NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
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 (“ABG”) 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.
As of the first day of the second quarter of 2022, the Company is accounting for its operations in Turkey as highly inflationary, as the prior three-year cumulative inflation rate has surpassed 100%. Accordingly, the Company changed the functional currency of its subsidiary in Turkey from the Turkish lira to the euro, which is the functional currency of its parent. The remeasurement of monetary assets and liabilities denominated in Turkish lira into euro did not have a material impact on the Company’s results of operations in the second quarter of 2022. As of July 31, 2022, net monetary assets denominated in Turkish lira represented less than 1% of the Company’s total net assets.
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 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 and twenty-six weeks ended July 31, 2022 and August 1, 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 supply chain and logistics disruptions and inflationary pressures globally, the war in Ukraine, the COVID-19 pandemic and foreign currency volatility 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 announced in March 2022 that it was temporarily closing stores and pausing commercial activities in Russia and Belarus. In the second quarter of 2022, the Company made the decision to exit from its Russia business, including the closure of its retail stores in Russia and the cessation of its wholesale operations in Russia and Belarus. 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.
The Company assessed the impacts of the war in Ukraine on the estimates and assumptions used in preparing these consolidated financial statements, including, but not limited to, the allowance for credit losses, inventory reserves, and carrying values of long-lived assets. Based on these assessments, the Company recorded pre-tax noncash impairment charges related to long-lived assets of $43.6 million during the twenty-six weeks ended July 31, 2022. Please see Note 12, “Fair Value Measurements,” for further discussion of the impairments.
There is significant uncertainty regarding the extent to which the war and its broader macroeconomic implications, including the potential impacts on the broader European market, will further impact the Company’s business, financial condition and results of operations in 2022.
COVID-19 Pandemic
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.
COVID-related pressures have continued into the first half of 2022, although to a much lesser extent than in the prior year period in all regions except China, as strict lockdowns in China resulted in temporary store closures and reductions in consumer traffic and purchasing, as well as impacted certain warehouses, which 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 a lesser extent than in 2021. Stores located in international tourist destinations have historically represented a significant portion of this 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.
2. REVENUE
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 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.
Product Sales
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.
Gift Cards
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.
License Agreements
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 July 31, 2022, the contractual minimum fees on the portion of all license agreements not yet satisfied totaled $918.1 million, of which the Company expects to recognize $106.0 million as revenue during the remainder of 2022, $256.7 million in 2023 and $555.4 million thereafter.
Deferred Revenue
Changes in deferred revenue, which primarily relate to customer loyalty programs, gift cards and license agreements for the twenty-six weeks ended July 31, 2022 and August 1, 2021 were as follows: | | | | | | | | | | | | | | |
| Twenty-Six Weeks Ended |
(In millions) | 7/31/22 | | 8/1/21 | |
Deferred revenue balance at beginning of period | $ | 44.9 | | | $ | 55.8 | | |
| | | | |
Net additions to deferred revenue during the period | 45.4 | | | 47.2 | | |
Reductions in deferred revenue for revenue recognized during the period (1) | (36.3) | | | (46.5) | | |
Reclassification of deferred revenue to liabilities related to assets held for sale | — | | | (1.6) | | (2) |
Deferred revenue balance at end of period | $ | 54.0 | | | $ | 54.9 | | |
(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 amounts include $4.0 million and $6.0 million of revenue recognized during the thirteen weeks ended July 31, 2022 and August 1, 2021, respectively.
(2) The Company reclassified $1.6 million of deferred revenue to liabilities related to assets held for sale in the Company’s Consolidated Balance Sheet as of August 1, 2021 in connection with the Heritage Brands transaction. Please see Note 4, “Acquisitions and Divestitures,” for further discussion.
The Company also had long-term deferred revenue liabilities included in other liabilities in its Consolidated Balance Sheets of $13.3 million, $15.0 million and $12.5 million as of July 31, 2022, January 30, 2022 and August 1, 2021, respectively.
Optional Exemptions
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.
3. INVENTORIES
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.
4. ACQUISITIONS AND DIVESTITURES
Australia Acquisition
The Company acquired in 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 and tranche 2 shares, the measurement periods ended in 2019 and 2020, respectively. The Company paid the management shareholders an aggregate purchase price of $17.3 million for the tranche 1 shares in June 2020 and an aggregate purchase price of $24.4 million for the tranche 2 shares in June 2021 based on exchange rates in effect on the applicable payment dates. The Company presented these payments within the Consolidated Statements of Cash Flows as follows: (i) $12.7 million and $15.2 million as financing cash flows for the twenty-six weeks ended August 2, 2020 and August 1, 2021, respectively, which represented the initial fair values of the liabilities for the tranche 1 and tranche 2 shares, respectively, recognized on the acquisition date, and (ii) $4.6 million and $9.2 million as operating cash flows for the twenty-six weeks ended August 2, 2020 and August 1, 2021, respectively, for the tranche 1 and tranche 2 shares, respectively, attributable to interest. The Company had no remaining liability for the mandatorily redeemable non-controlling interest as of August 1, 2021.
Sale of Certain Heritage Brands Trademarks and Other Assets
The Company entered into a definitive agreement on June 23, 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 ABG and other parties for $222.9 million in cash. The Company classified the assets and related liabilities as held for sale during the second quarter of 2021 and completed the sale on the first day of the third quarter of 2021.
The net assets classified as held for sale in the Company’s Consolidated Balance Sheet as of August 1, 2021 were included in the Heritage Brands Wholesale segment and consisted of the following:
| | | | | |
(In millions) | |
Assets held for sale: | |
Inventories, net | $ | 32.5 | |
Tradenames | 66.9 | |
| |
| |
| |
Goodwill, net (1) | — |
| |
| |
Total assets held for sale | $ | 99.4 | |
| |
Liabilities related to assets held for sale: | |
Deferred revenue | $ | 1.6 | |
| |
| |
| |
| |
Total liabilities related to assets held for sale | $ | 1.6 | |
(1) Goodwill, net includes goodwill, gross of $92.7 million and accumulated impairment losses of $92.7 million.
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.
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 $164.9 million, $165.3 million and $154.7 million as of July 31, 2022, January 30, 2022 and August 1, 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 $18.8 million from these investments during the twenty-six weeks ended July 31, 2022 and August 1, 2021, respectively.
The Company entered into a definitive agreement on April 29, 2022 to sell its approximately 8% economic interest in Karl Lagerfeld Holding B.V. (“Karl Lagerfeld”) to a subsidiary of G-III Apparel Group, Ltd. (the “Karl Lagerfeld transaction”). The Company completed the sale on May 31, 2022 for approximately $20.5 million in cash, subject to customary adjustments, of which $19.1 million was received during the second quarter of 2022 and $1.4 million is being held in escrow and subject to exchange rate fluctuation. The carrying value of the Company’s investment in Karl Lagerfeld was $1.0 million immediately prior to the completion of the sale.
In connection with the closing of the Karl Lagerfeld transaction, the Company recorded a pre-tax gain of $16.1 million during the second quarter of 2022, which reflected (i) the excess of the proceeds over the carrying value of the Karl Lagerfeld investment, less (ii) $3.4 million of foreign currency translation adjustment losses previously recorded in accumulated other comprehensive loss. The gain was included in equity in net income of unconsolidated affiliates in the Company’s Consolidated Statements of Operations, and recorded in corporate expenses not allocated to any reportable segments, consistent with how the Company has historically recorded its proportionate share of the net income or loss of its investment in Karl Lagerfeld.
Please see Note 5, “Investments In Unconsolidated Affiliates,” 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 further discussion of the Karl Lagerfeld investment.
7. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the twenty-six weeks ended July 31, 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 | — | | | (13.9) | | | — | | | (120.5) | | | — | | | — | | | (134.4) | |
Balance as of July 31, 2022 | | | | | | | | | | | | | |
Goodwill, gross | 781.8 | | | 877.6 | | | 203.0 | | | 1,513.4 | | | 105.0 | | | — | | | 3,480.8 | |
Accumulated impairment losses | (287.3) | | | (394.0) | | | — | | | — | | | (105.0) | | | — | | | (786.3) | |
Goodwill, net | $ | 494.5 | | | $ | 483.6 | | | $ | 203.0 | | | $ | 1,513.4 | | | $ | — | | | $ | — | | | $ | 2,694.5 | |
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 twenty-six weeks ended July 31, 2022 that would indicate the remaining carrying amount of the Company’s goodwill and other intangible assets may be impaired as of July 31, 2022.
8. RETIREMENT AND BENEFIT PLANS
The Company, as of July 31, 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:
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| Pension Plans | | Pension Plans | | | | |
| Thirteen Weeks Ended | | Twenty-Six Weeks Ended | | | | |
(In millions) | 7/31/22 | | 8/1/21 | | 7/31/22 | | 8/1/21 | | | | | | | | |
| | | | | | | | | | | | | | | |
Service cost | $ | 7.7 | | | $ | 10.1 | | | $ | 15.7 | | | $ | 20.5 | | | | | | | | | |
Interest cost | 6.4 | | | 6.2 | | | 12.7 | | | 12.4 | | | | | | | | | |
Expected return on plan assets | (10.4) | | | (11.1) | | | (20.9) | | | (22.2) | | | | | | | | | |
Special termination benefits | — | | | 0.3 | | | — | | | 0.3 | | | | | | | | | |
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| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Total | $ | 3.7 | | | $ | 5.5 | | | $ | 7.5 | | | $ | 11.0 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| SERP Plans | | SERP Plans |
| Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
(In millions) | 7/31/22 | | 8/1/21 | | 7/31/22 | | 8/1/21 |
| | | | | | | |
Service cost | $ | 0.7 | | | $ | 1.0 | | | $ | 1.3 | | | $ | 2.4 | |
Interest cost | 0.8 | | | 0.7 | | | 1.4 | | | 1.6 | |
Special termination benefits | — | | | 0.6 | | | — | | | 0.6 | |
Total | $ | 1.5 | | | $ | 2.3 | | | $ | 2.7 | | | $ | 4.6 | |
The Company provided enhanced retirement benefits to terminated employees during the second quarter of 2021 and as a result recognized $0.9 million of special termination benefit costs with a corresponding increase to its pension benefit obligation.
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 and twenty-six weeks ended July 31, 2022 and August 1, 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.
