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| PVH > SEC Filings for PVH > Form 10-Q on 11-Jun-2009 | All Recent SEC Filings |
11-Jun-2009
Quarterly Report
References to the brand names Calvin Klein Collection, ck Calvin Klein, Calvin Klein, Van Heusen, IZOD, Eagle, Bass, Geoffrey Beene, ARROW, BCBG Max Azria, BCBG Attitude, CHAPS, Sean John, JOE Joseph Abboud, MICHAEL Michael Kors, Michael Kors Collection, Donald J. Trump Signature Collection, Kenneth Cole New York, Kenneth Cole Reaction, DKNY, Tommy Hilfiger, Nautica, Ike Behar, Jones New York, J. Garcia, Claiborne, Timberland and to other brand names are to registered trademarks owned by us or licensed to us by third parties and are identified by italicizing the brand name.
References to the BVH acquisition refer to our October 2008 acquisition from The British Van Heusen Company Limited, a former licensee of Van Heusen men's dresswear and accessories in the United Kingdom and Ireland, and one of its affiliates of certain assets (including inventories) of the licensed business. We refer to The British Van Heusen Company Limited and its affiliate together as "BVH."
References to the Mulberry acquisition refer to our April 2008 acquisition of certain assets (including certain trademark licenses, inventories and receivables) of Mulberry Thai Silks, Inc., a manufacturer and distributor of branded neckwear in the United States, which we refer to as "Mulberry."
References to our acquisition of CMI refer to our January 2008 acquisition from Warnaco, Inc. ("Warnaco") of Confezioni Moda Italia S.r.L., which we refer to as "CMI." CMI is the licensee of the Calvin Klein Collection apparel and accessories businesses under agreements with our Calvin Klein, Inc. subsidiary.
References to the Superba acquisition refer to our January 2007 acquisition of substantially all of the assets of Superba, Inc., a manufacturer and distributor of neckwear in the United States and Canada, which we refer to as "Superba."
References to our acquisition of Calvin Klein refer to our February 2003 acquisition of Calvin Klein, Inc. and certain affiliated companies, which companies we refer to collectively as "Calvin Klein."
OVERVIEW
The following discussion and analysis is intended to help you understand us, our operations and our financial performance. It should be read in conjunction with our consolidated financial statements and the accompanying notes, which are included elsewhere in this report.
We are one of the largest apparel companies in the world, with a heritage dating back over 125 years. Our brand portfolio consists of nationally recognized brand names, including Calvin Klein, Van Heusen, IZOD, ARROW, Bass and Eagle, which are owned, and Geoffrey Beene, Kenneth Cole New York, Kenneth Cole Reaction, BCBG Max Azria, BCBG Attitude, Sean John, JOE Joseph Abboud, MICHAEL Michael Kors, Michael Kors Collection, CHAPS, Donald J. Trump Signature Collection, DKNY, Tommy Hilfiger, Nautica, Ike Behar, J. Garcia, Claiborne, Jones New York and Timberland, which are licensed.
We faced a very challenging environment during the second half of 2008, which has continued into 2009. The global economic crisis began early in 2008 in the United States, affecting the principal market for our heritage businesses. The crisis deepened and became more widespread, affecting travel and foreign currency exchange rates, as well as consumer confidence and spending. This resulted in further deterioration of our heritage businesses and interrupted the growth trajectory of our Calvin Klein businesses. We announced during the fourth quarter of 2008 a series of actions we are undertaking to respond to these economic conditions, including restructuring certain of our operations and implementing a number of other cost reduction efforts. We began implementing the restructuring initiatives during the fourth quarter of 2008 and we are expecting to complete substantially all of them by the end of the second quarter of 2009. The restructuring initiatives include the shutdown of domestic production of machine-made neckwear, a realignment of our global sourcing organizational structure and reductions in warehousing capacity, all of which have headcount reductions associated with them, as well as other initiatives to reduce corporate and administrative expenses. In the second quarter of 2008, we had announced that we would not renew our license agreements to operate Geoffrey Beene outlet retail stores and we executed our plan to close our Geoffrey Beene outlet retail division before the end of 2008.
