SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|☒||QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
|For the quarterly period ended||May 1, 2022|
|☐||TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
|For the transition period from||to|Commission File Number 001-07572
|(Exact name of registrant as specified in its charter)|
|(State or other jurisdiction of||(I.R.S. Employer|
|incorporation or organization)||Identification No.)|
|285 Madison Avenue,||New York,||New York||10017|
|(Address of principal executive offices)||(Zip Code)|
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
|Title of each class||Trading Symbol||Name of each exchange on which registered|
|Common Stock, $1.00 par value||PVH||New York Stock Exchange|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|Large Accelerated Filer||☒||Accelerated filer ||☐|
|☐||Smaller reporting company||☐|
|Emerging growth company||☐|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of outstanding shares of common stock of the registrant as of June 1, 2022 was 66,960,539.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: Forward-looking statements in this Quarterly Report on Form 10-Q, including, without limitation, statements relating to our future revenue, earnings and cash flows, plans, strategies, objectives, expectations and intentions are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy, and some of which might not be anticipated, including, without limitation, (i) our plans, strategies, objectives, expectations and intentions are subject to change at any time at our discretion; (ii) our ability to realize anticipated benefits and savings from divestitures, restructurings and similar plans, such as the workforce reductions in North America and certain international markets, the reductions in our office and store real estate footprint, and our sale of certain intellectual property and other assets of, and exiting from, our Heritage Brands business to focus on our Calvin Klein and Tommy Hilfiger businesses, all as previously announced; (iii) we may be considered to be highly leveraged and we use a significant portion of our cash flows to service our indebtedness, as a result of which we might not have sufficient funds to operate our businesses in the manner we intend or have operated in the past; (iv) the levels of sales of our apparel, footwear and related products, both to our wholesale customers and in our retail stores and our directly operated digital commerce sites, the levels of sales of our licensees at wholesale and retail, and the extent of discounts and promotional pricing in which we and our licensees and other business partners are required to engage, all of which can be affected by weather conditions, changes in the economy (including inflationary pressures like those currently being seen globally), fuel prices, reductions in travel, fashion trends, consolidations, repositionings and bankruptcies in the retail industries, repositionings of brands by our licensors, consumer sentiment and other factors; (v) our ability to manage our growth and inventory; (vi) quota restrictions, the imposition of safeguard controls and the imposition of new or increased duties or tariffs on goods from the countries where we or our licensees produce goods under our trademarks, any of which, among other things, could limit the ability to produce products in cost-effective countries, or in countries that have the labor and technical expertise needed, or require us to absorb costs or try to pass costs onto consumers, which could materially impact our revenue and profitability; (vii) the availability and cost of raw materials; (viii) our ability to adjust timely to changes in trade regulations and the migration and development of manufacturers (which can affect where our products can best be produced); (ix) the regulation or prohibition of the transaction of business with specific individuals or entities and their affiliates or goods manufactured in (or containing raw materials or components from) certain regions, such as the listing of a person or entity as a Specially Designated National or Blocked Person by the U.S. Department of the Treasury’s Office of Foreign Assets Control and the issuance of Withhold Release Orders by the U.S. Customs and Border Patrol; (x) changes in available factory and shipping capacity, wage and shipping cost escalation, and store closures in any of the countries where our licensees’ or wholesale customers’ or other business partners’ stores or our stores are located or products are sold or produced or are planned to be sold or produced, as a result of civil conflict, war or terrorist acts, the threat of any of the foregoing, or political or labor instability, such as the current war in Ukraine that has led to temporary cessation of our business and those of many business partners in Ukraine, Russia and Belarus; (xi) disease epidemics and health-related concerns, such as the ongoing COVID-19 pandemic, which could result in (and, in the case of the COVID-19 pandemic, has resulted in some of the following) supply-chain disruptions due to closed factories, reduced workforces and production capacity, shipping delays, container and trucker shortages, port congestion and other logistics problems, closed stores, reduced consumer traffic and purchasing, or governments implement mandatory business closures, travel restrictions or the like, and market or other changes that could result (or, with respect to the COVID-19 pandemic, could continue to result) in shortages of inventory available to be delivered to our stores and customers, order cancellations and lost sales, as well as in noncash impairments of our goodwill and other intangible assets, operating lease right-of-use assets, and property, plant and equipment; (xii) actions taken towards sustainability and social and environmental responsibility as part of our sustainability and social and environmental strategy, may not be achieved or may be perceived to be disingenuous, which could diminish consumer trust in our brands, as well as our brands value; (xiii) the failure of our licensees to market successfully licensed products or to preserve the value of our brands, or their misuse of our brands; (xiv) significant fluctuations of the U.S. dollar against foreign currencies in which we transact significant levels of business; (xv) our retirement plan expenses recorded throughout the year are calculated using actuarial valuations that incorporate assumptions and estimates about financial market, economic and demographic conditions, and differences between estimated and actual results give rise to gains and losses, which can be significant, that are recorded immediately in earnings, generally in the fourth quarter of the year; (xvi) the impact of new and revised tax legislation and regulations; and (xvii) other risks and uncertainties indicated from time to time in our filings with the Securities and Exchange Commission.
We do not undertake any obligation to update publicly any forward-looking statement, including, without limitation, any estimate regarding revenue, earnings or cash flows, whether as a result of the receipt of new information, future events or otherwise.
