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Trade War and Global Volatility Cause PVH to Lower 2019 Guidance

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While PVH Corp. scored gains in income and revenue in the second quarter, the ongoing U.S-China trade war has put a damper on its outlook.

In a Nutshell: PVH Corp. revise its 2019 guidance based on the assumption that current trends in the business–reductions in revenue and margins attributable to the trade tensions between the U.S. and China, the ongoing protests in Hong Kong and the increasingly promotional U.S. retail environment–continue for the remainder of the year.

The 2019 guidance incorporates the impact on certain products of imposed tariffs and those expected to be imposed by the U.S. on goods imported from China into the U.S., including $250 billion in goods imported from China into the U.S. currently at 25 percent, with an expected increase to 30 percent on Oct. 1, and $300 billion worth of Chinese goods at 15 percent expected to be imposed in part on Sept. 1 with the remainder following on Dec. 15. These tariffs are expected to have a negative impact of approximately 20 cents per share in 2019, PVH said.

PVH said 2019 earnings per share are now projected to be in the range of $7.95 to $8.05 compared to $9.65 in 2018. The projection includes an estimated negative impact of approximately 35 cents per share related to foreign currency translation.

Revenue in 2019 is projected to increase around 1 percent compared to 2018. Revenue for the Tommy Hilfiger business is projected to increase approximately 5 percent and revenue for the Calvin Klein business is projected to decrease approximately 2 percent, while revenue for the Heritage Brands business is projected to fall about 1 percent.

Sales: Revenue in the second quarter ended Aug. 4 revenue increased 1.3 percent to $2.36 billion compared to the year-ago period.

Revenue in the Tommy Hilfiger business for the quarter increased 8 percent to $1.1 billion compared to the prior-year period. Tommy Hilfiger International revenue rose 18 percent to $697 million, driven by a strong performance in Europe. International comparable store sales were up 9 percent. Tommy Hilfiger North America revenue decreased 5 percent to $413 million, with an 8 percent decline in North America comparable store sales due to weakness in traffic and consumer spending trends, especially in stores located in international tourist locations.

Revenue in the Calvin Klein business for the quarter were down 6 percent  to $873 million compared to the prior-year period, which includes an aggregate net reduction of approximately 2 percent resulting from the winding down of the company’s directly operated women’s jeans wear wholesale business in the U.S. and Canada in connection with the licensing of this business to G-III Apparel Group Ltd. and the closure of the Calvin Klein 205 W39 NYC brand.

Calvin Klein International revenue increased 1 percent to $465 million, lifted by solid growth in Europe and revenue from the acquisition of the Australian business, partially offset by a reduction of revenue as a result of the CK Collection closure and softness experienced across China. International comparable store sales were flat.

Calvin Klein North America revenue decreased 13 percent to $409 million, mainly due to the effect of the G-III license and a 3 percent decline in North America comparable store sales.

Revenue in the Heritage Brands business for the quarter was flat at $381 million, as comparable store sales declined 2 percent.

Earnings: Net income rose 17.2 percent to $193.1 million from $164.7 million in the second quarter of 2018. Earnings before interest and taxes (EBIT) for the quarter increased 8.2 percent to $250 million, inclusive of a $5 million negative impact due to foreign currency translation, from $231 million in the prior-year period. Included in EBIT was an aggregate net gain of $17 million consisting of a noncash gain of $113 million to write up the company’s equity investments in Gazal and PVH Australia to fair value, costs of $60 million in connection with early termination of the global Calvin Klein and Tommy Hilfiger North America socks and hosiery businesses in conjunction with the company’s plan to consolidate the socks and hosiery business for all brands in North America in a newly formed joint venture that is expected to begin operations in December, and to bring in-house the international Calvin Klein socks and hosiery business, and costs of $29 million related to the Calvin Klein restructuring.

At Tommy Hilfiger, earnings before interest and taxes increased to $148 million, inclusive of a $3 million negative impact due to foreign currency translation, from $134 million in the prior-year period.

For Calvin Klein, EBIT fell to $18 million, inclusive of a $2 million negative impact due to foreign currency translation, from $105 million in the prior-year period. Included in EBIT were costs of $29 million in connection with the restructuring associated with the strategic changes for the Calvin Klein business.

EBIT in Heritage Brands fell to $17 million from $33 million, principally due to gross margin pressure in the wholesale and retail businesses attributable to a more promotional U.S. retail environment.

CEO’s Take: Emanuel Chirico, chairman and CEO, said: “We are pleased to report our second quarter results, which saw continued outperformance by our European businesses. However, our businesses in North America and across China experienced weak traffic trends, including the impact of protests in Hong Kong, resulting in a more promotional environment” and causing the company to take “a conservative approach to our second half outlook.”

“As such, we lowered our annual revenue and EPS outlook based on our current trends and our expectation that the volatility in the macro environment, the global retail landscape and the continuing escalation of the trade tensions between the U.S. and China will cause our business to remain under pressure, as will the ongoing impact of protests in Hong Kong,” he said. “We have great confidence in our diversified business model and the underlying power of Calvin Klein and Tommy Hilfiger, and believe we are positioning our businesses to succeed in the ever-changing consumer landscape. As we execute on our strategic priorities, our ongoing data and digital transformation, together with delivering the best product and consumer experience, should allow us to capture the heart of the consumer.”