9. DEBT
Short-Term Borrowings
The Company had $12.2 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 July 31, 2022. The weighted average interest rate on funds borrowed as of July 31, 2022 was 0.16%. These facilities provided for borrowings of up to $187.8 million based on exchange rates in effect on July 31, 2022 and are utilized primarily to fund working capital needs. The maximum amount of borrowings outstanding under these facilities during the twenty-six weeks ended July 31, 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, 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 twenty-six weeks ended July 31, 2022.
Long-Term Debt
The carrying amounts of the Company’s long-term debt were as follows:
| | | | | | | | | | | | | | | | | | |
(In millions) | 7/31/22 | | 1/30/22 | | 8/1/21 | |
| | | | | | |
Senior unsecured Term Loan A facilities due 2024 (1)(2) | $ | 457.8 | | | $ | 513.5 | | | $ | 891.2 | | |
| | | | | | |
7 3/4% debentures due 2023 | 99.9 | | | 99.8 | | | 99.8 | | |
3 5/8% senior unsecured euro notes due 2024 (2) | 532.5 | | | 580.8 | | | 619.2 | | |
4 5/8% senior unsecured notes due 2025 | 496.4 | | | 495.7 | | | 495.1 | | |
3 1/8% senior unsecured euro notes due 2027 (2) | 607.1 | | | 662.6 | | | 706.9 | | |
Total | 2,193.7 | | | 2,352.4 | | | 2,812.2 | | |
Less: Current portion of long-term debt | 38.2 | | | 34.8 | | | 29.7 | | |
Long-term debt | $ | 2,155.5 | | | $ | 2,317.6 | | | $ | 2,782.5 | | |
(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 €450.0 million, respectively, as of July 31, 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 July 31, 2022, January 30, 2022 and August 1, 2021.
The Company’s mandatory long-term debt repayments for the remainder of 2022 through 2027 were as follows as of July 31, 2022:
| | | | | |
(In millions) | |
Fiscal Year | Amount (1) |
Remainder of 2022 | $ | 19.1 | |
2023 | 138.2 | |
2024 | 936.9 | |
2025 | 500.0 | |
2026 | — | |
2027 | 611.9 | |
(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 July 31, 2022 because the carrying amount reflects the unamortized portions of debt issuance costs and the original issue discounts.
As of July 31, 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 $457.8 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 $12.0 million of outstanding letters of credit under the senior unsecured revolving credit facilities as of July 31, 2022.
The Company made payments totaling $13.4 million and $707.4 million on its term loans under the 2019 facilities during the twenty-six weeks ended July 31, 2022 and August 1, 2021, respectively.
The current applicable margin with respect to the Euro TLA facility and each revolving credit facility as of July 31, 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 twenty-six weeks ended August 1, 2021 (no interest rate swap agreements were entered into or in effect during the twenty-six weeks ended July 31, 2022):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | | | | | | | | | | |
Designation Date | | Commencement Date | | Initial Notional Amount | | Notional Amount Outstanding as of July 31, 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 | | 50.0 | | | — | | (1) | 1.409% | | February 2022 |
June 2019 | | June 2019 | | 50.0 | | | — | | | 1.719% | | July 2021 |
January 2019 | | February 2020 | | 50.0 | | | — | | | 2.4187% | | February 2021 |
November 2018 | | February 2019 | | 139.2 | | | — | | | 2.8645% | | February 2021 |
October 2018 | | February 2019 | | 115.7 | | | — | | | 2.9975% | | February 2021 |
June 2018 | | August 2018 | | 50.0 | | | — | | | 2.6825% | | February 2021 |
(1) The Company terminated in 2021 the interest rate swap agreements due to expire in February 2022 and February 2023 in connection with the early repayment of the outstanding principal balance under its USD TLA facility.
The 2019 facilities require the Company to comply with customary affirmative, negative and financial covenants, including a minimum interest coverage ratio and a maximum net leverage ratio, calculated in the manner set forth in the terms of the 2019
facilities. Please see Note 8, “Debt,” 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 further discussion of the 2019 facilities.
7 3/4% Debentures Due 2023
The Company has outstanding $100.0 million of debentures due November 15, 2023 that accrue interest at the rate of 7 3/4%. The debentures are not redeemable at the Company’s option prior to maturity.
3 5/8% Euro Senior Notes Due 2024
The Company has outstanding €525.0 million principal amount of 3 5/8% senior notes due July 15, 2024. The Company may redeem some or all of these notes at any time prior to April 15, 2024 by paying a “make whole” premium plus any accrued and unpaid interest. In addition, the Company may redeem some or all of these notes on or after April 15, 2024 at their principal amount plus any accrued and unpaid interest.
4 5/8% Senior Notes Due 2025
The Company has outstanding $500.0 million principal amount of 4 5/8% senior notes due July 10, 2025. The Company may redeem some or all of these notes at any time prior to June 10, 2025 by paying a “make whole” premium plus any accrued and unpaid interest. In addition, the Company may redeem some or all of these notes on or after June 10, 2025 at their principal amount plus any accrued and unpaid interest.
3 1/8% Euro Senior Notes Due 2027
The Company has outstanding €600.0 million principal amount of 3 1/8% senior notes due December 15, 2027. The Company may redeem some or all of these notes at any time prior to September 15, 2027 by paying a “make whole” premium plus any accrued and unpaid interest. In addition, the Company may redeem some or all of these notes on or after September 15, 2027 at their principal amount plus any accrued and unpaid interest.
The Company’s financing arrangements contain financial and non-financial covenants and customary events of default. As of July 31, 2022, the Company was in compliance with all applicable financial and non-financial covenants under its financing arrangements.
The Company also has standby letters of credit outside of its 2019 facilities primarily to collateralize the Company’s insurance and lease obligations. The Company had $58.8 million of these standby letters of credit outstanding as of July 31, 2022.
Please see Note 8, “Debt,” 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 further discussion of the Company’s debt.
10. INCOME TAXES
The effective income tax rates for the thirteen weeks ended July 31, 2022 and August 1, 2021 were 26.4% and 28.1%, respectively. The effective income tax rate for the thirteen weeks ended July 31, 2022 reflected a $41.4 million income tax expense recorded on $156.7 million of pre-tax income. The effective income tax rate for the thirteen weeks ended August 1, 2021 reflected a $70.9 million income tax expense recorded on $252.7 million of pre-tax income.
The effective income tax rates for the twenty-six weeks ended July 31, 2022 and August 1, 2021 were 28.0% and 33.1%, respectively. The effective income tax rate for the twenty-six weeks ended July 31, 2022 reflected a $96.8 million income tax expense recorded on $345.2 million of pre-tax income. The effective income tax rate for the twenty-six weeks ended August 1, 2021 reflected a $139.2 million income tax expense recorded on $420.7 million of pre-tax income.
The effective income tax rates for the thirteen and twenty-six weeks ended July 31, 2022 and August 1, 2021 were higher than the United States statutory income tax rate primarily due to the tax on foreign earnings in excess of a deemed return on tangible assets of foreign corporations (known as “GILTI”) and the mix of foreign and domestic pre-tax results.
The Company files income tax returns in more than 40 international jurisdictions each year. A substantial amount of the Company’s earnings are in international jurisdictions, particularly in the Netherlands and Hong Kong SAR, where the income tax rates, when coupled with special rates levied on income from certain of the Company’s jurisdictional activities, have
historically been lower than the United States statutory income tax rate. In 2022, the Company no longer benefits from these special rates.
11. DERIVATIVE FINANCIAL INSTRUMENTS
Cash Flow Hedges
The Company has exposure to changes in foreign currency exchange rates related to anticipated cash flows associated with certain international inventory purchases. The Company uses foreign currency forward exchange contracts to hedge against a portion of this exposure.
The Company also has exposure to interest rate volatility related to its 2019 facilities borrowings, which bear interest at a rate equal to an applicable margin plus a variable rate. The Company from time to time enters into interest rate swap agreements to hedge against a portion of the exposure related to its term loans under the 2019 facilities. No interest rate swap agreements were outstanding as of July 31, 2022 and January 30, 2022. As of July 31, 2022, approximately 80% of the Company’s long-term debt was at a fixed interest rate, with the remaining (euro-denominated) balance at a variable rate. Please see Note 9, “Debt,” for further discussion of the 2019 facilities and these agreements.
The Company records the foreign currency forward exchange contracts and interest rate swap agreements at fair value in its Consolidated Balance Sheets and does not net the related assets and liabilities. The foreign currency forward exchange contracts associated with certain international inventory purchases and any interest rate swap agreements are designated as effective hedging instruments (collectively, “cash flow hedges”). As such, the changes in the fair value of the cash flow hedges are recorded in equity as a component of accumulated other comprehensive loss (“AOCL”). No amounts were excluded from effectiveness testing.
Net Investment Hedges
The Company has exposure to changes in foreign currency exchange rates related to the value of its investments in foreign subsidiaries denominated in a currency other than the United States dollar. To hedge against a portion of this exposure, the Company designated the carrying amounts of its (i) €600.0 million principal amount of 3 1/8% senior notes due 2027 and (ii) €525.0 million principal amount of 3 5/8% senior notes due 2024 (collectively, “foreign currency borrowings”), that were issued by PVH Corp., a U.S.-based entity, as net investment hedges of its investments in certain of its foreign subsidiaries that use the euro as their functional currency. Please see Note 9, “Debt,” for further discussion of the Company’s foreign currency borrowings.
The Company records the foreign currency borrowings at carrying value in its Consolidated Balance Sheets. The carrying value of the foreign currency borrowings is remeasured at the end of each reporting period to reflect changes in the foreign currency exchange spot rate. Since the foreign currency borrowings are designated as net investment hedges, such remeasurement is recorded in equity as a component of AOCL. The fair value and the carrying value of the foreign currency borrowings designated as net investment hedges were $1,147.8 million and $1,139.6 million, respectively, as of July 31, 2022, $1,361.7 million and $1,243.4 million, respectively, as of January 30, 2022 and $1,500.5 million and $1,326.1 million, respectively, as of August 1, 2021. The Company evaluates the effectiveness of its net investment hedges at inception and at the beginning of each quarter thereafter. No amounts were excluded from effectiveness testing.
Undesignated Contracts
The Company records immediately in earnings changes in the fair value of hedges that are not designated as effective hedging instruments (“undesignated contracts”), which primarily include foreign currency forward exchange contracts related to third party and intercompany transactions, and intercompany loans that are not of a long-term investment nature. Any gains and losses that are immediately recognized in earnings on such contracts are largely offset by the remeasurement of the underlying balances.