PART I -- FINANCIAL INFORMATION
Item 1 - Financial Statements
PART II -- OTHER INFORMATION
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Consolidated Statements of Operations
(In millions, except per share data)
|Thirteen Weeks Ended|
|May 1,||May 2,|
|Net sales ||$||2,006.6 ||$||1,980.5 |
|Royalty revenue ||90.0 ||77.7 |
|Advertising and other revenue ||26.1 ||21.1 |
|Total revenue ||2,122.7 ||2,079.3 |
|Cost of goods sold (exclusive of depreciation and amortization)||884.0 ||850.2 |
|Gross profit ||1,238.7 ||1,229.1 |
|Selling, general and administrative expenses ||1,039.4 ||1,039.4 |
|Non-service related pension and postretirement income||(3.6)||(4.0)|
|Equity in net income of unconsolidated affiliates||7.4 ||3.7 |
|Income before interest and taxes ||210.3 ||197.4 |
|Interest expense ||23.0 ||30.5 |
|Interest income ||1.2 ||1.1 |
|Income before taxes ||188.5 ||168.0 |
|Income tax expense||55.4 ||68.3 |
|Net income ||133.1 ||99.7 |
|Less: Net loss attributable to redeemable non-controlling interest||— ||(0.2)|
|Net income attributable to PVH Corp.||$||133.1 ||$||99.9 |
|Basic net income per common share attributable to PVH Corp.||$||1.96 ||$||1.40 |
Diluted net income per common share attributable to PVH Corp.
|$||1.94 ||$||1.38 |
See accompanying notes.
Consolidated Statements of Comprehensive Income
|Thirteen Weeks Ended|
|May 1,||May 2,|
|Net income ||$||133.1 ||$||99.7 |
|Other comprehensive (loss) income:|
|Foreign currency translation adjustments||(131.8)||(6.5)|
Net unrealized and realized gain related to effective cash flow hedges, net of tax expense of $9.0 and $1.2
|25.8 ||8.3 |
Net gain on net investment hedges, net of tax expense of $16.6 and $1.5
|50.2 ||4.5 |
|Total other comprehensive (loss) income||(55.8)||6.3 |
|Comprehensive income ||77.3 ||106.0 |
|Less: Comprehensive loss attributable to redeemable non-controlling interest||— ||(0.2)|
|Comprehensive income attributable to PVH Corp.||$||77.3 ||$||106.2 |
See accompanying notes.
Consolidated Balance Sheets
(In millions, except share and per share data)
|May 1,||January 30,||May 2,|
|Cash and cash equivalents ||$||748.7 ||$||1,242.5 ||$||913.2 |
Trade receivables, net of allowances for credit losses of $57.2, $61.9 and $69.8
|831.1 ||745.2 ||852.7 |
|Other receivables ||41.4 ||20.1 ||30.6 |
|Inventories, net ||1,389.7 ||1,348.5 ||1,450.9 |
|Prepaid expenses ||200.5 ||169.0 ||167.5 |
|Other||153.6 ||128.4 ||68.1 |
|Total Current Assets||3,365.0 ||3,653.7 ||3,483.0 |
|Property, Plant and Equipment, net ||863.3 ||906.1 ||909.4 |
|Operating Lease Right-of-Use Assets||1,312.5 ||1,349.0 ||1,494.1 |
|Goodwill ||2,745.9 ||2,828.9 ||2,947.4 |
|Tradenames ||2,675.1 ||2,722.9 ||2,865.4 |
|Other Intangibles, net||577.1 ||584.1 ||642.7 |
Other Assets, including deferred taxes of $41.0, $46.1 and $57.1
|350.4 ||352.1 ||359.6 |
|Total Assets||$||11,889.3 ||$||12,396.8 ||$||12,701.6 |
|LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY|
|Accounts payable ||$||1,062.2 ||$||1,220.8 ||$||1,023.8 |
|Accrued expenses||919.1 ||1,100.8 ||868.7 |
|Deferred revenue ||37.6 ||44.9 ||46.4 |
|Current portion of operating lease liabilities||358.1 ||375.4 ||409.4 |
|Short-term borrowings ||15.5 ||10.8 ||13.8 |
|Current portion of long-term debt ||36.2 ||34.8 ||26.4 |
|Total Current Liabilities ||2,428.7 ||2,787.5 ||2,388.5 |
|Long-Term Portion of Operating Lease Liabilities||1,171.7 ||1,214.4 ||1,374.4 |
|Long-Term Debt||2,216.5 ||2,317.6 ||3,018.2 |
Other Liabilities, including deferred taxes of $387.8, $373.9 and $452.4
|803.9 ||788.5 ||1,084.7 |
|Redeemable Non-Controlling Interest||— ||— ||(3.6)|
Preferred stock, par value $100 per share; 150,000 total shares authorized
|— ||— ||— |
Common stock, par value $1 per share; 240,000,000 shares authorized; 87,264,650; 87,107,155 and 86,546,242 shares issued
|87.3 ||87.1 ||86.5 |
|Additional paid-in capital - common stock ||3,208.4 ||3,198.4 ||3,141.3 |
|Retained earnings ||4,693.3 ||4,562.8 ||3,713.1 |
|Accumulated other comprehensive loss||(668.5)||(612.7)||(512.8)|
Less: 19,837,212; 18,572,482 and 15,221,493 shares of common stock held in treasury, at cost
|Total Stockholders’ Equity ||5,268.5 ||5,288.8 ||4,839.4 |
|Total Liabilities, Redeemable Non-Controlling Interest and Stockholders’ Equity||$||11,889.3 ||$||12,396.8 ||$||12,701.6 |
See accompanying notes.
