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| PVH > SEC Filings for PVH > Form 10-Q on 10-Sep-2009 | All Recent SEC Filings |
10-Sep-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 a subsidiary of The Warnaco Group, Inc. of Confezioni Moda Italia S.r.L., which we refer to as "CMI." (We refer to The Warnaco Group, Inc. and its subsidiaries, separately and together, as "Warnaco.") 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. (now known as Skipper, Inc., "Skipper"), a manufacturer and distributor of neckwear in the United States and Canada.
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 expect to complete substantially all of them by the end of the third quarter of 2009. The restructuring initiatives include the shutdown of domestic production of machine-made neckwear, a realignment of our global sourcing organization 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 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. We continue to remain cautious about the pace of the economic recovery. We did, however, see improvement
Our business strategy is to manage and market a portfolio of nationally recognized brands at multiple price points and across multiple channels of distribution. We believe this strategy reduces our reliance on any one demographic group, merchandise preference or distribution channel. We have enhanced this strategy by expanding our portfolio of brands through acquisitions of well-known brands, such as Calvin Klein and ARROW, that offer additional distribution channel and price point opportunities in our traditional categories of dress shirts and sportswear. These acquisitions also enhanced our business strategy by providing us with established international licensing businesses which do not require working capital investments. We have successfully pursued growth opportunities in extending these brands through licensing into additional product categories and geographic areas. The Superba and Mulberry acquisitions helped to advance our historical strategy by adding a product category that is complementary to our heritage dress shirt business and leverages our position in dress furnishings. Our business strategy was also extended by our assumption in 2007 of the wholesale IZOD women's sportswear collection, which was previously a licensed business. Further, in the second quarter of 2008, we began marketing men's sportswear under the Timberland brand in North America under a licensing arrangement with The Timberland Company. Timberland is an authentic outdoor traditional brand targeted to the department and specialty store channels of distribution that we believe has a unique positioning that complements our existing portfolio of sportswear brands and enables us to reach a broader spectrum of consumers.
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 $11.0 million related principally to severance, non-cash asset impairments and other costs during the first half of 2009. We expect to incur additional charges of approximately $6.0 million related principally to lease terminations pursuant to recent agreements for certain of our Calvin Klein specialty retail stores. Although lease termination costs were included in our previously announced initiatives, these costs relate to new agreements that we did not originally expect to be able to conclude. Such costs are expected to be incurred in the third quarter of 2009.
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 half 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.
Selling, general and administrative expenses include all other expenses, excluding interest and income taxes. Salaries and related fringe benefits is the largest component of selling, general and administrative expenses, comprising 49% of such expenses in the first half of 2009. Rent and occupancy for offices, warehouses and retail stores is the next largest expense, comprising 23% of selling, general and administrative expenses in the first half of 2009.
RESULTS OF OPERATIONS
Thirteen Weeks Ended August 2, 2009 Compared With Thirteen Weeks Ended August 3, 2008
Net Sales
Net sales in the second quarter of 2009 decreased 4.8% to $457.4 million from $480.3 million in the second quarter of the prior year. The decrease of $22.9 million was due principally to the net effect of the items described below:
·
The reduction of $25.9 million of net sales associated with our closing in 2008 of our Geoffrey Beene outlet retail division.
·
The addition of $1.8 million of net sales attributable to growth in our retail segments associated with our ongoing retail businesses. This was primarily driven by the additional sales attributable to the conversion of a limited number of Geoffrey Beene outlet retail stores to the Calvin Klein outlet retail format, mostly offset by comparable store sales declines in our retail divisions of 3% on a combined basis.
·
The addition of $0.9 million of net sales attributable to our Wholesale Dress Furnishings and Sportswear and Related Products segments.
Royalty, Advertising and Other Revenue
Royalty, advertising and other revenue in the second quarter of 2009 decreased 10.9% to $71.9 million from the prior year's second quarter amount of $80.7 million. Within the Calvin Klein Licensing segment, global licensee royalty revenue decreased 6% for the second quarter, which includes a $1.6 million negative impact from a stronger U.S. dollar. On a constant exchange rate basis, Calvin Klein global licensee royalty revenue decreased 3%. The royalty revenue decrease on a constant exchange rate basis was principally due to sales reductions in the fragrance business, which continues to be affected by reductions in travel and discretionary spending resulting from the difficult economic environment, and, to a lesser extent, sales reductions in the jeans business. These reductions were partially offset by strong performance in the footwear, women's apparel and outerwear businesses. Calvin Klein advertising and other revenue decreased $4.1 million in the second quarter of 2009 compared to the second quarter of 2008 as a result of less discretionary spending in 2009 as compared to 2008 by our licensees. Such advertising and other 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.
Gross Profit on Total Revenue
Gross profit on total revenue in the second quarter of 2009 was $265.8 million, or 50.2% of total revenue, compared with $288.9 million, or 51.5% of total revenue in the second quarter of the prior year. The 130 basis point decrease was driven by increased promotional selling resulting from the difficult economic environment, combined with 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%, decreased as a percentage of total revenue.
Selling, General and Administrative ("SG&A") Expenses
SG&A expenses in the second quarter of 2009 decreased $20.1 million to $214.3 million, or 40.5% of total revenue, from $234.5 million, or 41.8% of total revenue, in the second quarter of the prior year. The 130 basis point decrease includes a decrease of approximately 100 basis points due principally to cost savings resulting from our 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 second quarter of 2009 was flat to the prior year's second quarter amount. Interest income decreased to $0.4 million in the second quarter of 2009 from $1.6 million in the second 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 second quarter of 2009 as compared to the second quarter of 2008.
