PVH Corp.
Form 10-K
For the Year Ended February 3, 20192, 2020
Table of Contents
| PART I | ||
| Item 1. | Business | |
| Item 1A. | Risk Factors | |
| Item 1B. | Unresolved Staff Comments | |
| Item 2. | Properties | |
| Item 3. | Legal Proceedings | |
| Item 4. | Mine Safety Disclosures | |
| PART II | ||
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | |
| Item 6. | Selected Financial Data | |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | |
| Item 8. | Financial Statements and Supplementary Data | |
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | |
| Item 9A. | Controls and Procedures | |
| Item 9B. | Other Information | |
| PART III | ||
| Item 10. | Directors, Executive Officers and Corporate Governance | |
| Item 11. | Executive Compensation | |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence | |
| Item 14. | Principal Accounting Fees and Services | |
| PART IV | ||
| Item 15. | Exhibits, Financial Statement Schedules | |
| Item 16. | Form 10-K Summary | |
| Signatures | ||
| Index to Financial Statements and Financial Statement Schedule | ||
PART I
Item 1. Business
Introduction
Unless the context otherwise requires, the terms “we,” “our” or “us” refer to PVH Corp. and its subsidiaries.
Our fiscal years are based on the 52-53 week period 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 our fiscal year, unless the context requires otherwise. Our 2019 year commenced on February 4, 2019 and ended on February 2, 2020; our 2018 year commenced on February 5, 2018 and ended on February 3, 2019; and our 2017 year commenced on January 30, 2017 and ended on February 4, 2018; and our 2016 year commenced on February 1, 2016 and ended on January 29, 2017.2018.
References to the brand names TOMMY HILFIGER, HILFIGER COLLECTION, TOMMY HILFIGER TAILORED, TOMMY JEANS, TOMMY SPORT, CALVIN KLEIN,CALVIN KLEIN 205 W39 NYC, CK CALVIN KLEIN, CALVIN KLEIN JEANS, CALVIN KLEIN UNDERWEAR, CALVIN KLEIN PERFORMANCE, Van Heusen, IZOD, ARROW, Speedo, Warner’s, Olga, True&Co., Geoffrey Beene, Kenneth Cole New York, Kenneth Cole Reaction, Unlisted, a Kenneth Cole Production, MICHAEL Michael Kors, Michael Kors Collection, DKNY, andChaps, and to other brand names in this report are to registered and common law trademarks owned by us or licensed to us by third parties and are identified by italicizing the brand name.
References to the acquisition of Warnaco refer to our February 2013 acquisition of The Warnaco Group, Inc. and its subsidiaries, which companies we refer to collectively as “Warnaco.”
References to the acquisition of Tommy Hilfiger refer to our May 2010 acquisition of Tommy Hilfiger B.V. and certain affiliated companies, which companies we refer to collectively as “Tommy Hilfiger.”
References to the acquisition of Calvin Klein refer to our February 2003 acquisition of Calvin Klein, Inc. and certain affiliated companies, which companies we refer to collectively as “Calvin Klein.”
We obtained the market and competitive position data used throughout this report from research, surveys or studies conducted by third parties (including, with respect to the brand rankings, the NPD Group/POS Tracking Service), information provided by customers, and industry or general publications. The United States department and chain store rankings to which we refer in this report are on a unit basis. Industry publications and surveys generally state that they have obtained information from sources believed to be reliable but do not guarantee the accuracy and completeness of such information. While we believe that each of these studies and publications and all other information are reliable, we have not independently verified such data and we do not make any representation as to the accuracy of such information.
Company Information
We were incorporated in the State of Delaware in 1976 as the successor to a business begun in 1881. Our principal executive offices are located at 200 Madison Avenue, New York, New York 10016; our telephone number is (212) 381-3500.
We make available at no cost, on our corporate website, PVH.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we have electronically filed such material with the Securities and Exchange Commission (“SEC”). All such filings are also available on the SEC’s website at sec.gov.
We also make available at no cost on PVH.com, the charters of the committees of our Board of Directors, as well as our Corporate Governance Guidelines and Code of Business Conduct and Ethics.
Company Overview
We are one of the largest brandedglobal apparel companies in the world, with a history going back over 135 years.world. We have over 38,00040,000 associates operating in overmore than 40 countries and generated $9.7$9.9 billion in revenues in 2018. Our2019. We manage a diversified brand portfolio, consists of nationally and internationally recognized trademarks, including the global designer lifestyle brands TOMMY HILFIGER, andCALVIN KLEIN, Van Heusen, IZOD, ARROW, Warner’s, Olga and Geoffrey Beene brands,as well as Van Heusen, IZOD, ARROW, Warner’s, Olga,the digital-centric True&Co and Geoffrey Beene.&Co. intimates brand. We
America and the Caribbean), Kenneth Cole New York, Kenneth Cole Reaction, Unlisted, a Kenneth Cole Production, MICHAEL Michael Kors, Michael Kors Collection, DKNY andChaps. Our brand portfolio also consists of various other owned, licensed and, to a lesser extent, private label brands. We entered into a definitive agreement on January 9, 2020 to sell our Speedo North America business to Pentland Group PLC (“Pentland”), parent company of Speedo International Limited, which licenses the Speedo brand to us, and we will no longer license the Speedo trademark upon closing of the sale (the “Speedo transaction”). The Speedo transaction is expected to close in the first quarter of 2020, subject to customary closing conditions, including clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, which has been received.