A significant portion of our total income before interest and taxes is derived from international sources, primarily driven by the international component of our Calvin Klein licensing business. We intend to continue to expand our operations globally through direct marketing by us and through partnerships with licensees. We recently expanded our international operations to include sales of certain of our products to department and specialty stores throughout Canada and parts of Europe, including through the BVH acquisition, which provided us with a wholesale distribution component and a limited number of retail stores, principally for Van Heusen dress furnishings in the United Kingdom and Ireland. We have also entered into approximately 80 license agreements, covering over 150 countries, with partners outside of the United States for our brands.
OPERATIONS OVERVIEW
We generate net sales from (i) the wholesale distribution of men's dress shirts and neckwear and men's and women's sportswear; and (ii) the sale, through over 650 company-operated retail locations, of apparel, footwear and accessories under the brand names Van Heusen, IZOD, Bass and Calvin Klein. In addition, into the fourth quarter of 2008, we operated retail stores under the brand name Geoffrey Beene.
Our stores principally operate in outlet centers in the United States. We also operate a full price store located in New York City under the Calvin Klein Collection brand, in which we principally sell men's and women's high-end collection apparel and accessories, soft home furnishings and tableware. Additionally, in connection with our acquisition of BVH, we assumed the operation of a limited number of retail stores located in the United Kingdom and Ireland that principally market Van Heusen brand dress furnishings.
We announced in the fourth quarter of 2008 a series of actions to respond to the current economic conditions by restructuring certain of our operations and implementing a number of other cost reduction efforts. We recorded pre-tax charges in the fourth quarter of 2008 that totaled approximately $82 million, of which approximately $64 million related to non-cash asset impairments, principally associated with our retail stores, and approximately $18 million related to lease terminations, severance and other costs in connection with these restructuring initiatives. We recorded additional pre-tax charges of $4.7 million related principally to lease terminations, severance and other costs during the first quarter of 2009 and we expect to incur additional charges of approximately $5.3 million principally in the second quarter of 2009 in connection with these initiatives.
We generate royalty, advertising and other revenue from fees for licensing the use of our trademarks. Calvin Klein royalty, advertising and other revenue, which comprised 92% of total royalty, advertising and other revenue in the first quarter of 2009, is derived under licenses and other arrangements for a broad array of products, including jeans, underwear, fragrances, eyewear, footwear, dresses, watches and home furnishings.
Gross profit on total revenue is total revenue less cost of goods sold. Included as cost of goods sold are costs associated with the production and procurement of product, including inbound freight costs, purchasing and receiving costs, inspection costs, internal transfer costs and other product procurement related charges. Because there is no cost of goods sold associated with royalty, advertising and other revenue, 100% of such revenue is included in gross profit. As a result, our gross profit may not be comparable to that of other entities.
RESULTS OF OPERATIONS
Thirteen Weeks Ended May 3, 2009 Compared With Thirteen Weeks Ended May 4, 2008
Net Sales
Net sales in the first quarter of 2009 decreased 12.4% to $475.7 million from $543.2 million in the first quarter of the prior year. The decrease of $67.4 million was due principally to the items described below:
·
The reduction of $36.4 million of net sales attributable to declines in our wholesale dress furnishings and sportswear segments resulting from the economic slowdown and the reduction of department store inventory levels, partially offset by additional sales associated with our new Timberland men's sportswear line, which was launched in the second quarter of 2008.
·
The reduction of $23.9 million of net sales associated with our exit in 2008 of our Geoffrey Beene outlet retail division.
·
The reduction of $5.5 million of net sales attributable to declines in our retail segments associated with our ongoing retail businesses. This was primarily driven by comparable store sales declines of 8%, partially offset by additional sales attributable to the conversion of a limited number of Geoffrey Beene outlet retail stores to the Calvin Klein outlet retail format.
Given the overall negative economic environment and our exit in 2008 of our Geoffrey Beene outlet retail business (which had sales of $94.9 million in 2008), we currently estimate our 2009 full year sales to decrease 7% to 8%.