The Company does not use derivative or non-derivative financial instruments for trading or speculative purposes. The cash flows from the Company’s hedges are presented in the same category in the Company’s Consolidated Statements of Cash Flows as the items being hedged.
The following table summarizes the fair value and presentation of the Company’s derivative financial instruments in its Consolidated Balance Sheets:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Assets | | Liabilities |
| 7/31/22 | | 1/30/22 | | 8/1/21 | | 7/31/22 | | 1/30/22 | | 8/1/21 |
(In millions) | Other Current Assets | Other Assets | | Other Current Assets | Other Assets | | Other Current Assets | Other Assets | | Accrued Expenses | Other Liabilities | | Accrued Expenses | Other Liabilities | | Accrued Expenses | Other Liabilities |
Contracts designated as cash flow hedges: | | | | | | | | | | | | | | | | | |
Foreign currency forward exchange contracts (inventory purchases) | $ | 84.5 | | $ | 2.5 | | | $ | 48.0 | | $ | 2.7 | | | $ | 13.5 | | $ | 0.8 | | | $ | 1.1 | | $ | 0.1 | | | $ | 0.6 | | $ | — | | | $ | 4.0 | | $ | 0.1 | |
Interest rate swap agreements | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | 2.0 | | 0.7 | |
Total contracts designated as cash flow hedges | 84.5 | | 2.5 | | | 48.0 | | 2.7 | | | 13.5 | | 0.8 | | | 1.1 | | 0.1 | | | 0.6 | | — | | | 6.0 | | 0.8 | |
Undesignated contracts: | | | | | | | | | | | | | | | | | |
Foreign currency forward exchange contracts | 6.7 | | — | | | 5.6 | | — | | | 4.0 | | — | | | 1.5 | | — | | | 1.1 | | — | | | 0.6 | | — | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total | $ | 91.2 | | $ | 2.5 | | | $ | 53.6 | | $ | 2.7 | | | $ | 17.5 | | $ | 0.8 | | | $ | 2.6 | | $ | 0.1 | | | $ | 1.7 | | $ | — | | | $ | 6.6 | | $ | 0.8 | |
The notional amount outstanding of foreign currency forward exchange contracts was $1,400.6 million at July 31, 2022. Such contracts expire principally between August 2022 and January 2024.
The following tables summarize the effect of the Company’s hedges designated as cash flow and net investment hedging instruments:
| | | | | | | | | | | | | | | | | | |
| | Gain (Loss) Recognized in Other Comprehensive (Loss) Income | | | | |
| | | | | |
(In millions) | | | |
| | | | | | | | |
Thirteen Weeks Ended | | 7/31/22 | | 8/1/21 | | | | |
Foreign currency forward exchange contracts (inventory purchases) | | $ | 12.5 | | | $ | 54.6 | | | | | |
Interest rate swap agreements | | — | | | (0.1) | | | | | |
Foreign currency borrowings (net investment hedges) | | 38.2 | | | 21.3 | | | | | |
Total | | $ | 50.7 | | | $ | 75.8 | | | | | |
| | | | | | | | |
Twenty-Six Weeks Ended | | 7/31/22 | | 8/1/21 | | | | |
Foreign currency forward exchange contracts (inventory purchases) | | $ | 45.8 | | | $ | 64.8 | | | | | |
Interest rate swap agreements | | — | | | 0.1 | | | | | |
Foreign currency borrowings (net investment hedges) | | 105.0 | | | 27.3 | | | | | |
Total | | $ | 150.8 | | | $ | 92.2 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Amount of Gain (Loss) Reclassified from AOCL into Income (Expense), Consolidated Statements of Operations Location, and Total Amount of Consolidated Statements of Operations Line Item |
(In millions) | | Amount Reclassified | | Location | | Total Statements of Operations Amount |
| | | | | | | | | | |
Thirteen Weeks Ended | | 7/31/22 | | 8/1/21 | | | | 7/31/22 | | 8/1/21 |
Foreign currency forward exchange contracts (inventory purchases) | | $ | 5.2 | | | $ | 5.8 | | | Cost of goods sold | | $ | 912.5 | | | $ | 979.6 | |
Interest rate swap agreements | | — | | | (0.8) | | | Interest expense | | 21.8 | | | 27.3 | |
Total | | $ | 5.2 | | | $ | 5.0 | | | | | | | |
| | | | | | | | | | |
Twenty-Six Weeks Ended | | 7/31/22 | | 8/1/21 | | | | 7/31/22 | | 8/1/21 |
Foreign currency forward exchange contracts (inventory purchases) | | $ | 3.7 | | | $ | 7.8 | | | Cost of goods sold | | $ | 1,796.5 | | | $ | 1,829.8 | |
| | | | | | | | | | |
Interest rate swap agreements | | — | | | (1.9) | | | Interest expense | | 44.8 | | | 57.8 | |
Total | | $ | 3.7 | | | $ | 5.9 | | | | | | | |
A net gain in AOCL on foreign currency forward exchange contracts at July 31, 2022 of $91.3 million is estimated to be reclassified in the next 12 months in the Company’s Consolidated Statement of Operations to cost of goods sold as the underlying inventory hedged by such forward exchange contracts is sold. Amounts recognized in AOCL for foreign currency borrowings would be recognized in earnings only upon the sale or substantially complete liquidation of the hedged net investment.
The following table summarizes the effect of the Company’s undesignated contracts recognized in SG&A expenses in its Consolidated Statements of Operations:
| | | | | | | | | | | | | | | | |
(In millions) | | | | Gain (Loss) Recognized in Income (Expense) |
Thirteen Weeks Ended | | | | 7/31/22 | | 8/1/21 |
| | | | | | |
Foreign currency forward exchange contracts | | | | $ | 12.5 | | | $ | 1.4 | |
| | | | | | |
| | | | | | |
Twenty-Six Weeks Ended | | | | 7/31/22 | | 8/1/21 |
Foreign currency forward exchange contracts | | | | $ | 26.6 | | | $ | (2.2) | |
| | | | | | |
The Company had no derivative financial instruments with credit risk-related contingent features underlying the related contracts as of July 31, 2022.
12. FAIR VALUE MEASUREMENTS
In accordance with accounting principles generally accepted in the United States, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three level hierarchy prioritizes the inputs used to measure fair value as follows:
Level 1 – Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 – Observable inputs other than quoted prices included in Level 1, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability and inputs derived principally from or corroborated by observable market data.
Level 3 – Unobservable inputs reflecting the Company’s own assumptions about the inputs that market participants would use in pricing the asset or liability based on the best information available.
In accordance with the fair value hierarchy described above, the following table shows the fair value of the Company’s financial assets and liabilities that are required to be remeasured at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 7/31/22 | | 1/30/22 | | 8/1/21 |
(In millions) | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency forward exchange contracts | N/A | | $ | 93.7 | | | N/A | | $ | 93.7 | | | N/A | | $ | 56.3 | | | N/A | | $ | 56.3 | | | N/A | | $ | 18.3 | | | N/A | | $ | 18.3 | |
Rabbi trust assets | 0.6 | | | 4.5 | | | N/A | | 5.1 | | | — | | | 0.3 | | | N/A | | 0.3 | | | N/A | | N/A | | N/A | | N/A |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Total Assets | $ | 0.6 | | | $ | 98.2 | | | N/A | | $ | 98.8 | | | $ | — | | | $ | 56.6 | | | N/A | | $ | 56.6 | | | N/A | | $ | 18.3 | | | N/A | | $ | 18.3 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency forward exchange contracts | N/A | | $ | 2.7 | | | N/A | | $ | 2.7 | | | N/A | | $ | 1.7 | | | N/A | | $ | 1.7 | | | N/A | | $ | 4.7 | | | N/A | | $ | 4.7 | |
Interest rate swap agreements | N/A | | — | | | N/A | | — | | | N/A | | — | | | N/A | | — | | | N/A | | 2.7 | | | N/A | | 2.7 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Total Liabilities | N/A | | $ | 2.7 | | | N/A | | $ | 2.7 | | | N/A | | $ | 1.7 | | | N/A | | $ | 1.7 | | | N/A | | $ | 7.4 | | | N/A | | $ | 7.4 | |
The fair value of the foreign currency forward exchange contracts is measured as the total amount of currency to be purchased, multiplied by the difference between (i) the forward rate as of the period end and (ii) the settlement rate specified in each contract. The fair value of the Level 1 rabbi trust assets, which consist of investments in mutual funds, is valued at the net asset value of the funds, as determined by the closing price in the active market in which the individual fund is traded. The fair value of the Level 2 rabbi trust assets, which consist of investments in common collective trust funds, is valued at the net asset value of the funds, as determined by the fund family. Funds are redeemable on a daily basis without restriction. The fair value of the
interest rate swap agreements is based on observable interest rate yield curves and represents the expected discounted cash flows underlying the financial instruments.
The Company established a rabbi trust that, beginning January 1, 2022, holds investments related to the Company’s supplemental savings plan. The rabbi trust assets, which generally mirror the investment elections made by eligible plan participants, were $5.1 million and $0.3 million as of July 31, 2022 and January 30, 2022, respectively, and recorded in the Company’s Consolidated Balance Sheets as follows: $0.1 million and $5.0 million were included in other current assets and other assets, respectively, as of July 31, 2022, and $0.3 million was included in other assets as of January 30, 2022. The corresponding deferred compensation liability was included in accrued expenses and other liabilities in the Company’s Consolidated Balance Sheets as of July 31, 2022 and January 30, 2022. Unrealized losses recognized on the rabbi trust investments were immaterial during the twenty-six weeks ended July 31, 2022.
There were no transfers between any levels of the fair value hierarchy for any of the Company’s fair value measurements.
The Company’s non-financial assets, which primarily consist of goodwill, other intangible assets, property, plant and equipment, and operating lease right-of-use assets, are not required to be measured at fair value on a recurring basis, and instead are reported at their carrying amount. However, on a periodic basis whenever events or changes in circumstances indicate that their carrying amount may not be fully recoverable (and at least annually for goodwill and indefinite-lived intangible assets), non-financial assets are assessed for impairment. If the fair value is determined to be lower than the carrying amount, an impairment charge is recorded to write down the asset to its fair value.
