic and consumer spending trends in Calvin Klein’s U.S. stores located in international tourist locations. Calvin Klein International revenue increased 13% to $328 million on a GAAP basis (increased 17% on a constant currency basis) compared to the prior year period, including an 11% increase in comparable store sales. The robust performance was driven by growth across Europe and Asia.

Earnings before interest and taxes on a GAAP basis for the quarter increased to $106 million, inclusive of a $15 million negative impact due to foreign currency exchange rates, compared to $81 million in the prior year period. The significant earnings increase was due principally to the revenue increase mentioned above and the favorable impact of a shift of advertising spending into the second half of 2016 from the second quarter when compared to the prior year period.

Tommy Hilfiger

Revenue in the Tommy Hilfiger business for the quarter increased 6% to $860 million on a GAAP basis (increased 7% on a constant currency basis) compared to the prior year period. Tommy Hilfiger North America revenue increased 3% to $407 million on a GAAP basis (also increased 3% on a constant currency basis) compared to the prior year period, as growth in the wholesale business was partially offset by continued softness in the U.S. retail business. North America comparable store sales declined 7% compared to the prior year period, driven by continued weakness in traffic and consumer spending trends in Tommy Hilfiger’s U.S. stores located in international tourist locations. Tommy Hilfiger International revenue increased 10% to $453 million on a GAAP basis (increased 11% on a constant currency basis) compared to the prior year period, driven by continued strong growth in Europe, including an 8% increase in comparable store sales, and the Company’s April 2016 acquisition of the 55% interest in its joint venture for Tommy Hilfiger in China (“TH China”) that it did not already own (the “TH China acquisition”).

Earnings before interest and taxes on a GAAP basis for the quarter decreased $22 million to $76 million compared to the prior year period principally due to costs incurred in connection with (i) the TH China acquisition, primarily consisting of noncash valuation adjustments and amortization of short-lived assets, and (ii) the licensing to G-III Apparel Group, Ltd. of the Tommy Hilfiger womenswear wholesale business in the U.S. and Canada.

Earnings before interest and taxes on a non-GAAP basis for the quarter of $97 million, which excluded the $22 million of costs identified above, was relatively flat compared to the prior year period and included a $24 million negative impact due to foreign currency exchange rates. Excluding the negative impact of foreign currency exchange rates, earnings on a non-GAAP basis increased, driven by the Tommy Hilfiger International revenue increase noted above, including the favorable impact of the TH China acquisition, as well as gross margin improvement in Europe. Partially offsetting this increase was an earnings decline in North America attributable to continued weakness in international tourist traffic and spending in Tommy Hilfiger’s U.S. stores, which drove more promotional selling, resulting in lower gross margins.

Heritage Brands

Revenue in the Heritage Brands business for the quarter decreased 14% to $347 million compared to the prior year period, principally resulting from the rationalization initiatives implemented in 2015 that will continue to impact the business throughout 2016, consisting of the exit from the Izod retail business and the discontinuation of several licensed product lines in the dress furnishings business. Also negatively impacting the second quarter of the current year was overall softness in the neckwear category and a shift in the timing of wholesale shipments into the third quarter from the second quarter as compared to the prior year period. Partially offsetting these decreases was an 11% increase in comparable store sales in the Van Heusen business.

Earnings before interest and taxes on a GAAP basis for the quarter was $12 million compared to $15 million in the prior year period. The prior year’s second quarter earnings included $11 million of costs incurred in connection with (i) the Warnaco integration and restructuring, (ii) the operation of and exit from the Izod retail business and (iii) the discontinuation of several licensed product lines in the dress furnishings business. The decrease in earnings before interest and taxes to $12 million on a GAAP basis in the second quarter (there were no non-GAAP exclusions) from $26 million on a non-GAAP basis in the prior year period, which excluded the $11 million of costs identified in the prior sentence, was driven by the overall revenue decline noted above and a deleveraging of expenses.

Second Quarter Consolidated Earnings:

Earnings before interest and taxes on a GAAP basis decreased $11 million to $143 million compared to $154 million in the prior year period principally driven by a net increase of $20 million of pre-tax costs that were excluded from earnings before interest and taxes on a non-GAAP basis in connection with (i) the TH China acquisition, (ii) the licensing to G-III of the Tommy Hilfiger womenswear wholesale business in the U.S. and Canada, (iii) the Warnaco integration and restructuring, (iv) the amendment of the Company’s credit facility, (v) the discontinuation of several licensed product lines in the Heritage Brands dress furnishings business and (vi) the operation of and exit from the Izod retail business.