Consolidated Statements of Cash Flows
|Thirteen Weeks Ended|
|May 1,||May 2,|
|Net income||$||133.1 ||$||99.7 |
|Adjustments to reconcile to net cash used by operating activities:|
|Depreciation and amortization ||76.8 ||77.6 |
|Equity in net income of unconsolidated affiliates||(7.4)||(3.7)|
|Deferred taxes ||(0.9)||31.3 |
|Stock-based compensation expense ||10.1 ||10.7 |
|Impairment of other long-lived assets||— ||28.1 |
|Changes in operating assets and liabilities:|
|Trade receivables, net ||(109.4)||(211.7)|
|Inventories, net ||(78.1)||(36.5)|
|Accounts payable, accrued expenses and deferred revenue ||(271.4)||(168.9)|
|Prepaid expenses ||(36.7)||(9.6)|
|Other, net ||1.7 ||(0.7)|
|Net cash used by operating activities||(303.4)||(189.1)|
|Purchases of property, plant and equipment ||(52.4)||(49.1)|
|Purchases of investments held in rabbi trust||(5.1)||— |
|Proceeds from investments held in rabbi trust||0.4 ||— |
|Net cash used by investing activities||(57.1)||(49.1)|
|Net proceeds from short-term borrowings||6.4 ||13.3 |
|Repayment of 2019 facilities||(6.9)||(503.7)|
|Net proceeds from settlement of awards under stock plans||0.1 ||1.4 |
|Cash dividends ||(2.6)||— |
|Acquisition of treasury shares ||(108.0)||(9.2)|
|Payments of finance lease liabilities||(1.0)||(1.4)|
|Net cash used by financing activities||(112.0)||(499.6)|
|Effect of exchange rate changes on cash and cash equivalents ||(21.3)||(0.4)|
|Decrease in cash and cash equivalents||(493.8)||(738.2)|
|Cash and cash equivalents at beginning of period ||1,242.5 ||1,651.4 |
|Cash and cash equivalents at end of period ||$||748.7 ||$||913.2 |
See Note 18 for information on Supplemental Cash Flow Information.
See accompanying notes.
Consolidated Statements of Changes in Stockholders’ Equity and Redeemable Non-Controlling Interest
(In millions, except share and per share data)
|Thirteen Weeks Ended May 2, 2021|
|Total Stockholders’ Equity|
|January 31, 2021||$||(3.4)||$||— ||86,293,158 ||$||86.3 ||$||3,129.4 ||$||3,613.2 ||$||(519.1)||$||(1,579.5)||$||4,730.3 |
|Net income attributable to PVH Corp.||99.9 ||99.9 |
|Foreign currency translation adjustments||(6.5)||(6.5)|
Net unrealized and realized gain related to effective cash flow hedges, net of tax expense of $1.2
|8.3 ||8.3 |
Net gain on net investment hedges, net of tax expense of $1.5
|4.5 ||4.5 |
|Comprehensive income attributable to PVH Corp.||106.2 |
|Settlement of awards under stock plans||253,084 ||0.2||1.2 ||1.4 |
|Stock-based compensation expense||10.7 ||10.7 |
Acquisition of 87,830 treasury shares
|Net loss attributable to redeemable non-controlling interest||(0.2)|
|May 2, 2021||$||(3.6)||$||— ||86,546,242 ||$||86.5 ||$||3,141.3 ||$||3,713.1 ||$||(512.8)||$||(1,588.7)||$||4,839.4 |
|Thirteen Weeks Ended May 1, 2022|
|Total Stockholders’ Equity|
|January 30, 2022||$||— ||$||— ||87,107,155 ||$||87.1 ||$||3,198.4 ||$||4,562.8 ||$||(612.7)||$||(1,946.8)||$||5,288.8 |
|Net income attributable to PVH Corp.||133.1 ||133.1 |
|Foreign currency translation adjustments||(131.8)||(131.8)|
Net unrealized and realized gain related to effective cash flow hedges, net of tax expense of $9.0
|25.8 ||25.8 |
Net gain on net investment hedges, net of tax expense of $16.6
|50.2 ||50.2 |
|Comprehensive income attributable to PVH Corp.||77.3 |
|Settlement of awards under stock plans||157,495 ||0.2 ||(0.1)||0.1 |
|Stock-based compensation expense||10.1 ||10.1 |
Dividends declared ($0.0375 per common share)
Acquisition of 1,264,730 treasury shares
|May 1, 2022||$||— ||$||— ||87,264,650 ||$||87.3 ||$||3,208.4 ||$||4,693.3 ||$||(668.5)||$||(2,052.0)||$||5,268.5 |
See accompanying notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PVH Corp. and its consolidated subsidiaries (collectively, the “Company”) constitute a global apparel company with a brand portfolio that includes TOMMY HILFIGER, Calvin Klein, Warner’s, Olga and True&Co., which are owned, Van Heusen, IZOD, ARROW and Geoffrey Beene, which the Company owned through the second quarter of 2021 and now licenses back for certain product categories, and other licensed brands. The Company designs and markets branded sportswear (casual apparel), jeanswear, performance apparel, intimate apparel, underwear, swimwear, dress shirts, neckwear, handbags, accessories, footwear and other related products and licenses its owned brands globally over a broad array of product categories and for use in numerous discrete jurisdictions. The Company entered into a definitive agreement during the second quarter of 2021 to sell certain of its heritage brands trademarks, including Van Heusen, IZOD, ARROW and Geoffrey Beene, as well as certain related inventories of its Heritage Brands business, to Authentic Brands Group and other parties (the “Heritage Brands transaction”). The Company completed the sale on the first day of the third quarter of 2021. References to the aforementioned and other brand names are to registered and common law trademarks owned by the Company or licensed to the Company by third parties and are identified by italicizing the brand name.