We design and market branded dress shirts, neckwear, sportswear (casual apparel), jeanswear, performance apparel, intimate apparel, underwear, swimwear, swim products, handbags, accessories, footwear and other related products. Our brands are positioned to sell globally at various price points and in multiple channels of distribution. This enables us to offer products to a broad range of consumers, while minimizing competition among our brands and reducing our reliance on any one demographic group, product category, price point, distribution channel or region. We also license the use of our trademarks to third parties and joint ventures for product categories and in regions where we believe our licensees’ expertise can better serve our brands. During 2018,2019, our directly operated businesses in North America consisted principally of wholesale sales under our TOMMY HILFIGER, CALVIN KLEIN, Van Heusen, IZOD, ARROW, Speedo, Warner’s, Olgaand Geoffrey Beene trademarks; the operation of digital commerce sites under the TOMMY HILFIGER, CALVIN KLEIN, Speedo, True&Co., Van Heusen and IZOD trademarks and the styleBureau.com digital commerce site; and the operation of retail stores, principally in premium outlet centers, primarily under our TOMMY HILFIGER, CALVIN KLEIN and certain of our heritage brands trademarks. Our directly operated businesses outside of North America consisted principally of our wholesale and retail sales in Europe and Asiathe Asia-Pacific region under our TOMMY HILFIGER trademarks; our wholesale and retail sales in Europe, Asiathe Asia-Pacific region and Latin America under our CALVIN KLEIN trademarks; and the operation of digital commerce sites under the TOMMY HILFIGER and CALVIN KLEIN trademarks. Our licensing activities principally related to the licensing worldwide of our TOMMY HILFIGER and CALVIN KLEIN trademarks for a broad array of product categories and for use in numerous discrete jurisdictions.
We entered into agreements on March 25,July 3, 2019 to terminate early the licenses for the global Calvin Klein and Tommy Hilfiger North America socks and hosiery businesses (the “Socks and Hosiery transaction”) in order to consolidate the socks and hosiery businesses for all of our brands in the United States and Canada in a definitive agreementnewly formed joint venture, PVH Legwear LLC (“PVH Legwear”), in which we own a 49% economic interest, and bring in-house the international Calvin Klein socks and hosiery wholesale businesses. The Socks and Hosiery transaction closed on December 2, 2019. PVH Legwear was formed with a wholly owned subsidiary of our former Heritage Brands socks and hosiery licensee. PVH Legwear licenses from us the rights to acquiredistribute and sell TOMMY HILFIGER, CALVIN KLEIN, IZOD, Van Heusen and Warner’s socks and hosiery.
We acquired the Tommy Hilfiger retail business in Hong Kong and certain other countries in Central and Southeast Asia from our currentprevious licensee in those marketsthat market (the “TH CSAP acquisition”). The closing is subject to customary conditions and regulatory approval and is expected to occur on July 1, 2019. As a result of the TH CSAP acquisition, we now operate directly the Tommy Hilfiger retail business in the second quarter of 2019.Central and Southeast Asia market.
We entered into on February 20, 2019 a definitive agreement to acquireacquired the approximately 78% interestownership interests in Gazal Corporation Limited (“Gazal”) that we dodid not already own (the “Australia acquisition”). We, on May 31, 2019. Prior to the closing, we, along with Gazal, jointly ownowned and managemanaged a joint venture, PVH Brands Australia Pty. Limited (“PVH Australia”), which licenseslicensed and operatesoperated businesses in Australia, New Zealand and other parts of Oceania under the TOMMY HILFIGER, CALVIN KLEIN and Van Heusen brands, along with other licensedowned and ownedlicensed brands. PVH Australia will comecame under our full ownershipcontrol as a result of the Australia acquisition. The closing is subject to customary conditions, including shareholder, courtacquisition and regulatory approvals,we now operate directly those businesses.
We entered into a licensing agreement on May 30, 2019 with G-III Apparel Group, Ltd. (“G-III”) for the design, production and is expected to occurwholesale distribution of CALVIN KLEIN JEANS women’s jeanswear collections in the second quarterUnited States and Canada (the “G-III license”), which resulted in the discontinuation of our directly operated Calvin Klein North America women’s jeanswear wholesale business in 2019.
We acquired the Geoffrey Beene tradename from Geoffrey Beene, LLC (“Geoffrey Beene”) on April 20, 2018. Prior to the acquisition, we had licensed the rights to design, market and distribute Geoffrey Beene dress shirts and neckwear from Geoffrey Beene.
We acquired True & Co., a direct-to-consumer intimate apparel digital commerce retailer, on March 30, 2017. This acquisition enabled us to participate further in the fast-growing online channel and provided a platform to increase innovation, data-driven decisions and speed in the way we serve our consumers across our channels of distribution.
We aggregate our reportable segments for purposes of discussion in this Report into three main businesses: (i) Tommy Hilfiger, which consists of the Tommy Hilfiger North America and Tommy Hilfiger International segments; (ii) Calvin Klein, which consists of the Calvin Klein North America and Calvin Klein International segments; and (iii) Heritage Brands, which consists of the Heritage Brands Wholesale and Heritage Brands Retail segments. Note 20,21, “Segment Data,” in the Notes to Consolidated Financial Statements included in Item 8 of this report contains information with respect to revenue, income before interest and taxes, assets, depreciation and amortization, and capital expenditures related to each segment, as well as information regarding our revenue generated by distribution channel and from foreign and domestic sources,based on geographic location, and the geographic locations where our net property, plant and equipment is held.
Our 20182019 revenue was $9.7$9.9 billion, of which over 50% was generated outside of the United States. Our global designer lifestyle brands, TOMMY HILFIGER and CALVIN KLEIN,together generated over 80%approximately 85% of our revenue during 2018.2019.