Earnings before interest and taxes on a non-GAAP basis for the quarter was $183 million, inclusive of a $40 million negative impact due to foreign currency exchange rates, compared to $174 million in the prior year period.

Net interest expense of $28 million was flat compared to the prior year period.

Inventory levels were relatively flat compared to the prior year’s second quarter, despite acquiring inventory as part of the TH China acquisition.

Six Months Consolidated Results:

Earnings per share was $3.95 on a GAAP basis for the first six months of 2016 compared to $2.59 in the prior year period. Earnings per share was $2.97 on a non-GAAP basis for the first six months of 2016 compared to $2.87 in the prior year period. Earnings per share on both a GAAP and non-GAAP basis for the first six months of 2016 included a $0.96 negative impact related to foreign currency exchange rates.

Revenue increased 3% on a GAAP basis to $3.85 billion (increased 4% on a constant currency basis) compared to the prior year period.

The revenue change was due to:

  • An 11% increase on a GAAP basis (14% increase on a constant currency basis) in the Calvin Klein business compared to the prior year period, driven by significant growth in Europe and the North America wholesale business. International retail comparable store sales increased 6%. North America retail comparable store sales decreased 4% driven by the continued weakness in traffic and consumer spending trends in Calvin Klein’s U.S. stores located in international tourist locations.
  • A 5% increase on a GAAP basis (6% increase on a constant currency basis) in the Tommy Hilfiger business compared to the prior year period, driven principally by strong growth across Europe, including a 9% increase in comparable store sales, and the TH China acquisition, which was completed in April 2016. In the Tommy Hilfiger North America business, wholesale growth was more than offset by an 8% decline in comparable store sales compared to the prior year period, driven by continued weakness in traffic and consumer spending trends in Tommy Hilfiger’s U.S. stores located in international tourist locations.
  • A 13% decrease in the Heritage Brands business compared to the prior year period, driven by the rationalization initiatives in the business, partially offset by an 11% increase in comparable store sales in the Van Heusen business.

Earnings before interest and taxes on a GAAP basis increased $107 million to $438 million compared to $331 million in the prior year period primarily due to the pre-tax noncash gain of $153 million recorded to write-up the Company’s equity investment in TH China to fair value in connection with the TH China acquisition and a $22 million reduction in Warnaco integration and restructuring costs compared to the prior year period. These increases were partially offset by $50 million of pre-tax costs incurred in connection with the TH China acquisition, a portion of which was noncash and related to valuation adjustments and amortization of short-lived assets, and $16 million of pre-tax costs incurred in connection with the amendment of the Company’s credit facility. Such amounts were excluded from earnings before interest and taxes on a non-GAAP basis, as discussed below.

Earnings before interest and taxes on a non-GAAP basis was $371 million, inclusive of an $84 million negative impact due to foreign currency exchange rates, compared to $370 million in the prior year period. Excluding the negative impact of foreign currency exchange rates, the strong growth on a non-GAAP basis was driven by earnings increases in the Calvin Klein business and in the Tommy Hilfiger International business. Partially offsetting these increases were earnings declines in Tommy Hilfiger North America, principally due to continued weak performance in Tommy Hilfiger’s U.S. stores located in international tourist locations, and in the Heritage Brands business due to the overall revenue decline and a deleveraging of expenses resulting from the rationalization initiatives in the business.

Stock Repurchase Program:

During the first six months of 2016, the Company repurchased approximately 1.4 million shares of its common stock for $129 million (approximately 2.8 million shares for $255 million since inception) under the $500 million three-year stock repurchase program authorized by the Board of Directors in June 2015. Stock repurchases under this 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 stock repurchase program may be modified, including to increase or decrease the repurchase limitation or extend, suspend, or terminate the program, at any time, without prior notice.