Royalty, Advertising and Other Revenue
Royalty, advertising and other revenue in the first quarter of 2009 was $81.7 million, which was relatively flat to the prior year's first quarter amount of $82.5 million. Within the Calvin Klein Licensing segment, global licensee royalty growth of 6% on a constant exchange rate basis was offset by the negative impact of a stronger U.S. dollar. The royalty growth on a constant exchange rate basis was principally due to strong performance in jeans, footwear, dresses and underwear, partially offset by a sales reduction in the fragrance business, which continues to be affected by reductions in travel and discretionary spending resulting from the difficult economic environment.
We currently expect that total royalty, advertising and other revenue will decrease 3% to 4% for the full year 2009. This decrease is due to reduced Calvin Klein advertising revenue in 2009 as a result of less discretionary spending in 2009 compared to 2008 by our licensees. Such advertising revenue is generally collected and spent, and is therefore presented as both a revenue and an expense within our income statement, with minimal net impact on earnings. Within the Calvin Klein Licensing segment, royalty revenue is expected to be flat, as anticipated global licensee royalty growth of 4% on a constant exchange rate basis is expected to be offset by the negative impact of a stronger U.S. dollar for the full year 2009.
Gross Profit on Total Revenue
Gross profit on total revenue in the first quarter of 2009 was $271.8 million, or 48.8% of total revenue, compared with $310.8 million, or 49.7% of total revenue in the first quarter of the prior year. The 90 basis point decrease was driven by increased promotional selling resulting from the difficult economic environment, partially offset by a change in revenue mix, as royalty, advertising and other revenue, which does not carry a cost of sales and has a gross profit percentage of 100%, increased as a percentage of total revenue.
We currently expect that the gross profit on total revenue percentage will decrease for the full year 2009 compared to 2008, due principally to increased promotional selling resulting from the difficult economic environment.
SG&A expenses in the first quarter of 2009 were $222.7 million, or 40.0% of total revenue, compared with $230.1 million, or 36.8% of total revenue, in the first quarter of the prior year. The 320 basis point increase includes an increase of approximately 70 basis points related to fixed asset impairments, severance, lease terminations and other costs associated with our restructuring initiatives. The remaining 250 basis point increase was due principally to the deleveraging of expenses due to the sales decreases mentioned previously. The $7.4 million decrease in SG&A expenses in the first quarter of 2009 was due principally to the absence of expenses incurred in the first quarter of 2008 related to our Geoffrey Beene outlet retail division, which we exited during 2008, and cost savings resulting from our 2008 restructuring initiatives. These reductions were mostly offset by expenses associated with the conversion of a limited number of Geoffrey Beene outlet retail stores to the Calvin Klein outlet retail format and by additional expenses related to fixed asset impairments, lease terminations, severance and other costs associated with our restructuring initiatives.
Our full year 2009 SG&A expenses are currently expected to decrease compared to 2008 principally as a result of a reduction in costs associated with (i) restructuring initiatives; (ii) impairments; and (iii) our Geoffrey Beene outlet retail division, which we exited during 2008. SG&A expenses for the full year 2009 as a percentage of total revenue is expected to decrease, as the reduction in SG&A expenses is expected to more than offset the impact of the deleveraging of expenses.
Gain on Sale of Investments
We sold, in the first quarter of 2006, minority interests held by one of our subsidiaries in certain entities that operate the licenses and related wholesale and retail businesses of Calvin Klein jeans and accessories in Europe and Asia and the ck Calvin Klein bridge line of sportswear and accessories in Europe. During the first quarter of 2008, we received a distribution of $1.9 million representing our share of the amount that remained in escrow in connection with this sale, which we recorded as a gain in the first quarter of 2008.
Interest Expense and Interest Income
The majority of our interest expense relates to our fixed rate long-term debt. As a result, variances in our net interest expense tend to be driven by changes in interest income and, to a lesser extent, costs related to our revolving credit facility.
Interest expense of $8.4 million in the first quarter of 2009 was flat to the prior year's first quarter amount. Interest income decreased to $0.5 million in the first quarter of 2009 from $1.9 million in the first quarter of the prior year due principally to a decrease in average investment rates of return, partially offset by an increase in our average cash position during the first quarter of 2009 as compared to the first quarter of 2008.