Tommy Hilfiger Business Overview
We believeTOMMY HILFIGER is one of the world’s leading designer lifestyle brands and is internationally recognized for celebrating the essence of classic American cool style with a preppy twist. Global retail sales of products sold under the TOMMY HILFIGER brands, including sales by our licensees, were approximately $8.5$9.2 billion in 2018.2019. Our Tommy Hilfiger business markets its products under several brands in order to fully capitalize on its global appeal, as each brand varies in terms of price point, product offerings, demographic target or distribution. The TOMMY HILFIGER brands consist of:
| • | HILFIGER COLLECTION — the pinnacle of the TOMMY HILFIGER product offerings, HILFIGER COLLECTION blends the brand’s Americana heritage with contemporary influences and a playful fashion edge. The collection targets 25 to 40 year-old consumers. HILFIGER COLLECTION is available globally at select TOMMY HILFIGER stores, through our wholesale partners (in stores and online) and on tommy.com. |
| • | TOMMY HILFIGER TAILORED — this line integrates sharp, sophisticated style with the TOMMY HILFIGER brand’s American menswear heritage. From structured suiting to casual weekend wear, classics are modernized with precision fit, premium fabrics, updated cuts, rich colors and luxe details, executed with the TOMMY HILFIGER brand’s signature twist. The collection targets 25 to 40 year-old consumers. TOMMY HILFIGER TAILORED is available globally at select TOMMY HILFIGER stores, through our wholesale partners (in stores and online) and on tommy.com. |
| • | TOMMY HILFIGER — our core line is globally recognized for bringing to life the classic American cool spirit at the heart of the brand. The collection focuses on 25 to 40 year-old consumers with a broad selection of designs across more than 25 categories, including men’s, women’s and children’s sportswear, footwear and accessories. TOMMY HILFIGER is available globally in our TOMMY HILFIGER stores, through our wholesale partners (in stores and online), through pure play digital commerce retailers and on tommy.com. |
| • | TOMMY JEANS — inspired by American denim classics with a modern, casual edge, TOMMY JEANS adds a youthful energy and irreverent twist to the TOMMY HILFIGER brand’s heritage. The men’s and women’s collections focus on premium denim and target 18 to 30 year-old consumers. TOMMY JEANS is available globally at select TOMMY HILFIGER stores, TOMMY JEANS stores, through our wholesale partners (in stores and online), through pure play digital commerce retailers and on tommy.com. |
| • | TOMMY SPORT— this line is engineered for performance and infused with the brand’s bold red, white and blue heritage. Silhouettes evoke the classic American cool spirit of the TOMMY HILFIGER brand with unique details and functional features. TOMMY SPORT is available globally at select TOMMY HILFIGER stores, through select wholesale partners (in stores and online), through pure play digital commerce retailers and on tommy.com. |
Tommy Hilfiger’s global marketing and communications strategy is to build a consumer-centric, go-to-market strategy that maintains the brand’s momentum, driving awareness, consistency and relevancy across product lines and regions. We engage consumers through comprehensive 360° marketing campaigns, which have a particular focus on innovative experiences and digital marketing initiatives. Marketing campaigns for the brand are focused on attracting a new generation of consumers worldwide through a blend of global and regional brand ambassadors and expanding TOMMY HILFIGER’s global growth categories (womenswear, denim, accessories, underwear and men’s tailored clothing), as well as its core men’s apparel and denim businesses.ambassadors. Tommy Hilfiger spent over $210$200 million on global marketing and communications efforts in 2018. The global brand power and digital expertise of Tommy Hilfiger are being recognized; in 2018, Fast Company ranked TOMMY HILFIGER #3 on its “World’s Most Innovative Companies” list in the Style category.2019.
Through our Tommy Hilfiger North America and Tommy Hilfiger International segments, we sell TOMMY HILFIGER products in a variety of distribution channels, including:
| • | Wholesale — principally consists of the distribution and sale of products in North America, Europe and the Asia-Pacific region under the TOMMY HILFIGER brands. In North America, distribution is primarily through department stores, warehouse clubs, and off-price and independent retailers, as well as digital commerce sites operated by the department store customers and pure play digital commerce retailers. In Europe and the Asia-Pacific region, distribution is through 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. |
| • | Retail — principally consists of the distribution and sale of products under the TOMMY HILFIGER brands in our stores in North America, Europe and the Asia-Pacific region, as well as on the tommy.com sites we operate in over 30 countries. Our stores in North America are primarily located in premium outlet centers. In Europe and the Asia-Pacific region, we operate full-price specialty and outlet stores, as well as select flagship stores and concession locations. |
| • | Licensing — we license the TOMMY HILFIGER brands to third parties globally for a broad range of products through approximately 25 license agreements. We provide support to our licensees and seek to preserve the integrity of our brands by taking an active role in the design, quality control, advertising, marketing and distribution of each licensed product, most of which are subject to our prior approval and continuing oversight. The arrangements generally are exclusive to a territory or product category. Territorial licensees include our joint ventures in Brazil, India and Mexico. |
Tommy Hilfiger’s key licensees, and the products and territories licensed, include:
| Licensee | Product Category and Territory | |
| American Sportswear S.A. | Men’s, women’s and children’s apparel, footwear and accessories (Central America, South America (excluding Brazil) and the Caribbean) | |
| F&T Apparel LLC & KHQ Investment LLC | Children’s apparel, children’s underwear and sleepwear and boy’s tailored clothing (United States and Canada) | |
| G-III | Men’s and women’s outerwear, luggage and women’s apparel, dresses, suits and swimwear (excluding intimates, sleepwear, loungewear, hats, scarves, gloves and footwear) (United States and Canada) | |
Handsome Corporation | Men’s, women’s and children’s apparel, sportswear, socks and accessories and men’s and women’s outerwear (South Korea) | |
| MBF Holdings LLC | Men’s and women’s footwear (United States and Canada) | |
| Movado Group, Inc. & Swissam Products, Ltd. | Men’s and women’s watches and jewelry (worldwide, excluding Japan (except certain customers)) | |
| Peerless Clothing International, Inc. | Men’s tailored clothing (United States and Canada) | |
| Safilo Group S.P.A. | Men’s, women’s and children’s eyeglasses and non-ophthalmic sunglasses (worldwide, excluding India) | |
Our Tommy Hilfiger North America segment includes the results of our Tommy Hilfiger wholesale, retail and licensing activities in the United States, Canada and Mexico, and our proportionate share of the net income or loss of our investmentinvestments in our joint venture in Mexico and in PVH MexicoLegwear, in each case relating to the joint venture’s Tommy Hilfiger business.businesses. Our Tommy Hilfiger International segment includes the results of our Tommy Hilfiger wholesale, retail and
licensing activities outside of North America, and our proportionate share of the net income or loss of our investments in joint ventures in Australia, Brazil and India relating to the joint ventures’ Tommy Hilfiger businesses.