The following table shows the fair values of the Company’s non-financial assets that were required to be remeasured at fair value on a non-recurring basis during the twenty-six weeks ended July 31, 2022 and August 1, 2021, and the total impairments recorded as a result of the remeasurement process:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
(In millions) | | Fair Value Measurement Using | | Fair Value As Of Impairment Date | | Total Impairments |
7/31/22 | | Level 1 | | Level 2 | | Level 3 | | |
Operating lease right-of-use assets | | N/A | | N/A | | $ | — | | | $ | — | | | $ | 26.4 | |
Property, plant and equipment, net | | N/A | | N/A | | — | | | — | | | 17.2 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
8/1/21 | | | | | | | | | | |
Operating lease right-of-use assets | | N/A | | N/A | | — | | | — | | | 17.8 | |
Property, plant and equipment, net | | N/A | | N/A | | — | | | — | | | 17.3 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Operating lease right-of-use assets with a carrying amount of $26.4 million and property, plant and equipment with a carrying amount of $17.2 million were written down to a fair value of zero during the twenty-six weeks ended July 31, 2022 in connection with the Company’s decision in the second quarter of 2022 to exit from its Russia business. Please see Note 16, “Exit Activity Costs,” for further discussion of the Russia business exit costs. Fair value of the Company’s operating lease right-of-use assets and property, plant and equipment were determined to be zero in line with the Company’s estimated future cash flows for the Russia business asset group.
The $43.6 million of impairment charges during the twenty-six weeks ended July 31, 2022 were included in SG&A expenses in the Company’s Consolidated Statement of Operations and recorded to the Company’s segments as follows: $33.7 million in the Tommy Hilfiger International segment and $9.9 million in the Calvin Klein International segment.
Operating lease right-of-use assets with a carrying amount of $17.8 million and property, plant and equipment with a carrying amount of $17.3 million were written down to a fair value of zero during the twenty-six weeks ended August 1, 2021 primarily as a result of actions taken by the Company to reduce its real estate footprint, including reductions in office space. Please see Note 16, “Exit Activity Costs,” for further discussion of these restructuring activities. Fair value of the Company’s operating lease right-of-use assets was determined based on the discounted cash flows of estimated sublease income using market participant assumptions, which considered the short length of the remaining lease term for certain of these assets, and current real estate trends and market conditions. Fair value of the Company’s property, plant and equipment was determined based on the estimated discounted future cash flows associated with the assets using market participant assumptions.
The $35.1 million of impairment charges during the twenty-six weeks ended August 1, 2021 were included in SG&A expenses in the Company’s Consolidated Statement of Operations and recorded to the Company’s segments as follows: $1.4 million in the Heritage Brands Wholesale segment and $33.7 million in corporate expenses not allocated to any reportable segments.
The carrying amounts and the fair values of the Company’s cash and cash equivalents, short-term borrowings and long-term debt were as follows:
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| 7/31/22 | | 1/30/22 | | 8/1/21 |
(In millions) | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
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Cash and cash equivalents | $ | 699.3 | | | $ | 699.3 | | | $ | 1,242.5 | | | $ | 1,242.5 | | | $ | 1,152.6 | | | $ | 1,152.6 | |
Short-term borrowings | 12.2 | | | 12.2 | | | 10.8 | | | 10.8 | | | 19.2 | | | 19.2 | |
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Long-term debt (including portion classified as current) | 2,193.7 | | | 2,210.9 | | | 2,352.4 | | | 2,522.4 | | | 2,812.2 | | | 3,066.2 | |
The fair values of cash and cash equivalents and short-term borrowings approximate their carrying amounts due to the short-term nature of these instruments. The Company estimates the fair value of its long-term debt using quoted market prices as of the last business day of the applicable quarter. The Company classifies the measurement of its long-term debt as a Level 1 measurement. The carrying amounts of long-term debt reflect the unamortized portions of debt issuance costs and the original issue discounts.
13. STOCK-BASED COMPENSATION
The Company grants stock-based awards under its Stock Incentive Plan (the “Plan”). Shares issued as a result of stock-based compensation transactions generally have been funded with the issuance of new shares of the Company’s common stock.
The Company may grant the following types of incentive awards under the Plan: (i) non-qualified stock options; (ii) incentive stock options; (iii) stock appreciation rights; (iv) restricted stock; (v) restricted stock units (“RSUs”); (vi) performance shares; (vii) performance share units (“PSUs”); and (viii) other stock-based awards. Each award granted under the Plan is subject to an award agreement that incorporates, as applicable, the exercise price, the term of the award, the periods of restriction, the number of shares to which the award pertains, performance periods and performance measures, and such other terms and conditions as the plan committee determines. Awards granted under the Plan are classified as equity awards, which are recorded in stockholders’ equity in the Company’s Consolidated Balance Sheets. When estimating the grant date fair value of stock-based awards, the Company considers whether an adjustment is required to the closing price or the expected volatility of its common stock on the date of grant when the Company is in possession of material non-public information. No such adjustments were made to the grant date fair value of awards granted during the twenty-six weeks ended July 31, 2022.
Through July 31, 2022, the Company has granted under the Plan (i) service-based non-qualified stock options, referred to as “stock options” below, RSUs and restricted stock; and (ii) contingently issuable PSUs and RSUs. There were no shares of restricted stock or contingently issuable RSUs outstanding as of July 31, 2022.
According to the terms of the Plan, for purposes of determining the number of shares available for grant, each share underlying a stock option award reduces the number available by one share and each share underlying an RSU or PSU award reduces the number available by two shares.
Net income for the twenty-six weeks ended July 31, 2022 and August 1, 2021 included $22.8 million and $24.5 million, respectively, of pre-tax expense related to stock-based compensation, with related recognized income tax benefits of $3.0 million and $3.4 million, respectively.
The Company receives a tax deduction for certain transactions associated with its stock-based awards. The actual income tax benefits realized from these transactions during the twenty-six weeks ended July 31, 2022 and August 1, 2021 were $3.1 million and $4.7 million, respectively. The tax benefits realized included discrete net excess tax (deficiencies) benefits of $(1.5) million and $0.1 million recognized in the Company’s provision for income taxes during the twenty-six weeks ended July 31, 2022 and August 1, 2021, respectively.
Stock Options
Stock options granted to employees are generally exercisable in four equal annual installments commencing one year after the date of grant. The underlying stock option award agreements generally provide for accelerated vesting upon the award recipient’s retirement (as defined in the Plan). Such stock options are granted with a 10-year term and the per share exercise price cannot be less than the closing price of the common stock on the date of grant.
The Company estimates the fair value of stock options at the date of grant using the Black-Scholes-Merton model. The estimated fair value of the stock options granted is expensed over the stock options’ requisite service periods.
The following summarizes the assumptions used to estimate the fair value of stock options granted during the twenty-six weeks ended July 31, 2022 and August 1, 2021 and the resulting weighted average grant date fair value per stock option:
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| 7/31/22 | | 8/1/21 |
Weighted average risk-free interest rate | 2.50 | % | | 1.24 | % |
Weighted average expected stock option term (in years) | 6.25 | | 6.25 |
Weighted average Company volatility | 47.34 | % | | 47.58 | % |
Expected annual dividends per share | $ | 0.15 | | $ | 0.15 |
Weighted average grant date fair value per stock option | $ | 34.27 | | $ | 48.28 |
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The risk-free interest rate is based on United States Treasury yields in effect at the date of grant for periods corresponding to the expected stock option term. The expected stock option term represents the weighted average period of time that stock options granted are expected to be outstanding, based on vesting schedules and the contractual term of the stock options. Company volatility is based on the historical volatility of the Company’s common stock over a period of time corresponding to the expected stock option term. Expected dividends are based on the anticipated common stock cash dividend rate for the Company at the time of grant; the dividend assumption for the stock options granted during the twenty-six weeks ended August 1, 2021 was not affected by the Company’s suspension of its cash dividend beginning with the second quarter of 2020 in response to the impacts of the COVID-19 pandemic on its business and as a condition of the June 2020 Amendment that was in effect through June 10, 2021, as such suspension was viewed as temporary. Please see Note 15, “Stockholders' Equity,” for further discussion of dividends on the Company’s common stock.
The Company has continued to utilize the simplified method to estimate the expected term for its “plain vanilla” stock options granted due to a lack of relevant historical data resulting, in part, from changes in the pool of employees receiving stock option grants. The Company will continue to evaluate the appropriateness of utilizing such method.
Stock option activity for the twenty-six weeks ended July 31, 2022 was as follows:
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(In thousands, except per stock option data) | Stock Options | | Weighted Average Exercise Price Per Stock Option |
Outstanding at January 30, 2022 | 688 | | | $ | 103.40 | |
Granted | 134 | | | 71.51 | |
Exercised | — | | | — | |
Forfeited / Expired | 67 | | | 99.63 | |
Outstanding at July 31, 2022 | 755 | | | $ | 98.06 | |
Exercisable at July 31, 2022 | 505 | | | $ | 109.12 | |
RSUs
RSUs granted to employees generally vest in four equal annual installments commencing one year after the date of grant, although the Company does make from time to time, and currently has outstanding, RSUs with different vesting schedules. Service-based RSUs granted to non-employee directors vest in full the earlier of one year after the date of grant or the date of the Annual Meeting of Stockholders following the year of grant. The underlying RSU award agreements for employees generally provide for accelerated vesting upon the award recipient’s retirement (as defined in the Plan). The fair value of RSUs is equal to the closing price of the Company’s common stock on the date of grant and is expensed over the RSUs’ requisite service periods.