The consolidated financial statements include the accounts of the Company. Intercompany accounts and transactions have been eliminated in consolidation. Investments in entities that the Company does not control but has the ability to exercise significant influence over are accounted for using the equity method of accounting. The Company’s Consolidated Statements of Operations include its proportionate share of the net income or loss of these entities. Please see Note 6, “Investments in Unconsolidated Affiliates,” for further discussion. The Company formed a joint venture in Ethiopia (“PVH Ethiopia”), in which the Company held an initial economic interest of 75%, with its partner’s 25% interest accounted for as a redeemable non-controlling interest (“RNCI”). The Company consolidated PVH Ethiopia in its consolidated financial statements. The Company closed in the fourth quarter of 2021 the manufacturing facility that was PVH Ethiopia’s sole operation. The closure did not have a material impact on the Company’s consolidated financial statements. Please see Note 5, “Redeemable Non-Controlling Interest,” for further discussion.
The Company’s fiscal years are based on the 52-53 week periods ending on the Sunday closest to February 1 and are designated by the calendar year in which the fiscal year commences. References to a year are to the Company’s fiscal year, unless the context requires otherwise.
The accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information. Accordingly, they do not contain all disclosures required by U.S. GAAP for complete financial statements. Reference is made to the Company’s audited consolidated financial statements, including the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended January 30, 2022.
The preparation of the interim financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ materially from these estimates.
The results of operations for the thirteen weeks ended May 1, 2022 and May 2, 2021 are not necessarily indicative of those for a full fiscal year due, in part, to the COVID-19 pandemic and seasonal factors. Furthermore, the data contained in these consolidated financial statements are unaudited and are subject to year-end adjustments. However, in the opinion of management, all known adjustments have been made to present fairly the consolidated operating results for the unaudited periods.
There is significant uncertainty due to the current war in Ukraine and its broader macroeconomic implications, inflationary pressures globally, as well as continued uncertainty due to the COVID-19 pandemic and supply chain and logistics disruptions globally and their impacts on the Company’s business. If economic conditions were to worsen, the Company’s results of operations, financial condition and cash flows from operations may be materially and adversely impacted.
War in Ukraine
As a result of the war in Ukraine, the Company made the decision to temporarily close stores and pause commercial activities in Russia and Belarus as of March 7, 2022. Additionally, while the Company has no direct operations in Ukraine, virtually all of
its wholesale customers and franchisees in Ukraine have closed their stores, which has resulted in a reduction in shipments to these customers and canceled orders. Approximately 2% of the Company’s revenue in 2021 was generated in Russia, Belarus and Ukraine. The war also has led to, and may lead to further, broader macroeconomic implications, including the continued weakening of the euro against the United States dollar, increases in fuel prices and volatility in the financial markets, as well as a decline in consumer spending.
There is significant uncertainty regarding the extent to which the war and its broader macroeconomic implications, including the potential impacts to the broader European market, will impact the Company’s business, financial condition and results of operations in 2022. Such impacts may include non-cash asset impairments, excess inventory and difficulty collecting trade receivables, among other things. As of May 1, 2022, the total assets of the Company’s subsidiaries in Russia, Belarus and Ukraine represented less than 1% of the Company’s total assets.
The COVID-19 pandemic has had, and continues to have, a significant impact on the Company’s business, results of operations, financial condition and cash flows from operations.
During the first quarter of 2021, pandemic-related pressures on the Company’s stores included temporary closures for a significant percentage of its stores in Europe, Canada and Japan. Pressures on its stores continued throughout 2021, with certain stores in Europe, Japan and Australia temporarily closed for varying periods of time in the second quarter, the majority of its stores in Australia closed temporarily in the third quarter, and the temporary closure of certain stores in Europe and China for varying periods of time in the fourth quarter. Further, a significant percentage of the Company’s stores globally were operating on reduced hours during the fourth quarter of 2021 as a result of increased levels of associate absenteeism due to the pandemic, particularly the Omicron variant.
COVID-related pressures have continued into the first quarter of 2022, although to a much lesser extent than in the prior year period in all regions except China, as strict lockdowns in China have resulted in temporary store closures and have also impacted certain warehouses, which has resulted in the temporary pause of deliveries to the Company’s wholesale customers and from its digital commerce business.
In addition, the Company’s North America stores have been, and are expected to continue to be, challenged by the lack of international tourists coming to the United States, although to lesser extent than in 2021. Stores located in international tourist destinations have historically represented a significant portion of that business.
The Company’s brick and mortar wholesale customers and its licensing partners also have experienced significant business disruptions as a result of the pandemic. The Company’s wholesale customers and franchisees globally generally have experienced temporary store closures and operating restrictions and obstacles in the same countries and at the same times as the Company.
The pandemic also has impacted, and continues to impact, the Company’s supply chain partners, including third party manufacturers, logistics providers and other vendors, as well as the supply chains of its licensees. These supply chains have experienced, and may continue to experience in the future, disruptions as a result of closed factories or factories operating with a reduced workforce, or other logistics constraints, including vessel, container and other transportation shortages, labor shortages and port congestion due to the impact of the pandemic.