Calvin Klein Business Overview
CALVIN KLEIN is one of the world’s most recognized brands, synonymous witha global lifestyle brand built on iconic essentials and powered by bold, progressive ideals and a seductive aesthetic.ideals. Global retail sales of products sold under the CALVIN KLEIN brands, including sales by our licensees, were approximately $9.8$9.4 billion in 2018.2019. The CALVIN KLEIN brands provide us with the opportunity to market products both domestically and internationally at various price points, through multiple distribution channels and to different consumer groups. Our tiered-brand strategy provides a focused, consistent approach to global growth and development that preserves the brand’s prestige and image. The CALVIN KLEIN brands consist of:
| • | CK CALVIN KLEIN — our “contemporary” brand, offering modern, sophisticated items including apparel and accessories. Distribution is in the Asia-Pacific region through select CALVIN KLEIN stores, selectwholesale partners (in stores and online) and calvinklein.com. |
| • | CALVIN KLEIN — our “master” brand, offering men’s and women’s sportswear, swimwear, outerwear, fragrance, accessories, footwear, men’s dress furnishings, women’s dresses, suits and handbags, and items for the home. Distribution is primarily in North America, Europe and the Asia-Pacific region through our own stores, our wholesale partners (in stores and online), pure play digital commerce retailers and on calvinklein.com. |
| • | CALVIN KLEIN JEANS — the casual expression of the CALVIN KLEIN brand with roots in denim, offering men’s and women’s jeanswear, related apparel and accessories. CALVIN KLEIN JEANS is known for its unique details and innovative washes. Distribution is worldwide through our own stores, our wholesale partners (in stores and online), pure play digital commerce retailers and on calvinklein.com. |
| • | CALVIN KLEIN UNDERWEAR — known across the globe for provocative, cutting-edge products and marketing campaigns and consistently delivering innovative designs with superior fit and quality. Offerings include men’s and women’s underwear, women’s intimates, sleepwear and loungewear. Distribution is worldwide throughour own stores, our wholesale partners (in stores and online), pure play digital commerce retailers and on calvinklein.com. |
| • | CALVIN KLEIN PERFORMANCE — built on the foundation of innovation, fit and function. Designs are fashion-inspired and feature trend-driven, modern pieces that unite innovative fabric technology with classic American design elements. Distribution is primarily in North America, Europe and the Asia-Pacific region through our own stores, our wholesale partners (in stores and online), pure play digital commerce retailers and on calvinklein.com. |
Over $380$365 million was spent globally in 20182019 in connection with the advertising, marketing and promotion of the CALVIN KLEIN brands and approximately 40% of these expenses were funded by Calvin Klein’s licensees and other authorized users of the brands. We announced in January 2019 that we establishedCalvin Klein’s global marketing and communications strategy is to bring together all facets of the consumer marketing experience. The CALVIN KLEIN brands continue to generate compelling brand and cultural relevancy by continually evolving and driving consumer engagement. Marketing campaigns for the brand are focused on a Consumer Marketing Organization (the “CMO”), which will focus on creative consistencytruly digital first, socially powered experience for consumers, through the use of global and consumer-centric marketing to drive sales, while also building personalized relationshipsregional brand ambassadors and tailoring the overall consumer experience through highly specialized teams. We believe that this enhanced marketing approach will better meet our consumers’ needs as we adapt to their rapidly changing demands.experiential events.
Through our Calvin Klein North America and Calvin Klein International segments, we sell CALVIN KLEIN products in a variety of distribution channels, including:
| • | Wholesale — principally consists of the distribution and sale of products in North America, Europe, the Asia-Pacific region and Brazil under the CALVIN KLEIN brands. In North America, distribution is primarily through 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. In Europe, the Asia-Pacific region and Brazil, distribution is through 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. |
| • | Retail — principally consists of the distribution and sale of apparel, accessories and related products under the CALVIN KLEIN brands in our stores in North America, Europe, the Asia-Pacific region and Brazil, as well as on the calvinklein.com sites we operate in over 35 countries. Our stores in North America are primarily located in premium outlet centers. In Europe, the Asia-Pacific region and Brazil, we operate full-price and outlet stores and concession locations. |
| • | Licensing — we license the CALVIN KLEIN brands throughout the world in connection with a broad array of product categories. In these arrangements, Calvin Klein combines its design, marketing and branding skills with the specific manufacturing, distribution and geographic capabilities of its partners to develop, market and distribute these goods, most of which are subject to our prior approval and continuing oversight. Calvin Klein has approximately 45 licensing and other arrangements across the CALVIN KLEIN brands. The arrangements generally are exclusive to a territory or product category. Territorial licensees include our joint ventures in India and Mexico. |
Calvin Klein’s key licensees, and the products and territories licensed, include:
| Licensee | Product Category and Territory | |
| CK21 Holdings Pte. Ltd. | Men’s and women’s CK CALVIN KLEIN apparel (Asia, excluding Japan) | |
| CK Watch & Jewelry Co., Ltd. (Swatch SA) | Men’s and women’s watches and jewelry (worldwide) * | |
| Coty Inc. | Men’s and women’s fragrance, bath products and color cosmetics (worldwide) | |
| Soft home bed and bath furnishings (United States, Canada, Mexico, Europe, Middle East, Asia and India) | ||
| G-III | Women’s coats, suits, dresses, sportswear, jeanswear, active performancewear, handbags and small leather goods, men’s coats, men’s and women’s luggage and men’s and women’s swimwear (United States and Canada | |
| Jimlar Corporation | Men’s and women’s footwear (various jurisdictions) * | |
| Marchon Eyewear, Inc. | Men’s and women’s optical frames and sunglasses (worldwide) | |
| Onward Kashiyama Co. Ltd. | Men’s and women’s CK CALVIN KLEIN apparel (Japan) | |
| Peerless Clothing International Inc. | Men’s tailored clothing (United States, Canada and Mexico) | |
*Licenses for these categories will be transitioning to new licensees in 2020.
Our Calvin Klein North America segment includes the results of our Calvin Klein wholesale, retail and licensing activities in the United States, Canada and Mexico, and our proportionate share of the net income or loss of our investmentinvestments in our joint venture in Mexico and in PVH MexicoLegwear, in each case relating to the joint venture’s Calvin Klein business.businesses in North America. Our Calvin Klein International segment includes the results of our Calvin Klein wholesale, retail and licensing activities outside of North America, and our proportionate share of the net income or loss of our investmentsinvestment in our joint venturesventure in Australia and India relating to the joint ventures’venture’s Calvin Klein businesses.business.