RSU activity for the twenty-six weeks ended July 31, 2022 was as follows:
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(In thousands, except per RSU data) | RSUs | | Weighted Average Grant Date Fair Value Per RSU |
Non-vested at January 30, 2022 | 1,176 | | | $ | 88.09 | |
Granted | 696 | | | 71.08 | |
Vested | 295 | | | 101.54 | |
Forfeited | 90 | | | 87.20 | |
Non-vested at July 31, 2022 | 1,487 | | | $ | 77.51 | |
PSUs
Contingently issuable PSUs granted to employees generally vest three years after the date of grant, subject to the satisfaction of performance conditions. The Company granted contingently issuable PSUs to certain of the Company’s senior executives during the second quarters of 2022 and 2021. The final number of shares to be earned, if any, is contingent upon the Company’s achievement of goals for the applicable performance period, of which (i) 50% is based upon the cumulative amount of the Company’s consolidated earnings before interest and taxes (“EBIT”) during a three-year performance period beginning with the fiscal year of grant for the awards granted in 2022 and EBIT for fiscal 2021 for the awards granted in 2021, and (ii) 50% is based upon the Company’s total shareholder return (“TSR”) during a three-year performance period from the grant date relative to a pre-established group of industry peers (which is substantially identical for grants in both years). For these awards, the Company records expense ratably over the three-year service period, with expense determined as follows: (i) EBIT-based portion of the awards – based on the grant date fair value per share and the Company’s current expectations of the probable number of shares that will ultimately be issued and (ii) TSR-based portion of the awards – based on the grant date fair value regardless of whether the market condition is satisfied because the awards are subject to market conditions. The grant date fair value of the awards granted was established as follows: (i) EBIT-based portion of the awards – based on the closing price of the Company’s common stock reduced for the present value of any dividends expected to be paid on the Company’s common stock during the three-year service period, as these contingently issuable PSUs do not accrue dividends and (ii) TSR-based portion of the awards – using the Monte Carlo simulation model. For the EBIT-based portion of the awards granted in the second quarter of 2021, the applicable performance period ended in the fourth quarter of 2021 and the maximum level of performance was achieved. These shares will vest and be paid out subject to and following the completion of the three-year service period.
The Company also granted contingently issuable PSUs to certain of the Company’s senior executives during 2019 and 2020, subject to a three-year performance period from the applicable grant date. For these awards, the final number of shares to be earned, if any, is contingent upon the Company’s achievement of goals for the applicable performance period, of which (i) 50% is based upon the Company’s absolute stock price growth during the applicable performance period and (ii) 50% is based upon the Company’s TSR during the applicable performance period relative to other companies included in the S&P 500 as of the date of grant. For these awards, the Company records expense ratably over the three-year service period based on the grant date fair value of the awards regardless of whether the market condition is satisfied because the awards are subject to market conditions. The grant date fair value of the awards granted was established for each grant using the Monte Carlo simulation model. For awards granted in 2019, the three-year performance period ended during either the first or second quarter of 2022 and holders of the awards did not earn any shares since the market conditions were not satisfied.
The following summarizes the assumptions used to estimate the fair value of PSUs subject to market conditions that were granted during the twenty-six weeks ended July 31, 2022 and August 1, 2021 and the resulting weighted average grant date fair value:
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| 7/31/22 | | 8/1/21 |
Weighted average risk-free interest rate | 2.91 | % | | 0.33 | % |
Weighted average Company volatility | 64.02 | % | | 60.69 | % |
Expected annual dividends per share | $ | 0.15 | | | $ | 0.15 | |
Weighted average grant date fair value per PSU | $ | 103.36 | | | $ | 159.29 | |
The risk-free interest rate is based on United States Treasury yields in effect at the date of grant for the term corresponding to the three-year performance period. Company volatility is based on the historical volatility of the Company’s common stock over a period of time corresponding to the three-year performance period. Expected dividends are based on the anticipated common stock cash dividend rate for the Company at the time of grant; the dividend assumption for the PSUs granted during the twenty-six weeks ended August 1, 2021 was not affected by the Company’s suspension of its cash dividend beginning with the second quarter of 2020 in response to the impacts of the COVID-19 pandemic on its business and as a condition of the June 2020 Amendment that was in effect through June 10, 2021, as such suspension was viewed as temporary. Please see Note 15, “Stockholders' Equity,” for further discussion of dividends on the Company’s common stock.
For certain of the awards granted, the after-tax portion of the award is subject to a holding period of one year after the vesting date. For these awards, the grant date fair value was discounted 6.90% in 2022 and 8.40% in 2021 for the restriction of liquidity, which was calculated using the Finnerty model.
Total PSU activity for the twenty-six weeks ended July 31, 2022 was as follows:
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(In thousands, except per PSU data) | PSUs | | Weighted Average Grant Date Fair Value Per PSU |
Non-vested at January 30, 2022 | 248 | | | $ | 93.15 | |
Granted | 72 | | | 87.16 | |
Reduction due to market conditions not satisfied | 67 | | | 118.28 | |
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Vested | — | | | — | |
Forfeited | 2 | | | 77.54 | |
Non-vested at July 31, 2022 | 251 | | | $ | 84.98 | |
14. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following tables present the changes in AOCL, net of related taxes, by component for the twenty-six weeks ended July 31, 2022 and August 1, 2021:
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(In millions) | Foreign currency translation adjustments | | | | Net unrealized and realized gain on effective cash flow hedges | | Total |
Balance, January 30, 2022 | $ | (665.9) | | | | | $ | 53.2 | | | $ | (612.7) | |
Other comprehensive (loss) income before reclassifications | (148.4) | | (1)(2) | | | 33.9 | | | (114.5) | |
Less: Amounts reclassified from AOCL | (3.4) | | (3) | | | 2.6 | | | (0.8) | |
Other comprehensive (loss) income | (145.0) | | | | | 31.3 | | | (113.7) | |
Balance, July 31, 2022 | $ | (810.9) | | | | | $ | 84.5 | | | $ | (726.4) | |
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(In millions) | Foreign currency translation adjustments | | | | Net unrealized and realized (loss) gain on effective cash flow hedges | | Total |
Balance, January 31, 2021 | $ | (481.6) | | | | | $ | (37.5) | | | $ | (519.1) | |
Other comprehensive (loss) income before reclassifications | (44.8) | | (1)(2) | | | 58.5 | | | 13.7 | |
Less: Amounts reclassified from AOCL | — | | | | | 6.9 | | | 6.9 | |
Other comprehensive (loss) income | (44.8) | | | | | 51.6 | | | 6.8 | |
Balance, August 1, 2021 | $ | (526.4) | | | | | $ | 14.1 | | | $ | (512.3) | |
(1) Foreign currency translation adjustments included a net gain on net investment hedges of $78.8 million and $20.6 million during the twenty-six weeks ended July 31, 2022 and August 1, 2021, respectively.
(2) Unfavorable foreign currency translation adjustments were principally driven by a strengthening of the United States dollar against the euro.
(3) Foreign currency translation adjustment losses were reclassified from AOCL during the second quarter of 2022 in connection with the Karl Lagerfeld transaction. Please see Note 6, “Investments in Unconsolidated Affiliates,” for further discussion.
The following table presents reclassifications from AOCL to earnings for the thirteen and twenty-six weeks ended July 31, 2022 and August 1, 2021:
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| Amount Reclassified from AOCL | Affected Line Item in the Company’s Consolidated Statements of Operations |
| Thirteen Weeks Ended | | Twenty-Six Weeks Ended | |
(In millions) | 7/31/22 | | 8/1/21 | | 7/31/22 | | 8/1/21 | |
Realized gain (loss) on effective cash flow hedges: | | | | | | | | |
Foreign currency forward exchange contracts (inventory purchases) | $ | 5.2 | | | $ | 5.8 | | | $ | 3.7 | | | $ | 7.8 | | Cost of goods sold |
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Interest rate swap agreements | — | | | (0.8) | | | — | | | (1.9) | | Interest expense |
Less: Tax effect | 1.4 | | | (0.5) | | | 1.1 | | | (1.0) | | Income tax expense |
Total, net of tax | $ | 3.8 | | | $ | 5.5 | | | $ | 2.6 | | | $ | 6.9 | | |
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Foreign currency translation adjustments: | | | | | | | | |
Karl Lagerfeld transaction | $ | (3.4) | | (1) | $ | — | | | $ | (3.4) | | (1) | $ | — | | Equity in net income of unconsolidated affiliates |
Less: Tax effect | — | | | — | | | — | | | — | | Income tax expense |
Total, net of tax | $ | (3.4) | | | $ | — | | | $ | (3.4) | | | $ | — | | |
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(1) Foreign currency translation adjustment losses were reclassified from AOCL during the second quarter of 2022 in connection with the Karl Lagerfeld transaction. Please see Note 6, “Investments in Unconsolidated Affiliates,” for further discussion.
15. STOCKHOLDERS’ EQUITY
Acquisition of Treasury Shares
The Company’s Board of Directors has authorized over time since 2015 an aggregate $3.0 billion stock repurchase program through June 3, 2026. Repurchases under the program may be made from time to time over the period through open market purchases, accelerated share repurchase programs, privately negotiated transactions or other methods, as the Company deems appropriate. Purchases are made based on a variety of factors, such as price, corporate requirements and overall market conditions, applicable legal requirements and limitations, trading restrictions under the Company’s insider trading policy and other relevant factors. The program may be modified by the Board of Directors, including to increase or decrease the repurchase limitation or extend, suspend or terminate the program at any time, without prior notice.
The Company suspended share repurchases under the stock repurchase program beginning in March 2020 in response to the impacts of the COVID-19 pandemic on its business. In addition, under the terms of a waiver the Company obtained in June 2020 of certain covenants under its senior unsecured credit facilities (referred to as the “June 2020 Amendment”), the Company was not permitted to make share repurchases during the relief period. However, effective June 10, 2021, the relief period under the June 2020 Amendment was terminated and the Company was permitted to resume share repurchases at management’s discretion. Please see Note 8, “Debt,” 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 further discussion of the terms of the June 2020 Amendment and the relief period.
The Company did not purchase any of its common stock under the program during the twenty-six weeks ended August 1, 2021, following termination of the relief period in June 2021. During the twenty-six weeks ended July 31, 2022, the Company purchased 3.2 million shares of its common stock under the program in open market transactions for $224.4 million. As of July 31, 2022, the repurchased shares were held as treasury stock and $998.5 million of the authorization remained available for future share repurchases.
Treasury stock activity also includes shares that were withheld in conjunction with the settlement of RSUs to satisfy tax withholding requirements.
Common Stock Dividends
The Company suspended its dividends in March 2020 in response to the impacts of the COVID-19 pandemic on its business. In addition, under the terms of the June 2020 Amendment, the Company was not permitted to declare or pay dividends during the relief period. However, effective June 10, 2021, the relief period was terminated and the Company was permitted to declare and pay dividends on its common stock at the discretion of the Board of Directors. Please see Note 8, “Debt,” 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 further discussion of the terms of the June 2020 Amendment and the relief period.
