The increase was principally driven by the addition of approximately $487 million of revenue related to the newly acquired Warnaco businesses, net of a reduction in licensing revenue attributable to Warnaco from the prior year, and an increase of $41 million related to the Tommy Hilfiger business, partially offset by the loss of $28 million attributable to the Izod women’s and Timberland wholesale sportswear businesses, which the company exited in 2012. On a GAAP basis, revenue of $1.910 billion was $30 million lower than non-GAAP revenue due to sales returns for certain Warnaco wholesale customers in Asia in connection with an initiative to reduce excess inventory levels.
Earnings per share was $1.91 on a non-GAAP basis, which significantly exceeded the company’s guidance, as compared to the prior year’s first quarter non-GAAP earnings per share of $1.33.
GAAP loss per share was $(0.25) as compared to the prior year’s first quarter GAAP earnings per share of $1.30, due to significant costs incurred in connection with the company’s acquisition during the quarter of its former licensee, The Warnaco Group, Inc. (“Warnaco”), and with the related integration and restructuring, a significant portion of which was non-cash.
Segment Presentation
The acquisition of Warnaco has significantly impacted the way the company manages and analyzes its operating results. Beginning with the first quarter, the company changed how it discusses its business segments and results. The company aggregates its segments into three main businesses: (i) Calvin Klein, which now consists of the Calvin Klein North America and Calvin Klein International segments; (ii) Tommy Hilfiger, which consists of the Tommy Hilfiger North America and Tommy Hilfiger International segments; and (iii) Heritage Brands, which now consists of the Heritage Brands Wholesale and Heritage Brands Retail segments, whose operations are in North America and now include the swimwear and women’s intimate apparel wholesale businesses acquired with Warnaco. Refer to Appendix A later in this release for a further discussion and the adjusted 2012 quarterly and annual revenue and earnings before interest and taxes by segment.
First Quarter Business Review:
Due to the 53rd week in fiscal 2012, first quarter 2013 comparable store sales are more appropriately compared with the thirteen week period ended May 6, 2012. All comparable store sales discussed in this release are presented on this shifted basis.
Calvin Klein
Revenue on a non-GAAP basis in the Calvin Klein business increased to $638 million from $262 million in the prior year’s first quarter. $361 million of the increase in revenue was due to the Warnaco acquisition and is net of the reduction in licensing revenue attributable to Warnaco for the prior year. Comparable store sales within the company’s Calvin Klein North America retail business increased 4 percent despite unseasonably cold weather in March and April. With respect to the Warnaco Calvin Klein jeans and underwear businesses, revenue exceeded the company’s estimate as a result of strong business in China and Brazil, due in part to wholesale shipments planned in the second quarter being accelerated into the first quarter, partially offset by continued weakness in Korea. The European business was on plan with a mid-single digit sales decline due to weakness in jeans, particularly in Spain and Italy where the European business is primarily concentrated and where the company is currently restructuring the distribution mix. Comparable store sales within the Calvin Klein International segment decreased 5 percent.
Royalty revenue in the first quarter decreased $22 million from the prior year amount, principally due to the loss of royalties from Warnaco subsequent to the acquisition date and the expiration of a long-term contractual agreement related to royalties in the North American women’s sportswear business. Excluding the expiration of this contract and loss of Warnaco royalties, royalty revenue increased 4 percent due to strength in handbags and accessories, women’s coats, outerwear and suits.
GAAP revenue in the current year’s first quarter was $608 million, or $30 million lower than non-GAAP revenue, due to the sales returns mentioned above.
Earnings before interest and taxes for the Calvin Klein business increased to $106 million on a non-GAAP basis, as compared to $58 million in the prior year’s first quarter (which was in accordance with GAAP), due largely to earnings related to the Calvin Klein businesses acquired from Warnaco and a strong increase in the company’s North America retail business due to the revenue increase mentioned above, combined with improved gross margins.
On a GAAP basis, earnings before interest and taxes for the Calvin Klein business decreased to a loss of $(36) million, as compared to earnings of $58 million in the prior year’s first quarter. This decrease was due principally to the significant acquisition and integration costs incurred during the first quarter, a significant portion of which was non-cash, partially offset by the net earnings from the acquired businesses noted above.
Tommy Hilfiger
Revenue in the Tommy Hilfiger business increased 5 percent to $811 million from $770 million in the prior year’s first quarter. Within the Tommy Hilfiger North America business, revenue increased 14 percent, principally driven by a 5 percent retail comparable store sales increase, retail square footage expansion and strong North America wholesale revenue growth. The increase in the North America wholesale business was due, in part, to the acceleration into the first quarter of wholesale shipments that were initially planned for the second quarter. Revenue in the Tommy Hilfiger International business was flat as compared to the prior year’s first quarter. Revenue growth in Europe was driven by a 4 percent retail comparable store sales increase despite unseasonably cool weather, but was offset by the negative impact of a weaker Yen and continued weakness in the company’s Japanese business, where it continues to strategically reposition the brand.