Heritage Brands Business Overview
Our Heritage Brands business designs, sources and markets a varied selection of prominent brand label dress shirts, neckwear, sportswear, swimwear, swim products, intimate apparel, underwear and related apparel and accessories, and licenses certain of our brands for an assortment of products. The Heritage Brands business also offers private label dress furnishings programs, particularly in neckwear. We design, source and market substantially all of these products on a brand-by-brand basis, targeting distinct consumer demographics and lifestyles in an effort to minimize competition among our brands. Global retail sales of products sold under our owned and licensed heritage brands, including sales by our licensees, were approximately $3.5$3.3 billion in 2018.2019.
Through our Heritage Brands Wholesale and Heritage Brands Retail segments, we sell heritage brands products in a variety of distribution channels, including:
Wholesale —We principally distribute our Heritage Brands products at wholesale in the United States and Canada through department, chain and specialty stores, warehouse clubs, and mass market, off-price and independent retailers (in stores and online), as well as through pure play digital commerce retailers and, for Speedo products, through sporting goods stores, team dealers swimclubs and catalog retailers.swimclubs. Products sold through this channel principally consist of:
| • | Men’s dress shirts and neckwear under brands including Van Heusen, IZOD, ARROW, Geoffrey Beene, Kenneth Cole New York, Kenneth Cole Reaction, Unlisted, a Kenneth Cole Production, MICHAEL Michael Kors, Michael Kors Collection and DKNY. We also market dress shirts under the Chaps brand, among others. We offer private label dress shirt and neckwear programs to retailers, primarily national department stores and mass market retailers. We believe our product offerings collectively represent a sizeable portion of the domestic dress furnishings market. |
We license certain of the brands under which we sell men’s dress shirts and neckwear. The following table provides information with respect to the expiration of the licenses for the more significant brands (as determined based on 20182019 sales volume):
| Brand Name | Expiration | |
MICHAEL Michael Kors and Michael Kors Collection | Michael Kors, LLC and Michael Kors (Switzerland) International GmbH | January 31, 2022 |
| DKNY | Donna Karan Studio LLC | Terminated on December 31, |
Kenneth Cole New York, Kenneth Cole Reaction and Unlisted, a Kenneth Cole Production | Kenneth Cole Productions (Lic), LLC and Kenneth Cole Productions, Inc. | December 31, 2022, with a right of renewal (subject to certain conditions) through December 31, 2025 |
| Chaps | The Polo/Lauren Company, LP and PRL USA, Inc. | March 31, |
| • | Men’s sportswear, including sport shirts, sweaters, bottoms and outerwear, principally under the Van Heusen, IZOD and ARROW brands. IZOD and Van Heusen were the first and second best selling national brand men’s woven sport shirts, respectively, in United States department and chain stores in 2019. We also produced men’s sportswear under a license agreement for the DKNY brand as noted in the table above. |
| • | Men’s, women’s and children’s swimwear, pool and deck footwear, and swim-related products and accessories under the Speedo trademark. The Speedo brand is exclusively licensed to us for North America and the Caribbean in perpetuity from Speedo International Limited. We will no longer license the Speedo trademark in conjunction with the Speedo transaction, which is expected to close in the first quarter of 2020, subject to customary closing conditions. |
| • | Women’s intimate apparel under the Warner’s and Olga brands and intimate apparel under the True&Co. brand.Warner’s was the fourth best selling brand for bras and panties in United States department and chain stores in 2019. True&Co. is primarily distributed in the United States through our TrueAndCo.com digital commerce site, and, to a lesser extent, through a department store and a mass market retailer. |
Retail —We also market products directly to consumers through our Heritage Brands stores, primarily located in outlet centers throughout the United States and Canada. A majority of our stores offer a broad selection of Van Heusen men’s and women’s apparel, along with a limited selection of our dress shirt and neckwear offerings, and IZODGolf, Warner’sand to a lesser extent, SpeedoWarner’s products. The majority of these stores feature multiple brand names on the store signage, with the remaining stores operating under the Van Heusen name. We also sell our products in the United States through our directly operated digital commerce sites for Speedoand, True&Co., VanHeusen and IZOD, as well as our IZOD.com,VanHeusen.styleBureau.com and styleBureau.com sites, which launched in July 2018.site.
Licensing — We license our Van Heusen, IZOD, ARROW, Geoffrey Beene, Speedo, Warner’s and Olga brands globally for a broad range of products through approximately 9080 license agreements. We provide support to our licensees and seek to preserve the integrity of our brands by taking an active role in the design, quality control, advertising, marketing and
distribution of each licensed product, most of which are subject to our prior approval and continuing oversight. The arrangements generally are exclusive to a territory or product category. Territorial licenses include our joint venturesventure in Australia and Mexico.
Our heritage brands licensees, and the products and territories licensed by them, include:
| Licensee | Product Category and Territory | |
Arvind Fashions Limited | ARROW men’s and women’s dresswear, sportswear and accessories (India, Middle East, | |
| Basic Resources, Inc. | Van Heusen and IZOD men’s and boys’ knit and woven | |
Five Star Blue, LLC | IZOD men’s denim, twill pants and shorts (United States, Canada and Mexico) | |
| F&T Apparel LLC | Van Heusen and ARROW boys’ dress furnishings and sportswear; IZOD boys’ sportswear; IZOD and ARROW boys’ andgirls’ school uniforms; ARROW men’s tailored clothing; IZOD boys’ tailored clothing (United States and Canada) | |
| I.C.C. International Public Company | ARROW men’s dress furnishings, tailored clothing, sportswear and accessories; ARROW women’s dresswear and sportswear (Thailand, Myanmar, Laos, Cambodia and Vietnam) | |
Peerless | Van Heusen and IZOD men’s tailored clothing (United States, Canada and Mexico) | |
IZODmen’s, women’s | ||
Our Heritage Brands Wholesale segment includes the results of our Heritage Brands wholesale and licensing activities, the results of our directly operated digital commerce sites, and our proportionate share of the net income or loss of our investments in theour joint venturesventure in AustraliaMexico and Mexicoin PVH Legwear, in each case relating to the joint ventures’venture’s Heritage Brands businesses. Our Heritage Brands Retail segment includes the results of our Heritage Brands stores.