The Company did not declare or pay any dividends on its common stock during the twenty-six weeks ended August 1, 2021, following termination of the relief period in June 2021. The Company declared and paid $5.2 million of dividends on its common stock during the twenty-six weeks ended July 31, 2022, including a $0.0375 per share dividend paid on each of March 30, 2022 and June 29, 2022 to its common stockholders of record on March 11, 2022 and June 8, 2022, respectively.
16. EXIT ACTIVITY COSTS
Russia Business Exit Costs
As a result of the war in Ukraine, the Company made the decision in the second quarter of 2022 to exit from its Russia business, including the closure of its retail stores in Russia and the cessation of its wholesale operations in Russia and Belarus. In connection with this exit, the Company recorded pre-tax costs during the thirteen and twenty-six weeks ended July 31, 2022 as shown in the following table. All expected costs related to the exit from the Russia business were incurred during the thirteen and twenty-six weeks ended July 31, 2022.
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(In millions) | Costs Incurred During the Thirteen and Twenty-Six Weeks Ended 7/31/22 | | | | | | | | | | |
Severance, termination benefits and other employee costs | $ | 2.1 | | | | | | | | | | | |
Long-lived asset impairments | 43.6 | | | | | | | | | | | |
Contract termination and other costs | 4.8 | | | | | | | | | | | |
Total | $ | 50.5 | | | | | | | | | | | |
Of the charges incurred during the thirteen and twenty-six weeks ended July 31, 2022, $36.7 million relate to SG&A expenses of the Tommy Hilfiger International segment and $13.8 million relate to SG&A expenses of the Calvin Klein International segment. Please see Note 19, “Segment Data,” for further discussion of the Company’s reportable segments.
Please see Note 12, “Fair Value Measurements,” for further discussion of the long-lived asset impairments recorded during the thirteen and twenty-six weeks ended July 31, 2022.
The liabilities at July 31, 2022 related to these costs were principally recorded in accrued expenses in the Company’s Consolidated Balance Sheet and were as follows:
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(In millions) | Liability at 1/30/22 | | Costs Incurred During the Twenty-Six Weeks Ended 7/31/22 | | Costs Paid During the Twenty-Six Weeks Ended 7/31/22 | | Liability at 7/31/22 |
Severance, termination benefits and other employee costs | $ | — | | | $ | 2.1 | | | $ | — | | | $ | 2.1 | |
Contract termination and other costs | — | | | 4.8 | | | — | | | 4.8 | |
Total | $ | — | | | $ | 6.9 | | | $ | — | | | $ | 6.9 | |
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2021 Reductions in Workforce and Real Estate Footprint
The Company announced in March 2021 plans to streamline its organization through reductions in its workforce, primarily in certain international markets, and to reduce its real estate footprint, including reductions in office space and select store closures, which resulted in annual cost savings of approximately $60 million. In connection with these activities, the Company recorded pre-tax costs during 2021 as shown in the following table. All expected costs related to the 2021 reductions in workforce and real estate footprint were incurred during 2021.
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(In millions) | Costs Incurred During the Thirteen Weeks Ended 8/1/21 | | Costs Incurred During the Twenty-Six Weeks Ended 8/1/21 | | Cumulative Costs Incurred | | | | | | |
Severance, termination benefits and other employee costs | $ | 1.0 | | | $ | 13.2 | | | $ | 15.7 | | | | | | | |
Long-lived asset impairments | — | | | 28.1 | | | 28.1 | | | | | | | |
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Contract termination and other costs | 0.8 | | | 3.8 | | | 3.8 | | | | | | | |
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Total | $ | 1.8 | | | $ | 45.1 | | | $ | 47.6 | | | | | | | |
Of the charges incurred during the twenty-six weeks ended August 1, 2021, $1.7 million relate to SG&A expenses of the Tommy Hilfiger North America segment, $7.1 million relate to SG&A expenses of the Tommy Hilfiger International segment, $2.1 million relate to SG&A expenses of the Calvin Klein North America segment, $5.7 million relate to SG&A expenses of the Calvin Klein International segment and $28.5 million relate to corporate SG&A expenses not allocated to any reportable segment. Please see Note 19, “Segment Data,” for further discussion of the Company’s reportable segments.
Please see Note 12, “Fair Value Measurements,” for further discussion of the long-lived asset impairments recorded during the twenty-six weeks ended August 1, 2021.
The liabilities at July 31, 2022 related to these costs were principally recorded in accrued expenses in the Company’s Consolidated Balance Sheet and were as follows:
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(In millions) | Liability at 1/30/22 | | Costs Incurred During the Twenty-Six Weeks Ended 7/31/22 | | Costs Paid During the Twenty-Six Weeks Ended 7/31/22 | | Liability at 7/31/22 |
Severance, termination benefits and other employee costs | $ | 6.2 | | | $ | — | | | $ | 2.2 | | | $ | 4.0 | |
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Heritage Brands Retail Exit Costs
The Company announced on July 14, 2020 plans to streamline its North American operations to better align its business with the evolving retail landscape, including the exit from its Heritage Brands Retail business, which consisted of 162 directly operated stores in North America and was substantially completed in the second quarter of 2021. In connection with the exit from the Heritage Brands Retail business, the Company recorded pre-tax costs during the thirteen and twenty-six weeks ended August 1, 2021 and recorded total cumulative costs during 2020 and 2021 as shown in the table below. All expected costs related to the exit from the Heritage Brands Retail business were incurred by the end of 2021.
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(In millions) | Costs Incurred During the Thirteen Weeks Ended 8/1/21 | | Costs Incurred During the Twenty-Six Weeks Ended 8/1/21 | | | | Cumulative Costs Incurred |
Severance, termination benefits and other employee costs | $ | 5.7 | | | $ | 10.8 | | | | | $ | 25.4 | |
Long-lived asset impairments | — | | | — | | | | | 7.2 | |
Accelerated amortization of lease assets | 3.0 | | | 5.9 | | | | | 13.1 | |
Contract termination and other costs | 4.4 | | | 4.4 | | | | | 4.4 | |
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Total | $ | 13.1 | | | $ | 21.1 | | | | | $ | 50.1 | |
The costs incurred during 2020 and 2021 relate to SG&A expenses of the Heritage Brands Retail segment. Please see Note 19, “Segment Data,” for further discussion of the Company’s reportable segments.
The liabilities at July 31, 2022 related to these costs were principally recorded in accrued expenses in the Company’s Consolidated Balance Sheet and were as follows:
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(In millions) | Liability at 1/30/22 | | Costs Incurred During the Twenty-Six Weeks Ended 7/31/22 | | Costs Paid During the Twenty-Six Weeks Ended 7/31/22 | | Liability at 7/31/22 |
Severance, termination benefits and other employee costs | $ | 3.5 | | | $ | — | | | $ | 3.1 | | | $ | 0.4 | |
Contract termination and other costs | 2.4 | | | — | | | 2.4 | | | — | |
Total | $ | 5.9 | | | $ | — | | | $ | 5.5 | | | $ | 0.4 | |
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17. NET INCOME PER COMMON SHARE
The Company computed its basic and diluted net income per common share as follows: | | | | | | | | | | | | | | | | | | | | | | | |
| Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
(In millions, except per share data) | 7/31/22 | | 8/1/21 | | 7/31/22 | | 8/1/21 |
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Net income attributable to PVH Corp. | $ | 115.3 | | | $ | 181.9 | | | $ | 248.4 | | | $ | 281.8 | |
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Weighted average common shares outstanding for basic net income per common share | 66.6 | | | 71.4 | | | 67.3 | | | 71.3 | |
Weighted average impact of dilutive securities | 0.4 | | | 1.1 | | | 0.6 | | | 1.1 | |
| | | | | | | |
Total shares for diluted net income per common share | 67.0 | | | 72.5 | | | 67.9 | | | 72.4 | |
| | | | | | | |
Basic net income per common share attributable to PVH Corp. | $ | 1.73 | | | $ | 2.55 | | | $ | 3.69 | | | $ | 3.95 | |
| | | | | | | |
Diluted net income per common share attributable to PVH Corp. | $ | 1.72 | | | $ | 2.51 | | | $ | 3.66 | | | $ | 3.89 | |
Potentially dilutive securities excluded from the calculation of diluted net income per common share as the effect would be anti-dilutive were as follows: | | | | | | | | | | | | | | | | | | | | | | | |
| Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
(In millions) | 7/31/22 | | 8/1/21 | | 7/31/22 | | 8/1/21 |
| | | | | | | |
Weighted average potentially dilutive securities | 1.8 | | | 0.7 | | | 1.4 | | | 0.7 | |
Shares underlying contingently issuable awards that have not met the necessary conditions as of the end of a reporting period are not included in the calculation of diluted net income per common share for that period. The Company had contingently issuable PSU awards outstanding that did not meet the performance conditions as of July 31, 2022 and August 1, 2021 and, therefore, were excluded from the calculation of diluted net income per common share for each applicable period. The maximum number of potentially dilutive shares that could be issued upon vesting for such awards was 0.4 million and 0.2 million as of July 31, 2022 and August 1, 2021, respectively. These amounts were also excluded from the computation of weighted average potentially dilutive securities in the table above.
18. SUPPLEMENTAL CASH FLOW INFORMATION
Noncash Investing and Financing Transactions
Omitted from the Company’s Consolidated Statements of Cash Flows for the twenty-six weeks ended July 31, 2022 and August 1, 2021 were capital expenditures related to property, plant and equipment of $43.7 million and $22.7 million, respectively, that were accrued and not yet paid as of the end of the respective periods.
Omitted from acquisition of treasury shares in the Company’s Consolidated Statement of Cash Flows for the twenty-six weeks ended July 31, 2022 were $3.1 million of shares repurchased under the stock repurchase program for which the trades occurred but remained unsettled as of the end of the period.
The Company completed the Australia acquisition in the second quarter of 2019. Total acquisition consideration included the issuance to key executives of Gazal and PVH Australia of approximately 6% of the outstanding shares in the subsidiary of the Company that acquired 100% of the ownership interests in the Australia business, for which the Company recognized a $26.2 million liability on the date of the acquisition. In subsequent periods, the liability was adjusted each reporting period to its redemption value based on conditions that existed as of each subsequent balance sheet date. The Company settled in June 2020 a portion of the liability for the 6% interest issued to key executives of Gazal and PVH Australia, and settled in June 2021 the remaining liability, under the conditions specified in the terms of the acquisition agreement. Please see Note 4, “Acquisitions and Divestitures,” for further discussion of this liability.
