(Filed Under Financial and General Interest News). PVH Corp. net income in the quarter ended August 2, 2015 dropped to $102.2 million on total revenue of $1.864 billion compared to $126.5 million on revenue of $1.976 billion in the quarter ended August 3, 2014.
In a press release, which referred to “non-GAAP” (non-Generally Accepted Accounting Principles) 110 times, the company sought to put the best face on the financial results. It attributed the declines primarily to the “negative impact primarily related to foreign currency exchange rates compared to the prior year.”
Emanuel Chirico, chairman and CEO claimed, “We are very pleased with our second quarter results, which exceeded our top and bottom line guidance. Our second quarter performance highlighted continued strength in our Calvin Klein business, as consumers responded well to our recent product initiatives, particularly in underwear. Overall, our first half earnings per share, which increased 16% on a non-GAAP and constant currency basis, demonstrated our ability to deliver against our 2015 plan, while managing through the anticipated difficult global retail environment.”
Looking at the second half of the year, he added, “We continue to believe, however, that the strength of the U.S. dollar and the changing consumer spending patterns for international tourists in the U.S., along with the volatility in the global environment, will remain a headwind.”
According to PVH, “Revenue in the Calvin Klein business for the quarter increased 3% on a constant currency basis (decreased 4% on a GAAP basis) from $675 million in the prior year’s second quarter.”
“Calvin Klein North America revenue was flat on a constant currency basis (decreased 2% on a GAAP basis) compared to the prior year’s second quarter. North America retail comparable store sales increased 4% as compared to the prior year’s second quarter, despite continued decreased traffic and spending trends in the company’s U.S. stores located in international tourist locations as a result of the strengthening U.S. dollar. The North America wholesale business experienced a moderate revenue decline due principally to a shift of shipments into the first quarter from the second quarter in the current year, as well as from the prior year’s second quarter having the benefit of sales from the packaging re-launch of men’s basic styles of Calvin Klein Underwear. Calvin Klein International revenue increased 7% on a constant currency basis (decreased 6% on a GAAP basis) compared to the prior year’s second quarter, with a 3% increase in retail comparable store sales. The international revenue increase on a constant currency basis was driven by continued strength in Europe, as customers are responding well to the investments we have made around the brand and in upgraded product, combined with growth in China. Overall, the Calvin Klein Underwear business performed exceptionally well globally.”
“Earnings before interest and taxes on a non-GAAP basis in the Calvin Klein business decreased to $81 million, inclusive of a $9 million negative impact due to foreign currency exchange rates, from $86 million in the prior year’s second quarter. The earnings increase on a constant currency basis was due principally to the constant currency revenue increase mentioned above, combined with gross margin improvements globally, particularly in Europe. Negatively impacting the current quarter’s earnings was an increase of $5 million spent on advertising compared to the prior year’s second quarter.”
“Earnings before interest and taxes on a GAAP basis in the Calvin Klein business was $81 million compared to $70 million in the prior year’s second quarter. The increase was principally driven by a reduction in Warnaco integration and restructuring costs compared to the prior year’s second quarter.”
Turning to its other major brand, the company reported “Revenue in the Tommy Hilfiger business for the quarter increased 5% on a constant currency basis (decreased 7% on a GAAP basis) from $870 million in the prior year’s second quarter. Tommy Hilfiger North America revenue increased 3% on a constant currency basis (increased 1% on a GAAP basis) compared to the second quarter of 2014 due to square footage expansion in company-operated retail stores and modest growth in the wholesale business on a constant currency basis. North America retail comparable store sales were relatively flat to the prior year’s second quarter. As with Calvin Klein, there was a continued decline in traffic and spending trends in the Company’s U.S. stores located in international tourist locations. Tommy Hilfiger International revenue increased 6% on a constant currency basis (decreased 13% on a GAAP basis) from the prior year period. The increase on a constant currency basis was driven by solid performance in the European business, including a 9% increase in retail comparable store sales.”
“Earnings before interest and taxes in the Tommy Hilfiger business was $98 million on a GAAP basis, inclusive of an $18 million negative impact due to foreign currency exchange rates, compared to $116 million on a GAAP basis and $118 million on a non-GAAP basis in the prior year’s second quarter. Earnings on a constant currency basis declined slightly, as earnings growth in Europe was more than offset by an earnings decline in North America due to weak international tourist traffic and spending, which drove more promotional selling, resulting in lower gross margins.”