Our Business Strategy
We see opportunities for long-term growth as we employ our strategic priorities across our organization. Our global growth strategies include:
Driving consumer engagement through innovative designs and personalized brand and shopping experiences that capture the heart of the consumer.
| ◦ | Leveraging data driven marketing to deepen the relationships with our consumers through segmented product assortments and personalized content. |
Expanding our worldwide reach through organic growth and acquisitions.
Investing in and evolving how we operate by leveraging technology and data to be dynamic, nimble and forward-thinking.
| ◦ | Evolving our supply chain to adapt more quickly to change and reduce lead times. |
Developing a talented and skilled workforce that embodies our core values and an entrepreneurial spirit, while empowering our associates to design their future.
Delivering sustainable, profitable growth and generating free cash flow to create long-term stockholder value.
Our strategies are complemented by our purpose to power brands that drive fashion forward, for good.
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Tommy Hilfiger Business
We believe that we can furthercontinue to grow TOMMY HILFIGER global retail sales of TOMMY HILFIGER product through a number of product and regional initiatives, which include:
| • | Delivering compelling products that reflect TOMMY HILFIGER’s accessible premium positioning and classic American cool aesthetic, with a focus on sustainability and social innovation. |
Digitizing the complete brand experience, from design to our storesshowrooms for wholesale customers, to our online offerings.and in-store experiences.
Calvin Klein Business
We believe growth opportunities exist to drive further global retail sales of CALVIN KLEIN product and improvements in the operating marginsmargin of CALVIN KLEINour Calvin Klein business over time, including through:
| • | Delivering compelling products that reflect CALVIN KLEIN’s accessible premium positioning and seductive aesthetic, with a focus on sustainable product creation. |
Further digitizing the brand by increasing our digital businessesgrowing online sales and growing our presence in specialty stores.expanding omni-channel capabilities.
Identifying operating efficiencies across the business to drive improvements in our operating margins.
Heritage Brands Business
Our Heritage Brands business represents our original business, where we developed our core competencies, and is an important complement to our global designer brand businesses. We believe that this business can continueIn addition to capturecapturing market share and generategenerating healthy cash flows, as we execute against our keywill continue to look for further ways to optimize the Heritage Brands portfolio. Our strategic initiatives whichfor our Heritage Brands business include:
Delivering trend-right products at an attractive value proposition, with a focus on new technologies, features and delivering compelling marketing campaigns.sustainability.
Enhancing profitability by optimizing our portfolio, capitalizing on supply chain opportunities, reducing costs and maintaining a critical focus on inventory management.
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Other Strategic Opportunities
Seasonality
Our business generally follows a seasonal pattern. Our wholesale businesses tend to generate higher levels of sales in the first and third quarters, while our retail businesses tend to generate higher levels of sales in the fourth quarter. Royalty, advertising and other revenue tends to be earned somewhat evenly throughout the year, although the third quarter has the highest level of royalty revenue due to higher sales by licensees in advance of the holiday selling season. We expect this seasonal pattern will generally continue. Working capital requirements vary throughout the year to support these seasonal patterns and business trends.
Design
Our business depends on our ability to stimulate and respond to consumer tastes and demands, as well as on our ability to remain competitive in the areas of quality and delivering a compelling price value proposition.
Our in-house design teams are significant contributors to the continued strength of our brands. Each of our branded businesses employs its own teams of designers and merchandisers that develop products representing its brand’s aesthetics, while also being mindful of consumers’ tastes, lifestyle needs and current fashion trends. To reflect consumer variances in each of our regional markets, the businesses tailor their products and offerings to appeal to local tastes, fit differences or other preferences, while maintaining the cohesive creative vision for each brand. Our teams have expanded their use of 3D design technology to enhance our design capabilities, which reduces the need for samples early in the design process and the time needed to bring products to market.
Product Sourcing
Our capabilities for worldwide procurement and sourcing enable us to deliver to our customers competitive and high quality goods at an attractive value and on a timely basis. We have an extensive established network of worldwide sourcing partners that enables us to meet our customers’ needs in an efficient manner and not relywithout relying on any one vendor or factory or on vendors or factories in any one country. Our products were produced in over 1,200 factories in approximately 50 countries during 2018.2019. All but one of these factories were operated by independent manufacturers, with most being located in Asia.
We source finished products and, to a lesserlimited extent, raw materials and trim. Raw materials and trim include fabric, buttons, thread, labels and similar components. Finished products consist of manufactured and fully assembled products ready for shipment to our customers and our stores. Raw material, trim, and finished product commitments are generally made two to six months prior to production. We believe we are one of the largest users of shirting fabric in the world. We believe that an ample number of alternative suppliers exist should we need to secure additional or replacement production capacity and raw materials.
Our purchases from our suppliers are effected through individual purchase orders specifying the price, quantity, delivery date and destination of the items to be produced. Sales are monitored regularly at both the retail and wholesale levels and modifications in production can be made either to increase or reduce inventories. We look to establish long-term supplier relationships in the appropriate locations throughout the world to meet our needs and we place our orders in a manner designed to limit the risk that a production disruption at any one facility could cause a serious inventory problem, while seeking to maximize the pricing opportunities.
The manufacturers of our products are required to meet our quality, human rights, safety, environmental and cost requirements. Our global supply chain teams, offices and buying agents enable us to monitor the quality of the goods manufactured by, and the delivery performance of, our suppliers and work with our global compliance teams to ensure the enforcement of our human rights and labor standards and other code of conduct requirements through our ongoing extensive training, approval and monitoring system. They also monitor and track the primary cost inputs to the finished product to ensure that we pay the most appropriate cost for our finished goods. We continue to assess our manufacturing footprint to ensure we have the best infrastructure to meet the needs of our global wholesale and retail businesses.