The Company generates revenue primarily from sales of finished products under its owned trademarks through its wholesale and retail operations. The Company also generates royalty and advertising revenue from licensing the rights to its trademarks to third parties. Revenue is recognized upon the transfer of control of products or services to the Company’s customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those products or services.
The Company generates revenue from the wholesale distribution of its products to traditional retailers (including for sale through their digital commerce sites), pure play digital commerce retailers, franchisees, licensees and distributors. Revenue is recognized upon transfer of control of goods to the customer, which generally occurs when title to goods is passed and risk of loss transfers to the customer. Depending on the contract terms, transfer of control is upon shipment of goods to or upon receipt of goods by the customer. Payment is typically due within 30 to 90 days. The amount of revenue recognized is net of returns, sales allowances and other discounts that the Company offers to its wholesale customers. The Company estimates returns based on an analysis of historical experience and individual customer arrangements and estimates sales allowances and other discounts based on seasonal negotiations, historical experience and an evaluation of current sales trends and market conditions.
The Company also generates revenue from the retail distribution of its products through its freestanding stores, shop-in-shop/concession locations and digital commerce sites. Revenue is recognized at the point of sale in the stores and shop-in-shop/concession locations and upon estimated time of delivery for sales through the Company’s digital commerce sites, at which point control of the products passes to the customer. The amount of revenue recognized is net of returns, which are estimated based on an analysis of historical experience. Costs associated with coupons are recorded as a reduction of revenue at the time of coupon redemption.
The Company excludes from revenue taxes collected from customers and remitted to government authorities related to sales of the Company’s products. Shipping and handling costs that are billed to customers are included in net sales.
Customer Loyalty Programs
The Company uses loyalty programs that offer customers of its retail businesses specified amounts off of future purchases for a specified period of time after certain levels of spending are achieved. Customers that are enrolled in the programs earn loyalty points for each purchase made.
Loyalty points earned under the customer loyalty programs provide the customer a material right to acquire additional products and give rise to the Company having a separate performance obligation. For each transaction where a customer earns loyalty points, the Company allocates revenue between the products purchased and the loyalty points earned based on the relative standalone selling prices. Revenue allocated to loyalty points is recorded as deferred revenue until the loyalty points are redeemed or expire.
The Company sells gift cards to customers in its retail stores and on certain of its digital commerce sites. The Company does not charge administrative fees on gift cards nor do they expire. Gift card purchases by a customer are prepayments for products to be provided by the Company in the future and are therefore considered to be performance obligations of the Company. Upon the purchase of a gift card by a customer, the Company records deferred revenue for the cash value of the gift card. Deferred revenue is relieved and revenue is recognized when the gift card is redeemed by the customer. The portion of gift cards that the Company does not expect to be redeemed (referred to as “breakage”) is recognized proportionately over the estimated customer redemption period, subject to the constraint that it must be probable that a significant reversal of revenue will not occur, if the Company determines that it does not have a legal obligation to remit the value of such unredeemed gift cards to any jurisdiction.
The Company generates royalty and advertising revenue from licensing the rights to access its trademarks to third parties, including the Company’s joint ventures. The license agreements generally are exclusive to a territory or product category, have terms in excess of one year and, in most cases, include renewal options. In exchange for providing these rights, the license agreements require the licensees to pay the Company a royalty and, in certain agreements, an advertising fee. In both cases, the Company generally receives the greater of (i) a sales-based percentage fee and (ii) a contractual minimum fee for each annual performance period under the license agreement.
In addition to the rights to access its trademarks, the Company provides ongoing support to its licensees over the term of the agreements. As such, the Company’s license agreements are licenses of symbolic intellectual property and, therefore, revenue is recognized over time. For license agreements where the sales-based percentage fee exceeds the contractual minimum fee, the Company recognizes revenues as the licensed products are sold as reported to the Company by its licensees. For license agreements where the sales-based percentage fee does not exceed the contractual minimum fee, the Company recognizes the contractual minimum fee as revenue ratably over the contractual period.
Under the terms of the license agreements, payments generally are due quarterly from the licensees. The Company records deferred revenue when amounts are received or receivable from the licensee in advance of the recognition of revenue.
As of May 1, 2022, the contractual minimum fees on the portion of all license agreements not yet satisfied totaled $988.9 million, of which the Company expects to recognize $177.5 million as revenue during the remainder of 2022, $256.8 million in 2023 and $554.6 million thereafter.
Changes in deferred revenue, which primarily relate to customer loyalty programs, gift cards and license agreements for the thirteen weeks ended May 1, 2022 and May 2, 2021 were as follows:
|Thirteen Weeks Ended|
|Deferred revenue balance at beginning of period||$||44.9 ||$||55.8 |
|Net additions to deferred revenue during the period||25.0 ||31.1 |
Reductions in deferred revenue for revenue recognized during the period (1)
|Deferred revenue balance at end of period||$||37.6 ||$||46.4 |
(1) Represents the amount of revenue recognized during the period that was included in the deferred revenue balance at the beginning of the period and does not contemplate revenue recognized from amounts deferred during the period.
The Company also had long-term deferred revenue liabilities included in other liabilities in its Consolidated Balance Sheets of $14.1 million, $15.0 million and $12.9 million as of May 1, 2022, January 30, 2022 and May 2, 2021, respectively.
The Company elected not to disclose the remaining performance obligations for contracts that have an original expected term of one year or less and expected sales-based percentage fees for the portion of all license agreements not yet satisfied.