Lease Transactions
Supplemental cash flow information related to leases was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | | Twenty-Six Weeks Ended | | | | |
(In millions) | | | | 7/31/22 | | 8/1/21 | | | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | | | |
Operating cash flows from operating leases | | | | $ | 237.0 | |
| $ | 242.7 | | | | | |
Operating cash flows from finance leases | | | | 0.1 | | | 0.2 | | | | | |
Financing cash flows from finance leases | | | | 2.2 | | | 2.8 | | | | | |
Noncash transactions: | | | | | | | | | | |
Right-of-use assets obtained in exchange for new operating lease liabilities | | | | 144.0 | | | 147.8 | | | | | |
Right-of-use assets obtained in exchange for new finance lease liabilities | | | | 3.9 | | | 2.5 | | | | | |
The Company has sought concessions from landlords for certain of its stores affected by temporary closures as a result of the COVID-19 pandemic in the form of rent deferrals or rent abatements. Consistent with updated guidance issued by the Financial Accounting Standards Board (“FASB”) in April 2020, the Company elected to treat COVID-19 related rent concessions as though enforceable rights and obligations for those concessions existed in the original contract. As such, rent abatements negotiated with landlords are recorded as a reduction to variable lease expense included in SG&A expenses in the Company’s Consolidated Statements of Operations. The Company recorded $1.6 million and $2.4 million of rent abatements during the thirteen and twenty-six weeks ended July 31, 2022, respectively. The Company recorded $12.1 million and $20.6 million of rent abatements during the thirteen and twenty-six weeks ended August 1, 2021, respectively. Rent deferrals have no impact to lease expense and amounts deferred and payable in future periods are included in the current portion of operating lease liabilities in the Company’s Consolidated Balance Sheets.
19. SEGMENT DATA
The Company manages its operations through its operating divisions, which are presented as its reportable segments: (i) Tommy Hilfiger North America; (ii) Tommy Hilfiger International; (iii) Calvin Klein North America; (iv) Calvin Klein International; (v) Heritage Brands Wholesale; and, (vi) through the second quarter of 2021, Heritage Brands Retail. The Company’s Heritage Brands Retail segment has ceased operations.
Tommy Hilfiger North America Segment - This segment consists of the Company’s Tommy Hilfiger North America division. This segment derives revenue principally from (i) marketing TOMMY HILFIGER branded apparel and related products at wholesale in the United States and Canada, primarily to department stores and off-price and independent retailers, as well as digital commerce sites operated by department store customers and pure play digital commerce retailers; (ii) operating retail stores, which are primarily located in premium outlet centers in the United States and Canada, and a digital commerce site in the United States, which sells TOMMY HILFIGER branded apparel, accessories and related products; and (iii) licensing and similar arrangements relating to the use by third parties of the TOMMY HILFIGER brand names for a broad range of product categories in North America. This segment also includes the Company’s proportionate share of the net income or loss of its investments in its unconsolidated affiliate in Mexico and its unconsolidated PVH Legwear LLC (“PVH Legwear”) affiliate relating to each affiliate’s Tommy Hilfiger business.
Tommy Hilfiger International Segment - This segment consists of the Company’s Tommy Hilfiger International division. This segment derives revenue principally from (i) marketing TOMMY HILFIGER branded apparel and related products at wholesale principally in Europe, Asia and Australia, primarily to department and specialty stores, and digital commerce sites operated by department store customers and pure play digital commerce retailers, as well as through distributors and franchisees; (ii) operating retail stores, concession locations and digital commerce sites in Europe, Asia and Australia, which sell TOMMY HILFIGER branded apparel, accessories and related products; and (iii) licensing and similar arrangements relating to the use by third parties of the TOMMY HILFIGER brand names for a broad range of product categories outside of North America. This segment also includes the Company’s proportionate share of the net income or loss of its investments in its unconsolidated affiliate in Brazil and its unconsolidated affiliate in India relating to each affiliate’s Tommy Hilfiger business.
Calvin Klein North America Segment - This segment consists of the Company’s Calvin Klein North America division. This segment derives revenue principally from (i) marketing Calvin Klein branded apparel and related products at wholesale in the United States and Canada, primarily to warehouse clubs, department and specialty stores, and off-price and independent retailers, as well as digital commerce sites operated by department store customers and pure play digital commerce retailers; (ii)
operating retail stores, which are primarily located in premium outlet centers in the United States and Canada, and a digital commerce site in the United States, which sells Calvin Klein branded apparel, accessories and related products; and (iii) licensing and similar arrangements relating to the use by third parties of the Calvin Klein brand names for a broad range of product categories in North America. This segment also includes the Company’s proportionate share of the net income or loss of its investments in its unconsolidated affiliate in Mexico and its unconsolidated PVH Legwear affiliate relating to each affiliate’s Calvin Klein business.
Calvin Klein International Segment - This segment consists of the Company’s Calvin Klein International division. This segment derives revenue principally from (i) marketing Calvin Klein branded apparel and related products at wholesale principally in Europe, Asia, Brazil and Australia, primarily to department and specialty stores, and digital commerce sites operated by department store customers and pure play digital commerce retailers, as well as through distributors and franchisees; (ii) operating retail stores, concession locations and digital commerce sites in Europe, Asia, Brazil and Australia, which sell Calvin Klein branded apparel, accessories and related products; and (iii) licensing and similar arrangements relating to the use by third parties of the Calvin Klein brand names for a broad range of product categories outside of North America. This segment also includes the Company’s proportionate share of the net income or loss of its investment in its unconsolidated affiliate in India relating to the affiliate’s Calvin Klein business.
Heritage Brands Wholesale Segment - This segment consists of the Company’s Heritage Brands Wholesale division. This segment derives revenue primarily from the marketing to department, chain and specialty stores, warehouse clubs, mass market, and off-price retailers (in stores and online), as well as pure play digital commerce retailers in North America of (i) women’s intimate apparel under the Warner’s, Olga and True&Co. brands; (ii) men’s dress shirts and neckwear under various licensed brand names; and (iii) men’s sportswear, bottoms and outerwear principally under the Van Heusen, IZOD and ARROW trademarks until August 2, 2021, when the Company completed the Heritage Brands transaction. This segment also derived revenue from Company operated digital commerce sites in the United States for Van Heusen and IZOD, which ceased operations during the third quarter of 2021 in connection with the Heritage Brands transaction. In addition, this segment derives revenue from the Heritage Brands business in Australia. This segment also includes the Company’s proportionate share of the net income or loss of its investments in its unconsolidated affiliate in Mexico and its unconsolidated PVH Legwear affiliate relating to each affiliate’s business under various owned and licensed brand names.
Heritage Brands Retail Segment - This segment consisted of the Company’s Heritage Brands Retail division. This segment derived revenue principally from operating retail stores, primarily located in outlet centers throughout the United States and Canada through which the Company marketed a selection of Van Heusen, IZOD and Warner’s apparel, accessories and related products directly to consumers. The Company announced in July 2020 a plan to exit its Heritage Brands Retail business, which was substantially completed in the second quarter of 2021. As a result, the Company’s Heritage Brands Retail segment has ceased operations. Please see Note 16, “Exit Activity Costs,” for further discussion.
The Company’s revenue by segment was as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Thirteen Weeks Ended | | | Twenty-Six Weeks Ended | |
(In millions) | 7/31/22 | (1) | 8/1/21 | (1) | | 7/31/22 | (1) | 8/1/21 | (1) |
Revenue – Tommy Hilfiger North America | | | | | | | | | |
Net sales | $ | 288.2 | | | $ | 273.9 | | | | $ | 523.7 | | | $ | 478.6 | | |
Royalty revenue | 17.1 | | | 15.4 | | | | 37.9 | | | 33.0 | | |
Advertising and other revenue | 4.2 | | | 3.6 | | | | 9.4 | | | 8.1 | | |
Total | 309.5 | | | 292.9 | | | | 571.0 | | | 519.7 | | |
| | | | | | | | | |
Revenue – Tommy Hilfiger International | | | | | | | | | |
Net sales | 749.5 | | | 826.3 | | | | 1,539.8 | | | 1,636.3 | | |
Royalty revenue | 14.9 | | | 13.1 | | | | 29.4 | | | 26.0 | | |
Advertising and other revenue | 4.6 | | | 3.2 | | | | 9.2 | | | 7.2 | | |
Total | 769.0 | | | 842.6 | | | | 1,578.4 | | | 1,669.5 | | |
| | | | | | | | | |
Revenue – Calvin Klein North America | | | | | | | | | |
Net sales | 301.0 | | | 311.0 | | | | 557.9 | | | 517.0 | | |
Royalty revenue | 34.2 | | | 28.6 | | | | 76.4 | | | 60.3 | | |
Advertising and other revenue | 11.5 | | | 9.5 | | | | 25.5 | | | 20.0 | | |
Total | 346.7 | | | 349.1 | | | | 659.8 | | | 597.3 | | |
| | | | | | | | | |
Revenue – Calvin Klein International | | | | | | | | | |
Net sales | 549.2 | | | 560.6 | | | | 1,107.8 | | | 1,085.6 | | |
Royalty revenue | 11.9 | | | 11.0 | | | | 24.2 | | | 21.5 | | |
Advertising and other revenue | 2.2 | | | 1.7 | | | | 4.4 | | | 3.2 | | |
Total | 563.3 | | | 573.3 | | | | 1,136.4 | | | 1,110.3 | | |
| | | | | | | | | |
Revenue – Heritage Brands Wholesale | | | | | | | | | |
Net sales | 143.2 | | | 217.7 | | | | 308.5 | | | 408.9 | | |
Royalty revenue | 0.2 | | | 4.8 | | | | 0.4 | | | 9.8 | | |
Advertising and other revenue | 0.1 | | | 0.8 | | | | 0.2 | | | 1.4 | | |
Total | 143.5 | | | 223.3 | | | | 309.1 | | | 420.1 | | |
| | | | | | | | | |
Revenue – Heritage Brands Retail | | | | | | | | | |
Net sales | — | | | 32.0 | | | | — | | | 75.6 | | |
Royalty revenue | — | | | — | | | | — | | | — | | |
Advertising and other revenue | — | | | — | | | | — | | | — | | |
Total | — | | | 32.0 | | | | — | | | 75.6 | | |
| | | | | | | | | |
Total Revenue | | | | | | | | | |
Net sales | 2,031.1 | | | 2,221.5 | | | | 4,037.7 | | | 4,202.0 | | |
Royalty revenue | 78.3 | | | 72.9 | | | | 168.3 | | | 150.6 | | |
Advertising and other revenue | 22.6 | | | 18.8 | | | | 48.7 | | | 39.9 | | |
Total | $ | 2,132.0 | | | $ | 2,313.2 | | | | $ | 4,254.7 | | | $ | 4,392.5 | | |
(1) Revenue was impacted by fluctuations of the United States dollar against foreign currencies in which the Company transacts significant levels of business.