2016 Guidance:

The Company currently expects its full year 2016 earnings per share results will be negatively impacted compared to 2015 by approximately $1.60 per share attributable to foreign currency exchange rates due to the stronger U.S. dollar against other currencies in which the Company transacts significant levels of business. Approximately 85% of the negative impact is expected to be on a transactional basis and approximately 15% is expected to be due to currency translation. The negative impact on a transactional basis is primarily due to our international businesses purchasing inventory in U.S. dollars, as the increased local currency value of inventory results in higher cost of goods in local currency when the goods are sold. The negative translation impact is related to the earnings generated in foreign markets, which will translate into fewer U.S. dollars.

The Company currently expects that the second half of 2016 will include an expense increase of approximately $40 million over the prior year period related to marketing and advertising (including a shift in advertising from the second quarter, as discussed earlier), as well as investments associated with the recent Calvin Klein creative team leadership change. The increase is expected to be evenly weighted throughout the third and fourth quarters.

Please see the section entitled “Full Year and Quarterly Reconciliations of GAAP to Non-GAAP Amounts” at the end of this release for further detail and reconciliations of GAAP to non-GAAP amounts discussed in this section.

Full Year Guidance

The Company currently projects that 2016 earnings per share on a GAAP basis will be in a range of $7.50 to $7.60 compared to $6.89 in the prior year period. The Company currently projects that 2016 earnings per share on a non-GAAP basis will be in a range of $6.55 to $6.65 compared to $7.05 in the prior year period. Both 2016 earnings per share projections include approximately $1.60 per share negative impact related to foreign currency exchange rates, as described above.

Revenue in 2016 is currently projected to increase approximately 2% on a GAAP basis (increase approximately 3% on a constant currency basis) as compared to 2015. It is currently projected that revenue for the Calvin Klein business will increase approximately 5% on a GAAP basis (increase approximately 7% on a constant currency basis). Revenue for the Tommy Hilfiger business is currently projected to increase approximately 5% on both a GAAP and constant currency basis. Revenue for the Heritage Brands business is currently projected to decrease approximately 8% on a GAAP basis principally due to the rationalization initiatives implemented in 2015 that will continue to impact the business throughout 2016, consisting of the exit from the Izod retail business and the discontinuation of several licensed product lines in the dress furnishings business.

Net interest expense in 2016 is expected to be in a range of $117 million to $120 million compared to $113 million in 2015 primarily due to the negative impacts of the interest rate swap that commenced in February 2016 to convert a portion of the Company’s variable rate debt under its term loans to fixed rate debt and the issuance of €350 million of senior notes in June 2016, partially offset by the positive impacts from debt repayments made during 2015 and expected to be made in 2016 and the amendment of the Company’s credit facility in the second quarter of 2016. The Company currently estimates that the 2016 effective tax rate will be approximately 14% on a GAAP basis and approximately 20% on a non-GAAP basis.

The Company’s 2016 earnings per share estimate on a non-GAAP basis excludes approximately $85 million of expected pre-tax net gains, consisting of (i) approximately $70 million related to TH China, including the noncash gain recorded to write-up the Company’s equity investment in TH China to fair value, partially offset by acquisition costs, primarily consisting of noncash valuation adjustments and amortization of short-lived assets and (ii) approximately $15 million related to a payment expected to be made to the Company during the third quarter of 2016 to exit one of its Tommy Hilfiger retail flagship locations in Europe. These gains are expected to be partially offset by approximately $41 million of pre-tax costs, consisting of (i) approximately $25 million expected to be incurred in connection with the Warnaco integration and related restructuring, the discontinuation of several licensed product lines in the Heritage Brands dress furnishings business, the licensing to G-III of the Tommy Hilfiger womenswear wholesale business in the U.S. and Canada and the restructuring associated with the new global creative strategy for Calvin Klein announced in April 2016and (ii) $16 million incurred in connection with the amendment of the Company’s credit facility in the second quarter of 2016. Also excluded from the Company’s estimate of 2016 earnings per share on a non-GAAP basis are discrete tax benefits of $6 million recorded in the first quarter of 2016 related to the resolution of uncertain tax positions and the estimated tax effects of the above pre-tax items.

Third Quarter Guidance

The Company currently expects its third quarter 2016 earnings per share results will be negatively impacted compared to the third quarter of 2015 by approximately $0.45 per share related to foreign currency exchange rates due to the stronger U.S. dollar against other currencies in which the Company transacts significant levels of business.

The Company currently expects that the third quarter of 2016 will include an expense increase of approximately $20 million over the prior year period related to marketing and advertising (including a shift in advertising from the second quarter, as discussed earlier), as well as investments associated with the recent Calvin Klein creative team leadership change.