Income Taxes
Income taxes decreased by $12.7 million to $16.5 million in the first quarter of 2009 from $29.3 million in the first quarter of 2008. The decrease was primarily due to a decrease in pre-tax income during the first quarter of 2009 compared to the first quarter of 2008. Income taxes for the first quarter of 2009 were provided for at a rate of 40.1% compared with last year's first quarter rate of 38.5%. Our quarterly tax rate tends to vary from our full year rate because discrete items do not occur in all quarters.
We currently anticipate that our 2009 tax expense as a percentage of pre-tax income will be between 37.0% and 37.5%, which compares with last year's full year rate of 37.3%. It is possible that our estimated full year rate could change from discrete events arising from specific transactions, audits by tax authorities or the receipt of new information.
LIQUIDITY AND CAPITAL RESOURCES
Generally, our principal source of cash is from operations, and our principal uses of cash are for capital expenditures, contingent purchase price payments and dividends.
Cash used by operating activities was $21.6 million in the first quarter of 2009, which compares with $5.7 million in the first quarter of the prior year. Net income adjusted for depreciation, amortization, stock-based compensation expense, deferred taxes, impairment and the gain on the sale of investments decreased $20.1 million and was partially offset by changes in working capital, including the following:
·
An increase in cash flow resulting from a change in net trade receivables due to the timing and amounts of wholesale sales in the first quarter of 2009 as compared to the first quarter of 2008.
·
An increase in cash flow resulting from a change in accounts payable, accrued expenses and deferred revenue due principally to the timing of inventory payments in our wholesale and retail businesses and a significant reduction in payments of incentive compensation costs, as the balance of accruals for incentive compensation at the end of 2008 was significantly lower than the balance at the end of 2007.
·
A decrease in cash flow due to the $38.5 million Warnaco paid us in the first quarter of 2008 in connection with our acquisition of CMI. Please see Note 4, "Acquisition of CMI," in the Notes to Consolidated Financial Statements included in Item 1 of this report for a further discussion. We did not receive a corresponding payment in the first quarter of 2009.
·
A decrease in cash flow resulting from a change in net inventories due principally to significantly higher inventory levels at the end of 2007 compared to the end of 2008, as inventory levels at the end of 2008 contemplated a sales reduction for the first quarter of 2009 resulting from the difficult economic environment.
·
A decrease in cash flow resulting from a change in prepaid expenses due principally to the timing of rent payments in our retail businesses.
Capital Expenditures
Our capital expenditures paid in cash in the first quarter of 2009 were $6.2 million. We currently expect that capital expenditures for the full year 2009 will be approximately $40.0 million. This compares to capital expenditures paid in cash for the full year 2008 of $88.1 million.
Contingent Purchase Price Payments
In connection with our acquisition of Calvin Klein, we are obligated to pay Mr. Calvin Klein contingent purchase price payments based on 1.15% of total worldwide net sales, as defined in the agreement governing the Calvin Klein acquisition, of products bearing any of the Calvin Klein brands with respect to sales made during the first 15 years following the closing of the acquisition. A significant portion of the sales on which the payments to Mr. Klein are made are wholesale sales by us and our licensees and other licensing partners to retailers. Such contingent purchase price payments totaled $9.6 million in the first quarter of 2009. We currently expect that such payments will decrease slightly for the full year 2009 compared to the prior year amount of $40.8 million.
In connection with the Superba acquisition, we are obligated to pay Superba contingent purchase price payments if the earnings of the acquired business exceed certain targets in 2007, 2008 and 2009. Any such contingent purchase price payments would be payable 90 days after the applicable fiscal year end. Such contingent purchase price payments totaled $14.5 million in the first quarter of 2008 based on the actual calculation of 2007 earnings, as defined in the underlying asset purchase agreement, achieved by the acquired business. The acquired business did not achieve the minimum earnings in 2008 required for a payout in 2009. The maximum payout that Superba can receive with respect to 2009 earnings is $30.0 million. We currently anticipate that no payment will be made in 2010 with respect to 2009 earnings.