We continue to make progress on maintaining an agile and data-driven supply chain. We have made advancements to capture additional gross margin opportunities, as we continue to optimizeexplore new areas of production that can grow with our vendor base to work more closely with long-term strategic partners, focus on core replenishment for select categories and improve our speed to market. We have also developed abusinesses. Our country of origin strategy that provides a flexible approach to product sourcing, which enables us to maximize regional opportunities and mitigate our potential exposure to risks associated with new duties, tariffs, surcharges, or other import controls or restrictions. We believeWhile China remains an important sourcing country for us, we have reduced our exposure to the enhancementcountry over time by growing our sourcing base in other parts of our supply chain efficiencies and working capital management through the effective useAsia, as well as Africa. Many of our distribution network and overall infrastructure will allow us to control costs better and provide improved service to our customers.
We also continue to develop strategies that can enhance the operational efficiency of our supply chain and unlock gross margin opportunities. We have incorporated 3D technology to enhance our design capabilities, which reduce our lead times, improve our planning abilities and eliminate the need for early samples in the design process. Speed is another critical focus area across the Company. We have implemented various speed models, core replenishment and read and react capabilities for select categories to enhance our operations and make our business model more dynamic and responsive, while also increasing service levels, reducing inventory exposure and improving quality and consumer value. We believe the enhancement of our supply chain efficiencies and working capital management through the effective use of our distribution network and overall infrastructure will allow us to control costs better and provide improved service to our customers.
Corporate Responsibility
As an industry leader and one of the largest branded apparel companies in the world, we recognize that we have a responsibility to address our social and environmental impacts. Corporate responsibility is central to how we conduct business and it is a crucial consideration embodied in all of the strategic business decisions that we make.
Our three strategic focus areas are:
Reduce negative impacts — Our ambition is for our products and business operations to generate zero waste, zero carbon emissions and zero hazardous chemicals. This means protecting our global climateenvironment by reducing energy use and powering our business through renewable sources, diverting the waste we send to landfills, eliminating water pollution from our wet processors, and fostering and harnessing innovation to design and manufacture products that eliminate product waste.
Increase positive impacts — Our ambition is for 100% of our products and packaging to be ethically and sustainably sourced from suppliers who respect human rights and are good employers.
| • | Improve lives across our value chain — Our ambition is to improve the lives of the over one million people across our value chain, focusing on education and opportunities for women and children, ensuring access to clean water, investing in health and education initiatives, and continuing to champion inclusion and diversity. |
We issue an annual report on our corporate responsibility efforts that can be found on our corporate website at PVH.com/responsibility.website.
Warehousing, Distribution and Logistics
Our products are shipped from manufacturers to our wholesale and retail warehousing and distribution centers for inspection, sorting, packing and shipment. Centers range in size and our main facilities, some of which are operated by independent third parties, are located in the United States, the Netherlands, Canada, China, Japan, Hong Kong, South Korea, TaiwanBrazil and Brazil.Australia. Our warehousing and distribution centers are designed to provide responsive service to our customers and our retail stores on a cost-effective basis.
Our backlog of customer orders totaled $1.652$1.693 billion and $2.097$1.652 billion as of February 3, 20192, 2020 and February 4, 2018,3, 2019, respectively. The size of our order backlog depends upon a number of factors, including the timing of the market weeks for our
particular lines, during which a significant percentage of our orders are received, and the timing of the shipments, which varies from year-to-year with consideration for holidays, consumer trends, concept plans, and the usage of our basic stock replenishment programs. As a consequence, a comparison of the size of our order backlog from period to period may not be meaningful, nor may it be indicative of eventual shipments.
Material Customers
Our largest customers account for significant portions of our revenue. Sales to our five largest customers were 18.4% of our revenue in 2019 and 18.9% of our revenue in each of 2018 and 2017, and 21.3% of our revenue in 2016.2017. No single customer accounted for more than 10% of our revenue in 2019, 2018 2017 or 2016.2017.
Advertising and Promotion
Our marketing programs are an integral component of the success of our brands and the products offered under them. We intend for each of our brands to be a leader in its respective market segment, with strong consumer awareness, relevance and consumer loyalty. We believe that our brands are successful in their respective market segments because we have strategically positioned each brand to target a distinct consumer demographic. Advertisements generally portray a lifestyle representation of our category offerings rather than a specific item. We design and market our products to complement each other, satisfy lifestyle needs, emphasize product features important to our target consumers, deliver a strong price/value proposition and encourage consumer loyalty.
A significant component of our marketing programs is digital media, including our digital commerce platforms and social media channels, which allow us to expand our reach to customers and enable us to provide timely information in an entertaining fashion to consumers about our products, special events, promotions and store locations. Tommy Hilfiger’s digital commerce site, tommy.com, and Calvin Klein’s digital commerce site, calvinklein.com, serve as marketing vehicles to complement the ongoing development of the TOMMY HILFIGER and CALVIN KLEIN lifestyle brands, respectively, in addition to offering a broad array of apparel and licensed products. Additionally, during 2018, we launched our ownWe also operate five Heritage Brands digital commerce sites.sites in the United States: VanHeusen.com, IZOD.com, styleBureau.com, TrueAndCo.com and SpeedoUSA.com.
We also advertise through print media (including fashion, entertainment/human interest, business, men’s, women’s and sports magazines and newspapers), on television, through outdoor signage and through in-store point of sale materials, as well as participate in cooperative advertising programs with our retail partners. In addition, we advertise our brands through sport sponsorships and product tie-ins. We believe that our use of high-profile brand ambassadors and well-known social media influencers across our marketing programs helps drive our brand awareness and cultural relevance.
With respect to our retail outlet stores, the majority of which are located in premium outlet centers in the United States and Canada, we generally rely upon local outlet mall developers to promote traffic for their centers. Outlet center developers employ multiple formats, including signage, print advertising, direct marketing, radio and television advertising, and special promotions.
