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PVH: Less Early Benefit From Warnaco Deal


(Filed Under Financial and General Interest News). PVH Corp. reported increased sales and earnings for 2012, while at the same time warning that after evaluating its recent purchase of Warnaco (which closed in mid-February) “we believe that additional investments above our initial expectations are required to achieve our goal of rebuilding the global Calvin Klein jeanswear and underwear businesses,” according to Emanuel Chirico, chairman and CEO of PVH. This means earnings as well as cost-saving “synergies” from the Warnaco acquisition will be significantly lower than expected for 2013.

PVH, which also owns such brands and Tommy Hilfiger, Van Heusen, Izod, Arrow and GH Bass, took over Warnaco and its brands in a deal valued at about $2.9 billion. For the year ended February 3, 2013, PVH reported net income of $433,840,000 on sales of $5,540,821,000, compared with earnings of $275,697,000 on sales of $5,410,028,000 for the year ended January 29, 2012. For the fourth quarter the company had net income of $80,748,000 on sales of $1,506,910,000 compared with income of $35,524,000 on sales of $1,407,818,000 the year before.

While PVH said it is projecting “Non-GAAP earnings per share” for 2013 of “approximately $7.00, as compared to the $6.58 in 2012,” those earnings will reflect “approximately $0.25 per share of dilution as a result of the Warnaco acquisition,” adding that “The company estimates the earnings before interest and taxes on a non-GAAP basis from the acquired Warnaco businesses will be approximately 20% lower than the company’s original plan, driven by the incremental investments required in the business.” PVH added that “The company projects synergies to be realized in 2013 to be approximately $25 million versus the initial expectation of approximately $50 million as a result of additional time needed to realize some of the projected savings. Given the additional time required to effect the upgrade of Warnaco’s systems and supply chain, overall synergies of approximately $100 million are now expected to be realized over the next four years. “

Within its discussions of all of its brands, much of it positive, PVH noted, for Calvin Klein, for both the year and the fourth quarter, “continued weakness in jeans in the United States and women’s underwear in Europe and the United States.” The company’s overall Calvin Klein business, which includes a variety of apparel categories, registered “an 8%, or $85.1 million, increase,” during the year, the company explained, “driven primarily by a 12% increase in the company’s Calvin Klein outlet retail business, which was attributable to new store openings, store expansions and a 5% increase in comparable store sales; and a 16% increase in the North American wholesale business. Royalty revenue increased 2% as compared to the prior year period, including a negative impact of 1% related to foreign currency translation. Continued global growth in women’s sportswear, dresses, footwear and handbags was partially offset by a decline in royalty revenue related to a reduction in the European bridge apparel and accessories business,” and the weakness in jeans and women’s underwear.

In the company’s fourth quarter, “Earnings before interest and taxes for the Calvin Klein business increased 5% to $73.8 million as compared to the prior year’s fourth quarter amount of $70.1 million, driven principally by the revenue increases,” according to the company statement, “and increased gross margin in the North American apparel business due to product cost decreases. These increases were partially offset by increased advertising expense due, in large part, to the Calvin Klein Concept underwear commercial that was aired during the Super Bowl broadcast.”

In remarks that accompanied the release of the financial statements, Chirico declared, “We completed our acquisition of Warnaco on February 13, 2013, and believe that the long term opportunities from this acquisition are significant. Having now owned the business for about 45 days, we believe that additional investments above our initial expectations are required to achieve our goal of rebuilding the global Calvin Klein jeanswear and underwear businesses. Therefore, we see 2013 as a year of investment and transition for the Warnaco business. These investments include: (i) enhancing the existing infrastructure (systems and supply chain), (ii) upgrading Calvin Klein jeanswear product design and quality with an emphasis on geographic differentiation, (iii) investing in in-store marketing and the in-store customer experience, (iv) adding appropriate talent to fill key design, marketing and merchandising positions, (v) rationalizing global excess inventory levels, and (vi) reducing and restructuring the off-price and club sales distribution in Europe and North America. Given these additional investments, we now project that the overall impact of the Warnaco transaction will be dilutive to 2013 earnings per share on a non-GAAP basis by approximately $0.25.”

Chirico continued, “At the core of our success and our opportunity is the power of our global designer lifestyle brands, Calvin Klein and Tommy Hilfiger. 2013 will be a transitional year for PVH, during which we will build the foundation for long-term sustainable growth for our businesses across the world. I believe we will emerge stronger and the investments we will make this year will help drive the Calvin Klein business going forward. Further, we believe they will pave the way for enhanced profitability and stockholder value, translating into expected earnings per share growth in excess of 15% per year for 2014 and beyond.”

Looking at the current year, the PVH release noted “Revenue in 2013 is currently projected to be approximately $8.2 billion. This amount reflects the elimination of approximately $200 million of revenue generated, in the aggregate, by the company and Warnaco in 2012 through transactions between each other and approximately $100 million of additional lost revenue from the absence of the 53rd week in 2013 and the revenue generated by Warnaco for the first ten days of the company’s 2013 fiscal year, since the acquisition did not close until February 13, 2013. The company’s expectation for revenue from the acquired Warnaco businesses is approximately $2.15 billion, which is relatively flat as compared to Warnaco’s 2012 revenue (excluding approximately $230 million of revenue related to the Chaps men’s sportswear business, which Ralph Lauren Corporation is reacquiring).”

PVH also stated “Non-GAAP earnings per share is currently projected to be approximately $7.00, as compared to the $6.58 in 2012, reflecting approximately $0.25 per share of dilution as a result of the Warnaco acquisition,” adding that “The company estimates the earnings before interest and taxes on a non-GAAP basis from the acquired Warnaco businesses will be approximately 20% lower than the company’s original plan, driven by the incremental investments required in the business.” PVH continued, “The company projects synergies to be realized in 2013 to be approximately $25 million versus the initial expectation of approximately $50 million as a result of additional time needed to realize some of the projected savings. Given the additional time required to effect the upgrade of Warnaco’s systems and supply chain, overall synergies of approximately $100 million are now expected to be realized over the next four years. The company now believes the overall impact of the transaction will be dilutive to 2013 earnings per share on a non-GAAP basis by approximately $0.25.”

For the first quarter of 2013, PVH said revenue “is expected to be approximately $1.9 billion. On a non-GAAP basis, earnings per share for the first quarter is currently projected to be relatively flat as compared to $1.33 in the prior year’s first quarter. The company’s first quarter 2013 earnings per share estimate excludes approximately $50 million of pre-tax costs associated with the acquisition and integration of Warnaco.”


more Financial and General Interest News >>

Published 03-28-2013 by Nick Monjo

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