Please see Note 19, “Segment Data,” for information on the disaggregation of revenue by segment and distribution channel.
Inventories are comprised principally of finished goods and are stated at the lower of cost or net realizable value, except for certain retail inventories in North America that are stated at the lower of cost or market using the retail inventory method. Cost for substantially all wholesale inventories in North America and certain wholesale and retail inventories in Asia is determined using the first-in, first-out method. Cost for all other inventories is determined using the weighted average cost method. The Company reviews current business trends and forecasts, inventory aging and discontinued merchandise categories to determine adjustments that it estimates will be needed to liquidate existing clearance inventories and record inventories at either the lower of cost or net realizable value or the lower of cost or market using the retail inventory method, as applicable.
The Company acquired on May 31, 2019 the approximately 78% ownership interest in Gazal Corporation Limited (“Gazal”) that it did not already own (the “Australia acquisition”).
Mandatorily Redeemable Non-Controlling Interest
Pursuant to the terms of the acquisition agreement, key executives of Gazal and PVH Brands Australia Pty. Limited (“PVH Australia”) exchanged a portion of their interests in Gazal for approximately 6% of the outstanding shares of the Company’s previously wholly owned subsidiary that acquired 100% of the ownership interests in the Australia business. The Company was obligated to purchase this 6% interest within two years of the Australia acquisition closing in two tranches: tranche 1 – 50% of the shares one year after the closing; and tranche 2 – all remaining shares two years after the closing.
The Company recognized a liability of $26.2 million for the fair value of the 6% interest on the date of the Australia acquisition, based on exchange rates in effect on that date, which was being accounted for as a mandatorily redeemable non-controlling interest. In subsequent periods, the liability for the mandatorily redeemable non-controlling interest was adjusted each reporting period to its redemption value based on conditions that existed as of each subsequent balance sheet date, provided that the liability could not be adjusted below the amount initially recorded at the acquisition date. The Company recorded any such adjustments to the liability in interest expense in the Company’s Consolidated Statements of Operations.
For the tranche 1 shares, the measurement period ended in 2019. The Company paid the management shareholders an aggregate purchase price of $17.3 million (based on exchange rates in effect on the payment date) for these shares in June 2020 under the conditions specified in the terms of the acquisition agreement. For the tranche 2 shares, the measurement period ended in 2020 and the Company had accrued a $24.5 million liability for these shares in the Company’s Consolidated Balance Sheet as of May 2, 2021 (based on exchange rates in effect on that date), which was subsequently paid to the management shareholders in June 2021 under the conditions specified in the terms of the acquisition agreement. The Company had no remaining liability for the mandatorily redeemable non-controlling interest as of May 1, 2022 and January 30, 2022.
5. REDEEMABLE NON-CONTROLLING INTEREST
The Company formed PVH Ethiopia during 2016 to operate a manufacturing facility that produced finished products for the Company for distribution primarily in the United States. The Company and its partner held initial economic interests of 75% and 25%, respectively, in PVH Ethiopia, with its partner’s 25% interest accounted for as an RNCI. The Company consolidated PVH Ethiopia in its consolidated financial statements. The capital structure of PVH Ethiopia was amended effective May 31, 2021 and, as a result, the Company solely managed and effectively owned all economic interests in the joint venture. The Company closed in the fourth quarter of 2021 the manufacturing facility that was PVH Ethiopia’s sole operation. The closure did not have a material impact on the Company’s consolidated financial statements.
The fair value of the RNCI as of the date of formation of PVH Ethiopia was $0.1 million. The carrying amount of the RNCI prior to May 31, 2021 was adjusted to equal the redemption amount at the end of each reporting period, provided that this amount at the end of each reporting period could not be lower than the initial fair value adjusted for the minority shareholder’s share of net income or loss. Any adjustment to the redemption amount of the RNCI, determined after attribution of net income or loss of the RNCI, would have been recognized immediately in retained earnings of the Company, since it was probable that the RNCI would become redeemable in the future based on the passage of time. There was no adjustment to the redemption amount of the RNCI as of May 31, 2021.
The carrying amount of the RNCI as of May 2, 2021 was $(3.6) million. In connection with the amendment of the capital structure of PVH Ethiopia, the Company reclassified the carrying amount of the RNCI as of May 31, 2021 of $(3.7) million to additional paid-in capital. Following this reclassification, the Company stopped attributing any net income or loss in PVH Ethiopia to the redeemable non-controlling interest.
6. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
The Company had investments in unconsolidated affiliates of $158.9 million, $165.3 million and $159.1 million as of May 1, 2022, January 30, 2022 and May 2, 2021, respectively. These investments are accounted for under the equity method of accounting and included in other assets in the Company’s Consolidated Balance Sheets. The Company received dividends of $16.2 million and $9.2 million from these investments during the thirteen weeks ended May 1, 2022 and May 2, 2021, respectively.
7. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the thirteen weeks ended May 1, 2022, by segment (please see Note 19, “Segment Data,” for further discussion of the Company’s reportable segments), were as follows:
|(In millions)||Calvin Klein North America||Calvin Klein International||Tommy Hilfiger North America||Tommy Hilfiger International||Heritage Brands Wholesale||Heritage Brands Retail||Total|
|Balance as of January 30, 2022|
|Goodwill, gross ||$||781.8 ||$||891.5 ||$||203.0 ||$||1,633.9 ||$||105.0 ||$||— ||$||3,615.2 |
|Accumulated impairment losses||(287.3)||(394.0)||— ||— ||(105.0)||— ||(786.3)|
|Goodwill, net ||494.5 ||497.5 ||203.0 ||1,633.9 ||— ||— ||2,828.9 |
|Currency translation||— ||(7.4)||— ||(75.6)||— ||— ||(83.0)|
|Balance as of May 1, 2022|
|Goodwill, gross ||781.8 ||884.1 ||203.0 ||1,558.3 ||105.0 ||— ||3,532.2 |
|Accumulated impairment losses||(287.3)||(394.0)||— ||— ||(105.0)||— ||(786.3)|
|Goodwill, net ||$||494.5 ||$||490.1 ||$||203.0 ||$||1,558.3 ||$||— ||$||— ||$||2,745.9 |
The Company assesses the recoverability of goodwill and other indefinite-lived intangible assets annually, at the beginning of the third quarter of each fiscal year, and between annual tests if an event occurs or circumstances change that would indicate that it is more likely than not that the carrying amount may be impaired. Impairment testing for goodwill is done at the reporting unit level. Impairment testing for other indefinite-lived intangible assets is done at the individual asset level. Intangible assets with finite lives are amortized over their estimated useful life and are tested for impairment, along with other long-lived assets, when events and circumstances indicate that the assets might be impaired. Indefinite-lived intangible assets and intangible assets with finite lives are tested for impairment prior to assessing the recoverability of goodwill. Please see Note 1, “Summary of Significant Accounting Policies,” in the Notes to Consolidated Financial Statements included in Item 8 of the Company’s Annual Report on Form 10-K for the year ended January 30, 2022 for discussion of the Company’s goodwill and other intangible assets impairment testing process.
There have been no significant events or change in circumstances during the thirteen weeks ended May 1, 2022 that would indicate the remaining carrying amount of the Company’s goodwill and other intangible assets may be impaired as of May 1, 2022.
8. RETIREMENT AND BENEFIT PLANS
The Company, as of May 1, 2022, has two noncontributory qualified defined benefit pension plans covering substantially all employees resident in the United States who were hired prior to January 1, 2022, and who meet certain age and service requirements. The plans provide monthly benefits upon retirement generally based on career average compensation and years of credited service. The plans also provide participants with the option to receive their benefits in the form of lump sum payments. Vesting in plan benefits generally occurs after five years of service. The Company refers to these two plans as its “Pension Plans.”
The Company also has three noncontributory unfunded non-qualified supplemental defined benefit pension plans, including:
–A plan for certain former members of Tommy Hilfiger’s domestic senior management. The plan is frozen and, as a result, participants do not accrue additional benefits.
–A capital accumulation program for certain former senior executives. Under the individual participants’ agreements, the participants in the program will receive a predetermined amount during the ten years following the attainment of age 65, provided that prior to the termination of employment with the Company, the participant has been in the plan for at least ten years and has attained age 55.
–A plan for certain employees resident in the United States hired prior to January 1, 2022, who meet certain age and service requirements that provides benefits for compensation in excess of Internal Revenue Service earnings limits and requires payments to vested employees upon, or shortly after, employment termination or retirement.
The Company refers to these three plans as its “SERP Plans.”
The components of net benefit cost recognized were as follows:
|Pension Plans||SERP Plans|
|Thirteen Weeks Ended||Thirteen Weeks Ended|
|Service cost||$||8.0 ||$||10.4 ||$||0.6 ||$||1.4 |
|Interest cost ||6.3 ||6.2 ||0.6 ||0.9 |
|Expected return on plan assets ||(10.5)||(11.1)||— ||— |
|Total ||$||3.8 ||$||5.5 ||$||1.2 ||$||2.3 |
The Company also provides certain postretirement health care and life insurance benefits to certain retirees resident in the United States. As a result of the Company’s acquisition of The Warnaco Group, Inc. (“Warnaco”), the Company also provides certain postretirement health care and life insurance benefits to certain Warnaco retirees resident in the United States. Retirees contribute to the cost of the applicable plan, both of which are unfunded and frozen. The Company refers to these two plans as its “Postretirement Plans.” Net benefit cost related to the Postretirement Plans was immaterial for the thirteen weeks ended May 1, 2022 and May 2, 2021.
The components of net benefit cost are recorded in the Company’s Consolidated Statements of Operations as follows: (i) the service cost component is recorded in selling, general and administrative (“SG&A”) expenses and (ii) the other components are recorded in non-service related pension and postretirement income.
Currently, the Company does not expect to make material contributions to the Pension Plans in 2022. The Company’s actual contributions may differ from planned contributions due to many factors, including changes in tax and other laws, as well as significant differences between expected and actual pension asset performance or interest rates.
The Company had $15.5 million of borrowings outstanding under short-term lines of credit, overdraft facilities and short-term revolving credit facilities denominated in various foreign currencies as of May 1, 2022. The weighted average interest rate on funds borrowed as of May 1, 2022 was 0.16%. These facilities provided for borrowings of up to $198.3 million based on exchange rates in effect on May 1, 2022 and are utilized primarily to fund working capital needs. The maximum amount of borrowings outstanding under these facilities during the thirteen weeks ended May 1, 2022 was $17.3 million.