Discussing the quarterly results in the conference call with analysts, Chirico boasted, “Globally, the underwear business continues to gain share in each market. Interestingly, our women’s underwear sales trends for the first half are outpacing our men’s sales trends worldwide. Men’s, with our key spring launches of Intense Power and Air FX have been very well received with great sell-throughs. And for fall, we just launched our magnetic waist-band product with positively early indicators from sales. In North America, we have seen our 2015 men’s market share grow by over 200 basis points with growth across all of our major retail partners.”
“Moving to women’s, our modern cotton logo product continues to be the big story for women’s, especially those under the age of 30. Along with our tailored bra offering by region, in which we have significantly grown over the last 12 months with our push-up styles leading the business in Asia, our Perfectly Fit style leading the business in Europe, and our new invisibles bra in North America driving sales gains. In North America, we have seen our 2015 women’s market share grow by over 100 basis points with growth across all of our major retail partners.”
While Chirico focused on Calvin Klein and Hilfiger during the call, he did note, “We’ve also seen strong performance in our Warner’s core intimate business particularly in the mid-tier channel distribution where we have seen our year-to-date market share grow by over 100 basis points.”
Chirico explained, “We also had some pretty significant square footage growth in Calvin, and Tommy to a degree, due to the transfer in North America of our IZOD stores to the Calvin Klein Underwear and Accessory stores. So square footage growth there that’ll really come in in the holiday selling season which is very strong.”
Discussing how the company promotes its brands, Chirico revealed, “today, I would say, between Calvin and Tommy, 60% of our marketing budget are directed at digital marketing.”
Asked about the company’s Amazon business, Chirico replied, it “has grown geometrically. Our Calvin Klein Underwear business in particular is by far the largest selling underwear on the Amazon site.” But he cautioned that PVH manages the business “closely,” “making sure it’s brand enhancing.” He added that while he expects Amazon to be “a significant growth area for us for both Calvin and Tommy over the next three years,” in Europe and North America, the company is “trying to manage that distribution, so it doesn’t become in any way brand negative.”
Speaking about the company’s women’s underwear business, Chirico noted “we always had a very strong bottoms, panty business. The focus has really been to grow the bra business, which from a price point is four times the unit cost of panties. So the growth has really been – to really try and grow that square footage.”
Discussing the challenge of growing the women’s underwear business, he declared, “that’s really been the opportunity. We’re so dominant in men’s. I think men’s will continue to grow nicely. But to be honest, the bigger market opportunity for us is women’s, market is much bigger, and our market share, although significant, is not nearly as dominant as it is in men’s. So that opportunity is really in front of us to grow.”
“In Europe, it’s been a growth in customer, better retail presentation, better customer presentation, true cleaning up of the brand into department stores and key specialty stores. Offsetting that has been getting out of the off-price channels and getting out of some terrible distribution that the brand was in.”
Chirico discussed the negative impact of the strong dollar on tourism and shopping at outlet stores across the U.S. “I think the brands that are being impacted the most dramatically are the global brands, ourselves, Calvin and Tommy, we talked about. I guess Ralph Lauren has talked about this, Coach has talked about it to a degree.” He continued, “If you’re a global player that really attracts a global consumer, in those centers like Orlando or Harriman, your customer base in those centers for those brands, 50% of the credit card sales are international tourists from South America, Europe and Asia. If tourism is down in the United States which we know, just in general terms, it is, those are the centers that are being impacted, and those 15 or so centers are the ones, because of the size of their business, are being dragged down.”
Looking ahead, he added, “Last year, our comps for both Calvin and Tommy were high single digit positive comps in North America. So we’re up against some of our most challenging comps in the third quarter driven by that international tourism.” Continuing to refer to the outlets, he concluded, “There is really nothing at all wrong with that channel distribution. It’s like saying there is a problem with Herald Square Macy’s because the tourism is down in Macy’s. It’s still the largest department store in the world and probably the most profitable department store in the world, but it is being impacted by just tourism trends.”
The complete conference call can be found here: http://seekingalpha.com/article/3472306-pvh-pvh-emanuel-chirico-on-q2-2015-results-earnings-call-transcript?page=1&p=qanda&l=last
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