Earnings before interest and taxes for the Tommy Hilfiger business increased 15 percent to $118 million from $103 million on a non-GAAP basis and $102 million on a GAAP basis in the prior year’s first quarter. The North America business drove the increase as a result of the net revenue growth discussed above and an improvement in gross margin resulting from an increase in average unit retail selling prices and stronger sell throughs.
Heritage Brands
Total revenue for the Heritage Brands business increased 24 percent to $491 million as compared to $395 million in the prior year’s first quarter, due principally to the addition of $126 million of revenue related to Warnaco’s Speedo swimwear and Warner’s and Olga women’s intimate apparel businesses. Partially offsetting this increase was a decrease of $28 million, or 7 percent, resulting from the 2012 exit from the Izod women’s and Timberland wholesale sportswear businesses. Excluding the impact of exited businesses, revenue for the pre-existing Heritage Brands business decreased 1 percent, principally driven by a 7 percent comparable store sales decline due principally to the soft performance of the company’s Bass retail business and unseasonably cool weather in the Northeast and Midwest, partially offset by a strong increase in the Izod men’s wholesale sportswear business due, in part, to the timing of shipments.
Earnings before interest and taxes for the Heritage Brands business was $39 million on a non-GAAP basis, as compared to the prior year’s first quarter of $18 million (which was in accordance with GAAP). The increase was due principally to (i) the addition of earnings related to the acquired Warnaco Heritage Brands businesses; and (ii) operating margin expansion in the pre-existing wholesale business primarily driven by strong gross margin improvement in the Izod men’s, Van Heusen and Arrow wholesale sportswear businesses, combined with exiting the lower-margin Izod women’s and Timberland wholesale sportswear businesses. Partially offsetting these increases was a decline in the Bass retail business, driven by the comparable store sales decline mentioned above, combined with higher promotional selling across the Heritage Brands Retail business, which pressured gross margins.
On a GAAP basis, earnings before interest and taxes for the Heritage Brands business was $22 million, as compared to $18 million in the prior year’s first quarter. This increase was due principally to the revenue and operating margin increases noted above, partially offset by Warnaco acquisition and integration costs, a significant portion of which was non-cash.
First Quarter Consolidated Earnings:
Earnings before interest and taxes on a non-GAAP basis increased 51 percent to $241 million from $159 million in the prior year’s first quarter due in large part to the positive impact of the acquired Warnaco businesses. The increase in earnings before interest and taxes on a non-GAAP basis was driven by the net effect of (i) an increase of $48 million in the Calvin Klein business; (ii) an increase of $15 million in the Tommy Hilfiger business; (iii) an increase of $21 million in the Heritage Brands business; and (iv) an increase of $3 million in corporate expenses due principally to the addition of Warnaco corporate expenses, net of synergies realized from the acquisition.
The company posted earnings before interest and taxes on a GAAP basis of $7 million, as compared to $156 million in the prior year’s first quarter. The decline in earnings was due principally to $235 million of acquisition, integration, restructuring and debt modification and extinguishment charges related to the Warnaco acquisition, partially offset by the net effect of the changes discussed above. Acquisition, integration, restructuring and debt modification and extinguishment charges totaling $133 million were non-cash, the majority of which relate to short-lived valuation adjustments and amortization.
Net interest expense increased to $45 million on a non-GAAP basis, as compared to $29 million in the prior year’s first quarter (which was in accordance with GAAP), due to the debt incurred in connection with the Warnaco acquisition, which increased the company’s total indebtedness above the pre-acquisition level. GAAP net interest expense was $46 million.
The effective tax rate was 20.6 percent on a non-GAAP basis as compared to 24.8 percent on a non-GAAP basis in the prior year’s first quarter. The non-GAAP effective tax rate in the first quarter of 2013 was lower than plan, which resulted in a favorable impact of $14 million, or $0.17 per share, due to the timing of certain discrete tax items. Such discrete items were also the reason for the decrease in the first quarter non-GAAP tax rate as compared to the prior year’s first quarter. On a GAAP basis, the impact of the Warnaco acquisition on pre-tax income, combined with certain discrete items recorded during the quarter, resulted in the GAAP effective tax rate increasing to 48.9 percent, as compared to 24.7 percent in the prior year’s first quarter.
2013 Guidance:
Please see the section entitled “Full Year and Second Quarter 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
Despite the strong tone of business that led to the company’s outperformance in the first quarter, the company believes it is premature to adjust its full year earnings guidance, given the short amount of time that has passed since closing the Warnaco acquisition and the complexity of the integration.