The Company’s revenue by distribution channel was as follows: | | | | | | | | | | | | | | | | | | | | | | | |
| Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
(In millions) | 7/31/22 | | 8/1/21 | | 7/31/22 | | 8/1/21 |
Wholesale net sales | $ | 1,073.8 | | | $ | 1,211.3 | | | $ | 2,309.1 | | | $ | 2,447.9 | |
| | | | | | | |
Owned and operated retail stores | 784.5 | | | 828.1 | | | 1,403.2 | | | 1,394.6 | |
Owned and operated digital commerce sites | 172.8 | | | 182.1 | | | 325.4 | | | 359.5 | |
Retail net sales | 957.3 | | | 1,010.2 | | | 1,728.6 | | | 1,754.1 | |
Net sales | 2,031.1 | | | 2,221.5 | | | 4,037.7 | | | 4,202.0 | |
| | | | | | | |
Royalty revenue | 78.3 | | | 72.9 | | | 168.3 | | | 150.6 | |
Advertising and other revenue | 22.6 | | | 18.8 | | | 48.7 | | | 39.9 | |
Total | $ | 2,132.0 | | | $ | 2,313.2 | | | $ | 4,254.7 | | | $ | 4,392.5 | |
The Company’s income before interest and taxes by segment was as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Thirteen Weeks Ended | | | Twenty-Six Weeks Ended | |
(In millions) | 7/31/22 | (1) | | 8/1/21 | (1) | | 7/31/22 | (1) | | 8/1/21 | (1) |
(Loss) income before interest and taxes – Tommy Hilfiger North America | $ | (1.9) | | | | $ | 24.7 | | | | $ | (14.9) | | | | $ | 19.6 | | (6) |
| | | | | | | | | | | |
Income before interest and taxes – Tommy Hilfiger International | 88.5 | | (4) | | 164.8 | | | | 227.9 | | (4) | | 332.1 | | (6) |
| | | | | | | | | | | |
Income before interest and taxes – Calvin Klein North America | 21.9 | | | | 39.7 | | | | 33.6 | | | | 38.9 | | (6) |
| | | | | | | | | | | |
Income before interest and taxes – Calvin Klein International | 78.4 | | (4) | | 98.9 | | | | 175.5 | | (4) | | 195.3 | | (6) |
| | | | | | | | | | | |
Income before interest and taxes – Heritage Brands Wholesale | 13.4 | | | | 22.2 | | | | 30.2 | | | | 43.4 | | |
| | | | | | | | | | | |
Loss before interest and taxes – Heritage Brands Retail | — | | | | (20.6) | | (5) | | — | | | | (33.9) | | (5) |
| | | | | | | | | | | |
Loss before interest and taxes – Corporate(2) | (23.3) | | (3) | | (50.7) | | |
| (65.0) | | (3) | | (119.0) | | (6) |
| | | | | | | | | | | |
Income before interest and taxes | $ | 177.0 | | | | $ | 279.0 | | | | $ | 387.3 | | | | $ | 476.4 | | |
(1) Income (loss) before interest and taxes was impacted by fluctuations of the United States dollar against foreign currencies in which the Company transacts significant levels of business.
(2) Includes corporate expenses not allocated to any reportable segments, the results of PVH Ethiopia (through the closure of the Ethiopia factory in the fourth quarter of 2021) and the Company’s proportionate share of the net income or loss of its investment in Karl Lagerfeld after the Company resumed the equity method of accounting for its investment in the fourth quarter of 2021 and until the closing of the Karl Lagerfeld transaction on May 31, 2022. Please see Note 5, “Redeemable Non-Controlling Interest,” for further discussion of PVH Ethiopia and Note 6, “Investments in Unconsolidated Affiliates,” for further discussion of the Company’s investment in Karl Lagerfeld. Corporate expenses represent overhead operating expenses and include expenses for senior corporate management, corporate finance, information technology related to corporate infrastructure, certain digital investments, certain corporate responsibility initiatives, certain global strategic initiatives and actuarial gains and losses on the Company’s Pension Plans, SERP Plans and Postretirement Plans (which are generally recorded in the fourth quarter).
(3) Loss before interest and taxes for the thirteen and twenty-six weeks ended July 31, 2022 included a gain of $16.1 million in connection with the Karl Lagerfeld transaction. Please see Note 6, “Investments in Unconsolidated Affiliates,” for further discussion.
(4) Income before interest and taxes for the thirteen and twenty-six weeks ended July 31, 2022 included costs of $50.5 million incurred in connection with the Company’s decision to exit from its Russia business, principally consisting of noncash asset impairments. Such costs were included in the Company’s segments as follows: $36.7 million in Tommy Hilfiger
International and $13.8 million in Calvin Klein International. Please see Note 16, “Exit Activity Costs,” for further discussion.
(5) Loss before interest and taxes for the thirteen and twenty-six weeks ended August 1, 2021 included costs and operating losses associated with the wind down of the Heritage Brands Retail business that was substantially completed in the second quarter of 2021. Please see Note 16, “Exit Activity Costs,” for further discussion.
(6) Income (loss) before interest and taxes for the twenty-six weeks ended August 1, 2021 included costs of $45.1 million incurred in connection with actions to streamline the Company’s organization through reductions in its workforce, primarily in certain international markets, and to reduce its real estate footprint, including reductions in office space and select store closures, consisting of noncash asset impairments, severance, and contract termination and other costs. Such costs were included in the Company’s segments as follows: $1.7 million in Tommy Hilfiger North America, $7.1 million in Tommy Hilfiger International, $2.1 million in Calvin Klein North America, $5.7 million in Calvin Klein International and $28.5 million in corporate expenses not allocated to any reportable segments. Please see Note 16, “Exit Activity Costs,” for further discussion.
Intersegment transactions, which primarily consist of transfers of inventory, are not material.
20. GUARANTEES
The Company has guaranteed a portion of the debt of its joint venture in India. The maximum amount guaranteed as of July 31, 2022 was approximately $9.4 million based on exchange rates in effect on that date. The guarantee is in effect for the entire term of the debt. The liability for this guarantee obligation was immaterial as of July 31, 2022, January 30, 2022 and August 1, 2021.
The Company has guaranteed to a financial institution the repayment of store security deposits in Japan paid to landlords on behalf of the Company. The amount guaranteed as of July 31, 2022 was approximately $4.6 million based on exchange rates in effect on that date. The Company has the right to seek recourse from the landlords for the full amount. The guarantees expire between 2025 and 2028. The liability for these guarantee obligations was immaterial as of July 31, 2022, January 30, 2022 and August 1, 2021.
The Company has guaranteed the payment of amounts on behalf of certain other parties, none of which are material individually or in the aggregate.
21. RECENT ACCOUNTING GUIDANCE
Recently Adopted Accounting Guidance
The FASB issued in November 2021 an update to accounting guidance requiring disclosures that increase the transparency of transactions with a government accounted for by applying a grant or contribution accounting model by analogy, including (i) the types of transactions, (ii) the accounting for those transactions, and (iii) the effect of those transactions on an entity’s financial statements. The Company adopted the update in the first quarter of 2022 using the prospective approach. The adoption of the update did not have any impact on the Company’s consolidated financial statements footnote disclosures as the amount of government assistance recorded in the Company’s consolidated financial statements as of and for the twenty-six weeks ended July 31, 2022 was immaterial.
Accounting Guidance Issued But Not Adopted as of July 31, 2022
The FASB issued in October 2021 an update to accounting guidance to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to their recognition and measurement. The update requires an acquirer to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with the revenue recognition guidance. This generally will result in the acquirer recognizing contract assets and contract liabilities at the same amounts recorded by the acquiree immediately before the acquisition date. Historically, such amounts were recognized by the acquirer at fair value. The update will be effective for the Company in the first quarter of 2023, with early adoption permitted. The Company will apply the update to applicable transactions occurring on or after the adoption date. The impact on the Company’s consolidated financial statements will depend on the facts and circumstances of any future transactions.
The FASB issued in March 2020 an update to provide temporary optional guidance intended to ease the potential burden of accounting for reference rate reform. The amendments in the update provide optional expedients and exceptions for applying U.S. GAAP to contract modifications, hedging relationships and other transactions affected by the expected market transition from LIBOR and other interbank offered rates to alternative reference rates if certain criteria are met. The amendments were effective upon issuance and can be applied on a prospective basis through December 31, 2022. The adoption of the update is not expected to have a material impact on the Company’s consolidated financial statements.
22. OTHER COMMENTS
The Company records warehousing and distribution expenses, which are subject to exchange rate fluctuations, as a component of SG&A expenses in its Consolidated Statements of Operations. Warehousing and distribution expenses incurred in the thirteen and twenty-six weeks ended July 31, 2022 totaled $82.0 million and $166.8 million, respectively. Warehousing and distribution expenses incurred in the thirteen and twenty-six weeks ended August 1, 2021 totaled $81.1 million and $164.0 million, respectively.
The Company is exposed to credit losses primarily through trade receivables from its customers and licensees. The Company records an allowance for credit losses as a reduction to its trade receivables for amounts that the Company does not expect to recover. An allowance for credit losses is determined through an analysis of the aging of accounts receivable and assessments of collectibility based on historical trends, the financial condition of the Company’s customers and licensees, including any known or anticipated bankruptcies, and an evaluation of current economic conditions as well as the Company’s expectations of conditions in the future. The Company writes off uncollectible trade receivables once collection efforts have been exhausted and third parties confirm the balance is not recoverable. The allowance for credit losses on trade receivables was $49.1 million, $61.9 million and $65.8 million as of July 31, 2022, January 30, 2022 and August 1, 2021, respectively.