Income Taxes
Income taxes for the second quarter of 2009 were provided for at a rate of 38.9% compared with last year's second quarter rate of 38.7%. Our quarterly tax rate tends to vary from our full year rate because discrete items do not occur in all quarters. Income taxes decreased by $1.5 million to $16.9 million in the second quarter of 2009 from $18.5 million in the second quarter of 2008, primarily due to a decrease in pre-tax income during the current year's second quarter compared to the prior year's second quarter.
Twenty-Six Weeks Ended August 2, 2009 Compared With Twenty-Six Weeks Ended August 3, 2008
Net Sales
Net sales in the first half of 2009 decreased 8.8% to $933.2 million from $1,023.5 million in the first half of the prior year. The decrease of $90.3 million was due principally to the net effect of the items described below:
·
The reduction of $49.8 million of net sales associated with our closing in 2008 of our Geoffrey Beene outlet retail division.
·
The reduction of $35.5 million of net sales attributable to declines in our Wholesale Dress Furnishings and Sportswear and Related Products segments, particularly in the first quarter of 2009, 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 $3.8 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 in our retail divisions of 5% on a combined basis, 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 our first half performance and our exit in 2008 from our Geoffrey Beene outlet retail business (which had net sales of $94.9 million in 2008), we currently estimate our 2009 full year sales to decrease 6% to 7%. We are currently estimating second half sales to decrease approximately 3% to 4%, which includes relatively flat performance compared to the prior year for our continuing businesses, combined with a decrease of approximately $45 million of sales related to our Geoffrey Beene outlet retail business, which we exited in 2008.
Royalty, Advertising and Other Revenue
Royalty, advertising and other revenue in the first half of 2009 decreased 5.9% to $153.6 million from the prior year's first half amount of $163.2 million. Within the Calvin Klein Licensing segment, global licensee royalty revenue decreased 3%, due to a $5.1 million negative impact of a stronger U.S. dollar, partially offset by growth on a constant exchange rate basis of 2%. The royalty growth on a constant exchange rate basis was principally due to
Given our first half performance, we currently expect that total royalty, advertising and other revenue will decrease 2% to 4% for the full year 2009. This decrease will be driven principally by a reduction in the Calvin Klein licensing segment due to reduced advertising revenue in 2009 as a result of less discretionary spending in 2009 compared to 2008 by our licensees. Within the Calvin Klein Licensing segment, royalty revenue is expected to be flat to down 2%, as anticipated global licensee royalty growth of 1% to 2% on a constant exchange rate basis is expected to be offset by the negative impact of a stronger U.S. dollar which was experienced in the first half of 2009.
Gross Profit on Total Revenue
Gross profit on total revenue in the first half of 2009 was $537.6 million, or 49.5% of total revenue, compared with $599.7 million, or 50.5% of total revenue in the first half of the prior year. The 100 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 the increased promotional selling we have experienced in the first half of the year.
Selling, General and Administrative (SG&A) Expenses
SG&A expenses in the first half of 2009 decreased $27.5 million to $437.0 million, or 40.2% of total revenue, from $464.5 million, or 39.1% of total revenue, in the first half of the prior year. The 110 basis point increase includes an increase of approximately 90 basis points due principally to the deleveraging of expenses due to the sales decreases mentioned previously and increases in accruals for incentive compensation costs, partially offset by reduced advertising expenditures as a result of less discretionary spending by our Calvin Klein licensees. The remaining decrease of 20 basis points was due to restructuring and exit activities, as fixed asset impairments, severance, lease terminations and other costs incurred in the first half of 2009 associated with our restructuring initiatives announced in the fourth quarter of 2008 exceeded similar costs incurred in the first half of 2008 associated with our closing in 2008 of our Geoffrey Beene outlet retail division.
Our full year 2009 SG&A expenses are currently expected to decrease compared to 2008 principally as a result of a reduction in (i) impairment charges; and (ii) costs associated with our Geoffrey Beene outlet retail division, which we closed 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.
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.
Income Taxes
Income taxes for the first half of 2009 were provided for at a rate of 39.5% compared with last year's first half rate of 38.6%. Our partial year tax rate tends to vary from our full year rate because discrete items do not occur in all quarters. Income taxes decreased by $14.3 million to $33.5 million in the first half of 2009 from $47.7 million in the first half of 2008, primarily due to a decrease in pre-tax income during the current year's first half compared to the prior year's first half.
We currently anticipate that our 2009 tax expense as a percentage of pre-tax income will be between 36.5% and 37.0%, 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.
Operations
Cash provided by operating activities was $80.9 million in the first half of 2009, which compares with $107.4 million in the first half of the prior year. This decrease was primarily due to a decrease of $24.7 million in net income. The net change in working capital was relatively flat to the prior year amount and consisted of the following:
·
An increase in cash flow resulting from a change in net trade receivables due primarily to the timing and amounts of wholesale sales in the second quarter of 2009 as compared to the second quarter of 2008.
·
An increase in cash flow resulting from a change in accounts payable, accrued expenses, deferred revenue and other, net due principally to 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. The change in other, net for the first six months of 2009 as compared to the prior year was principally due to the reclassification of certain non-current liabilities to accrued expenses. This had no material impact on cash provided by operating activities for the first half of 2009.
·
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 half of 2009.
·
A decrease in cash flow resulting from a change in inventories. Inventory balances are typically higher at the end of the second quarter when compared to year end, resulting in a cash outflow. Although inventory balances decreased 7% from the second quarter of 2008 to the second quarter of 2009, inventory levels at the beginning of 2008 were significantly higher than levels at the beginning of 2009, causing the cash outflow for the first half of 2009 to be more pronounced than that for the first half of 2008.
Capital Expenditures
Our capital expenditures paid in cash in the first half of 2009 were $12.9 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.
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 $18.6 million in the first half 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.
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