2021 Unsecured Revolving Credit Facility
On April 28, 2021, the Company replaced its 364-day $275.0 million United States dollar-denominated unsecured revolving credit facility, which matured on April 7, 2021 (the “2020 facility”), with a 364-day $275.0 million United States dollar-denominated unsecured revolving credit facility (the “2021 facility”). The 2021 facility matured on April 27, 2022, and was not replaced. The Company paid $0.8 million of debt issuance costs in connection with the 2021 facility, which were amortized over the term of the debt agreement. The Company had no borrowings outstanding under the 2021 facility during the thirteen weeks ended May 1, 2022.
The carrying amounts of the Company’s long-term debt were as follows:
Senior unsecured Term Loan A facilities due 2024 (1)(2)
|$||479.6 ||$||513.5 ||$||1,103.3 |
|7 3/4% debentures due 2023||99.9 ||99.8 ||99.8 |
3 5/8% senior unsecured euro notes due 2024 (2)
|550.0 ||580.8 ||628.7 |
|4 5/8% senior unsecured notes due 2025||496.0 ||495.7 ||494.8 |
3 1/8% senior unsecured euro notes due 2027 (2)
|627.2 ||662.6 ||718.0 |
|Total ||2,252.7 ||2,352.4 ||3,044.6 |
|Less: Current portion of long-term debt ||36.2 ||34.8 ||26.4 |
|Long-term debt ||$||2,216.5 ||$||2,317.6 ||$||3,018.2 |
(1) The outstanding principal balance for the United States dollar-denominated Term Loan A facility and the euro-denominated Term Loan A facility was zero and €456.3 million, respectively, as of May 1, 2022.
(2) The carrying amount of the euro-denominated Term Loan A facility and the senior unsecured euro notes includes the impact of changes in the exchange rate of the United States dollar against the euro.
Please see Note 12, “Fair Value Measurements,” for the fair value of the Company’s long-term debt as of May 1, 2022, January 30, 2022 and May 2, 2021.
The Company’s mandatory long-term debt repayments for the remainder of 2022 through 2027 were as follows as of May 1, 2022:
|Remainder of 2022||$||26.4 |
(1) A portion of the Company’s mandatory long-term debt repayments is denominated in euros and subject to changes in the exchange rate of the United States dollar against the euro.
Total debt repayments for the remainder of 2022 through 2027 exceed the total carrying amount of the Company’s debt as of May 1, 2022 because the carrying amount reflects the unamortized portions of debt issuance costs and the original issue discounts.
As of May 1, 2022, approximately 80% of the Company’s long-term debt had fixed interest rates, with the remainder at variable interest rates.
2019 Senior Unsecured Credit Facilities
The Company has senior unsecured credit facilities due April 29, 2024 (as amended, the “2019 facilities”) that consist of a €500.0 million euro-denominated Term Loan A facility (the “Euro TLA facility”) and senior unsecured revolving credit facilities consisting of (i) a $675.0 million United States dollar-denominated revolving credit facility, (ii) a CAD $70.0 million Canadian dollar-denominated revolving credit facility available in United States dollars or Canadian dollars, (iii) a €200.0 million euro-denominated revolving credit facility available in euro, Australian dollars and other agreed foreign currencies and (iv) a $50.0 million United States dollar-denominated revolving credit facility available in United States dollars or Hong Kong dollars. The 2019 facilities also consisted of a $1,093.2 million United States dollar-denominated Term Loan A facility (the “USD TLA facility”). The Company repaid the outstanding principal balance under its USD TLA facility in 2021. Borrowings under the 2019 facilities bear interest at variable rates calculated in the manner set forth in the terms of the 2019 facilities.
The Company had loans outstanding of $479.6 million, net of debt issuance costs and based on applicable exchange rates, under the Euro TLA facility, no borrowings outstanding under the senior unsecured revolving credit facilities, and $12.7 million of outstanding letters of credit under the senior unsecured revolving credit facilities as of May 1, 2022.
The Company made payments totaling $6.9 million and $503.7 million on its term loans under the 2019 facilities during the thirteen weeks ended May 1, 2022 and May 2, 2021, respectively.
The current applicable margin with respect to the Euro TLA facility and each revolving credit facility as of May 1, 2022 was 1.250% for adjusted Eurocurrency rate loans and 0.250% for base rate or Canadian prime rate loans. The applicable margin for borrowings under the Euro TLA facility and the revolving credit facilities is subject to adjustment (i) after the date of delivery of the compliance certificate and financial statements, with respect to each of the Company’s fiscal quarters, based upon the Company’s net leverage ratio or (ii) after the date of delivery of notice of a change in the Company’s public debt rating by Standard & Poor’s or Moody’s.
The Company entered into interest rate swap agreements designed with the intended effect of converting notional amounts of its variable rate debt obligation to fixed rate debt. Under the terms of the agreements, for any outstanding notional amount, the Company’s exposure to fluctuations in the one-month London interbank offered rate (“LIBOR”) is eliminated and the Company pays a fixed rate plus the current applicable margin. The following interest rate swap agreements were entered into or in effect during the thirteen weeks ended May 2, 2021 (no interest rate swap agreements were entered into or in effect during the thirteen weeks ended May 1, 2022):
|Designation Date||Commencement Date||Initial Notional Amount ||Notional Amount Outstanding as of May 1, 2022||Fixed Rate||Expiration Date|
|March 2020||February 2021||$||50.0 ||$||— ||(1)||0.562%||February 2023|
|February 2020||February 2021||50.0 ||— ||(1)||1.1625%||February 2023|
|February 2020||February 2020||50.0 ||— ||(1)||1.2575%||February 2023|
|August 2019||February 2020||50.0 ||— ||(1)||1.1975%||February 2022|
|June 2019||February 2020|