Third quarter 2016 earnings per share on a GAAP basis is currently projected to be in a range of $2.30 to $2.35 compared to $2.67 in the prior year period. The Company currently projects that third quarter 2016 earnings per share on a non-GAAP basis will be in a range of $2.35 to $2.40 compared to $2.66 in the prior year period. Both third quarter 2016 earnings per share projections include approximately $0.45 per share negative impact related to foreign currency exchange rates, as described above.

Revenue in the third quarter of 2016 is currently projected to increase approximately 3% on both a GAAP and constant currency basis compared to the prior year period. Revenue for the Calvin Klein business in the third quarter is currently projected to increase approximately 6% on both a GAAP and constant currency basis. Revenue for the Tommy Hilfiger business in the third quarter is currently projected to increase approximately 5% on a GAAP basis (increase approximately 6% on a constant currency basis). Revenue for the Heritage Brands business in the third quarter is currently projected to decrease approximately 6% on a GAAP basis, principally due to the rationalization of the business, as discussed earlier in this release.

The Company currently projects that third quarter 2016 net interest expense will be approximately $30 million compared to $27 million in the prior year period, primarily due to the negative impacts of the interest rate swap noted above and the issuance of €350 million of senior notes in June 2016, partially offset by the positive impacts of debt repayments made during 2015 and the first half of 2016 and the amendment of the Company’s credit facility in the second quarter of 2016. The Company currently estimates that the third quarter effective tax rate will be in a range of 16% to 17%.

The Company’s third quarter earnings per share estimate on a non-GAAP basis excludes (i) approximately $3 million of pre-tax costs expected to be incurred in connection with the Warnaco integration and related restructuring and the licensing to G-III of the Tommy Hilfiger womenswear wholesale business in the U.S. and Canada, (ii) approximately $16 million of pre-tax costs expected to be incurred in connection with the TH China acquisition, primarily consisting of noncash amortization of short-lived assets and (iii) a pre-tax gain of approximately $15 million related to a payment expected to be made to the Company to exit one of its Tommy Hilfiger retail flagship locations in Europe. The estimated tax effects of the above pre-tax items are also excluded from the Company’s third quarter 2016 earnings per share estimate on a non-GAAP basis.

Non-GAAP Exclusions:

The discussions in this release that refer to non-GAAP amounts exclude the following:

  • Pre-tax costs of approximately $12 million expected to be incurred in 2016 in connection with the integration of Warnaco and the related restructuring, of which $7 million was incurred in the first quarter, $2 million was incurred in the second quarter and approximately $2 million is expected to be incurred in the third quarter.
  • Pre-tax costs of $3 million incurred in the first quarter of 2016 related to the discontinuation of several licensed product lines in the Heritage Brands dress furnishings business.
  • Pre-tax costs of approximately $4 million expected to be incurred in 2016 in connection with the licensing to G-III of the Tommy Hilfiger womenswear wholesale business in the U.S. and Canada, of which $1 million was incurred in the first quarter, $1 million was incurred in the second quarter and approximately $1 million is expected to be incurred in the third quarter.
  • Pre-tax costs of $6 million incurred in the first quarter of 2016 in connection with the restructuring associated with the new global creative strategy for Calvin Klein announced in April 2016.
  • Pre-tax noncash gain of $153 million recorded in the first quarter of 2016 to write-up the Company’s equity investment in TH China to fair value in connection with the TH China acquisition, which was completed in the first quarter of 2016. Partially offsetting the pre-tax gain are pre-tax costs of approximately $83 million expected to be incurred in 2016, which primarily consist of noncash charges related to valuation adjustments and amortization of short-lived assets. Of these pre-tax costs, $30 million was incurred in the first quarter, $20 million was incurred in the second quarter and approximately $16 million is expected to be incurred in the third quarter.
  • Pre-tax costs of $16 million incurred in the second quarter of 2016 in connection with the amendment of the Company’s credit facility.
  • Pre-tax gain of approximately $15 million expected to be recorded in the third quarter of 2016 related to a payment expected to be made to the Company to exit one of its Tommy Hilfiger retail flagship locations in Europe.
  • Discrete tax benefits of $6 million recorded in the first quarter of 2016 related to the resolution of...

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