Acquisition of Block
We acquired in February 2009 from Block Corporation ("Block"), a former licensee
of Van Heusen and IZOD "big and tall" sportswear in the United States,
inventories and inventory purchase commitments related to the licensed business.
We paid $5.7 million during the first quarter of 2009 in connection with the
transaction. As part of this transaction, the license agreements between us and
Block were terminated. Please see Note 3, "Acquisition of Block Assets," in the
Notes to Consolidated Financial Statements included in Item 1 of this report for
a further discussion.
Acquisition of CMI
We acquired CMI from Warnaco on January 30, 2008. CMI is the licensee of the Calvin Klein Collection apparel and accessories businesses under agreements with our Calvin Klein, Inc. subsidiary. Warnaco acquired the shares of CMI in January 2008 and was obligated to operate the Calvin Klein Collection businesses through 2013. In return for us assuming ownership of CMI, Warnaco made a payment of $38.5 million to us during the first quarter of 2008. As part of this transaction, we paid to Warnaco $17.1 million during the first quarter of 2008 based on a percentage of Warnaco's estimate of the net working capital of CMI as of the closing date. This amount is subject to adjustment. We adjusted during 2008 the preliminary allocation of the purchase price based on our calculation of the working capital of CMI as of the closing date. Pursuant to the process set forth in the amended acquisition agreement, we submitted our calculation of the closing date working capital to Warnaco and Warnaco has disputed the calculation. We are in discussion with Warnaco to resolve the disputed calculation. Our results for the balance of 2009 could be impacted depending on the outcome of these discussions. Please see Note 4, "Acquisition of CMI," in the Notes to Consolidated Financial Statements included in Item 1 of this report for a further discussion.
Dividends
Our common stock, which as of May 3, 2009 is the only class of stock issued, currently pays annual dividends totaling $0.15 per share.
We project that cash dividends on our common stock in 2009 will be $7.8 million to $7.9 million based on our current dividend rate, the number of shares of our common stock outstanding at May 3, 2009 and our estimates of stock to be issued in 2009 under our stock incentive plans.
Cash Flow Summary
Our net cash outflow in the first quarter of 2009 was $46.2 million. Cash flow for the full year 2009 will be impacted by various other factors in addition to those noted above in this "Liquidity and Capital Resources" section. We currently expect to generate approximately $65.0 million to $75.0 million of cash flow in 2009 after making cash payments for severance, lease terminations and other costs in connection with our restructuring initiatives. There can be no assurance that this estimate will prove to be accurate. Unforeseen events, including changes in our net income, working capital requirements or other items, including acquisitions and equity transactions, could occur, which could cause our cash flow to vary significantly from this estimate.
Financing Arrangements
Our capital structure as of May 3, 2009 was as follows:
(in millions)
Long-term debt $ 399.6
Stockholders' equity $1,023.4
We believe our capital structure provides a secure base to support our current operations and our planned growth in the future. There are no maturities of our long-term debt until 2011.
For near-term liquidity, in addition to our cash balance, we have a $325.0 million secured revolving credit facility with JP Morgan Chase Bank, N.A. as the Administrative Agent and Collateral Agent that expires in July 2012 and provides for revolving credit borrowings, as well as the issuance of letters of credit. We may, at our option, borrow and repay amounts up to a maximum of $325.0 million for revolving credit borrowings and the issuance of letters of credit, which may be increased by us under certain conditions by up to $100.0 million, with a sublimit of $50.0 million for standby letters of credit and with no sublimit on trade letters of credit. Based on our working capital projections, we believe that our borrowing capacity under this facility provides us with adequate liquidity for our peak seasonal needs for the foreseeable future. During the first quarter of 2009, we had no revolving credit borrowings under the facility, and the maximum amount of letters of credit outstanding was $115.2 million. As of May 3, 2009, we had $109.1 million of outstanding letters of credit under this facility. We currently do not expect to have any revolving credit borrowings under the facility during the remainder of 2009.
SEASONALITY
Our business generally follows a seasonal pattern. Our wholesale businesses tend . . .
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