The company continues to project that revenue in 2013 will be approximately $8.2 billion.
Revenue for the Calvin Klein business in 2013 on a non-GAAP basis is projected to increase to approximately $2.75 billion as compared to the 2012 amount of $1.15 billion, principally due to the Warnaco jeans and underwear businesses. Revenue for the Tommy Hilfiger business in 2013 is expected to be approximately $3.40 billion as compared to the 2012 amount of $3.22 billion. Revenue for the Heritage Brands business in 2013 is projected to increase to approximately $2.05 billion as compared to the 2012 amount of $1.68 billion due principally to the addition of revenue related to the newly acquired Speedo swimwear and Warner’s and Olga women’s intimate apparel businesses.
The company continues to project that non-GAAP earnings per share will be approximately $7.00, as compared to the $6.58 in 2012.
The company currently projects that 2013 interest expense will be approximately $200 million and that the 2013 full year tax rate will be approximately 25.5 percent to 26.5 percent. The company currently plans to make term loan payments of approximately $400 million during the remainder of 2013, the majority of which are expected to be voluntary.
The company’s 2013 earnings per share estimate excludes approximately $450 million of pre-tax costs associated with the Warnaco acquisition and the related integration, restructuring and debt modification and extinguishment, of which approximately $225 million are expected to be non-cash charges, the majority of which are expected to relate to short-lived valuation adjustments and amortization. (Please see section entitled “Non-GAAP Exclusions” for details on these pre-tax costs.)
Second Quarter Guidance
Revenue in the second quarter of 2013 is expected to be approximately $1.9 billion.
Revenue for the Calvin Klein business in the second quarter of 2013 is projected to increase to approximately $625 million as compared to the 2012 amount of $251 million principally due to the Warnaco jeans and underwear businesses. Revenue for the Tommy Hilfiger business in the second quarter of 2013 is expected to be approximately $775 million as compared to the 2012 amount of $722 million. Revenue for the Heritage Brands business in the second quarter of 2013 is projected to increase to approximately $500 million as compared to the 2012 amount of $363 million due principally to the addition of revenue related to the newly acquired Speedo swimwear and Warner’s and Olga women’s intimate apparel businesses.
On a non-GAAP basis, earnings per share for the second quarter is currently projected to be approximately $1.35 as compared to $1.28 in the prior year’s second quarter.
The company currently projects that second quarter 2013 interest expense will be approximately $50 million and that the 2013 second quarter tax rate will be approximately 30.0 percent to 31.0 percent.
The company’s second quarter 2013 earnings per share estimate excludes approximately $125 million of pre-tax costs associated with the integration and related restructuring of Warnaco, of which approximately $75 million are expected to be non-cash charges, the majority of which relate to short-lived valuation adjustments and amortization. (Please see section entitled “Non-GAAP Exclusions” for details on these pre-tax costs.)
CEO Comments:
Commenting on these results, Emanuel Chirico, Chairman and Chief Executive Officer, noted, “We are very pleased with our first quarter performance, which included our newly acquired Warnaco businesses and significantly exceeded our guidance. Our results demonstrated the strength of the Calvin Klein and Tommy Hilfiger businesses, which both continue to exhibit strong global growth, despite the macro-environment and unseasonably cold weather that negatively impacted sales of spring product in North America and Europe. We were also pleased to see the strong operating improvements in our pre-existing Heritage Brands wholesale business, primarily in the sportswear division, and believe the Speedo, Warner’s and Olga brands are proving to be strategic complements to our pre-existing Heritage Brands portfolio.”
Mr. Chirico continued, “During the first quarter, we began to make the necessary investments to rebuild Warnaco’s Calvin Klein jeanswear and underwear businesses, which will allow us to capitalize on their long-term growth opportunities. We are committed to successfully executing on our previously announced initiatives, which include our focus on upgrading the quality and product design of Calvin Klein jeanswear, investing in marketing and merchandising, reducing excess inventory levels, and restructuring the sales distribution mix for these businesses in Europe and North America. Additionally, significant steps are being taken to enhance the existing operating infrastructure and fill key positions across the organization. The impact of these initiatives will result in a more pronounced increase in expenses in the second half of the year. Taking into account all of these initiatives and that we are only four months into our acquisition, we believe it is prudent to hold our full year non-GAAP earnings guidance at $7.00.”
Mr. Chirico concluded, “2013 will be a year of transition for PVH. We are actively implementing our integration plans to build upon the foundation of PVH around the world and pave the way for the continued success of our businesses. We are optimistic that the expansion of our brands globally and the sound execution of our business strategies will continue to drive long-term growth and stockholder value.”
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