Tommy Hilfiger Business
We believe that TOMMY HILFIGER is one of the world’s leading designer lifestyle brands and is internationally recognized for celebrating the essence of classic American cool style with a preppy twist. Tommy Hilfiger employs advertising, marketing and communications staff, including an in-house creative team, as well as outside agencies, to implement its global marketing and communications strategy across all channels of distribution. The Tommy Hilfiger marketing and communications team develops and coordinates TOMMY HILFIGER advertising for all regions and product lines, licensees and regional distributors. Advertisements for TOMMY HILFIGER brand products appear primarily in social media outlets, fashion and lifestyle magazines, newspapers, outdoor media and cinema and on television. The digital and online focus of marketing for the TOMMY HILFIGER brands is integral to its campaigns and continues to increase. Additionally, the marketing and communications team coordinates personal appearances by Mr. Tommy Hilfiger, including at runway shows and brand events as part of its efforts. Tommy Hilfiger maintains multiple showroom facilities and sales offices around the world. Nearly all of its showrooms are digitized, offering a more engaging, integrated and seamless buying experience for its wholesale partners.
to experience the global brand ambassador for TOMMYHILFIGER fashion show and view the TommyXLewis collaborative collection on different platforms. TOMMY HILFIGER men’s for Spring and Fall 2018. In conjunction with this, TOMMY HILFIGER formedalsohas a multi-year strategic partnership with four-time World Champions Mercedes-AMG Petronas Motorsport as their Official Apparel Partner, beginning in Spring 2018. These partnerships reflect the brand’s strategic commitment to build on its strong menswear heritage and further drive the global growth of its men’s business, while also bringing the next generation of fans to the brand. To capitalize on the power of the collaboration, Tommy Hilfiger offered its first TommyXLewis collaborative collection in Fall 2018 with a world tour that included the TOMMYNOW Fall 2018 fashion show in Shanghai, an industry event in New York City, and a presentation as a 3D holographic water projection in Tokyo. In conjunction with these events, we launched a SuperPartner.
Tommy Hilfiger also delivered engaging marketing campaignspartnerships geared toward the female consumer, as we believe that it is significantly underpenetrated in women’s apparel and accessories. The brand continued its successful partnership with Gigi Hadid for Spring 2018, which marked her final season servingenlisting Zendaya as a brand ambassador and designer of the TommyXGigi capsule collection. Continuing with the “see now, buy now” realm, the brand’s TOMMYNOW Spring 2018 fashion show in Milan featured the TommyXGigi capsule collection, which allowed consumers to purchase immediately items featured on the runway through tommy.com, as well as in TOMMY HILFIGER stores and through select wholesale partners globally. As the year progressed, Tommy Hilfiger enlisted model Hailey Bieber, model and activist Winnie Harlow and actress Maggie Jiang as the newest members of the TOMMY HILFIGER family, with the celebrities serving as the new global brand ambassadors for TOMMY HILFIGER women’s for Fall 2018, as well as starring in the Fall 2018 TOMMY ICONS capsule collection for women.
Calvin Klein Business
We announcedestablished a Consumer Marketing Organization (the “CMO”) in January 2019, that we established the CMO, which encompasses the business’s marketing, communications, social media, celebrity dressing and special events. The CMO will focus on creative consistency and consumer-centric marketing to drive sales,events, while also building personalized relationships and tailoring the overall consumer experience through its highly specialized teams. We believe that this enhanced marketing approach will better meet our consumers’ needs as we adapt to their rapidly changing demands. Calvin Klein maintains showrooms and sales offices around the world.
We continued to evolve our marketing strategy, shifting to a digital and video-first mindset by creating branded content and curated experiences to leverage across social media campaign.platforms. A highlight of 2019 was CALVIN KLEIN’s official sponsorship of the Coachella Valley Music and Arts Festival in California, where our Spring 2019 campaign came to life through an immersive experience offering the opportunity to interact with both product and branded content. The activation was recognized by Brandweek with its Constellation Award for best luxury/fashion team.
Calvin Klein also continued to leverage strategic partnerships by balancing global and regional brand ambassadors. Singer-actor Lay Zhang was named CALVIN KLEIN’s first-ever Chinese global ambassador, underscoring the significant long-term opportunity to grow CALVIN KLEIN’s footprint and gain market share across the region. In collaboration with the partnership, we hosted several experiential events, including a surprise performance for fans in Shanghai.
Heritage Brands Business
In our Heritage Brands business, we leveraged and enhanced each brand’s position in the market by delivering engaging marketing campaigns, with a particular focus on driving relevance with younger consumers. We launchedcontinued a partnership for Van Heusen with the UFC® that featured MMA fightersfighter Stephen Thompson and T.J. Dillashaw as brand ambassadors. The campaign had digital and social engagement rates that far exceeded our expectations.ambassador. We also launchedcontinued our largest media campaign to-date for IZOD that features Green Bay Packers quarterback Aaron Rodgers and comedian Colin Jost from Saturday Night Live. There were engagement opportunities for Speedo, as well, including industry events such as Miami
We continue to promote our Heritage Brands business through sport sponsorships. Four-time PGA Tour winner Marc Leishman serves as brand ambassador for IZODGolf, which includes wearing IZOD Golf apparel on-course. Olympic gold medalists and World No. 1 ranked men’s double tennis team, Bob and Mike Bryan continue to serve as brand ambassadors for IZOD. Team Speedo USA consists of world-class swimmers, including Caeleb Dressel, Ryan Murphy, Nathan Adrian, Kathleen Baker and Para-Olympian Becca Meyers. These athletes wear Speedo products exclusively in competition and participate in various promotional activities on behalf of the brand. In addition, we have an all-brand, regional sponsorship relationship with the New York Giants.
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Trademarks
We own the TOMMY HILFIGER, CALVIN KLEIN, Van Heusen, IZOD, ARROW, Warner’s, Olga, True&Co. and Geoffrey Beene brands, as well as related trademarks (e.g., the interlocking “IZ” logo for IZOD and the TOMMY HILFIGER flag logo and crest design) and lesser-known names. These trademarks are registered for use in each of the primary countries where our products are sold and additional applications for registration of these and other trademarks are made in jurisdictions to accommodate new marks, uses in additional trademark classes or additional categories of goods or expansion into new countries.
Mr. Tommy Hilfiger is prohibited in perpetuity from using, or authorizing others to use, the TOMMY HILFIGER marks (except for the use by Mr. Hilfiger of his name personally and in connection with certain specified activities). In addition, we are prohibited in perpetuity from selling products not ordinarily sold under the names of prestige designer businesses or prestige global lifestyle brands without Mr. Hilfiger’s consent, from engaging in new lines of business materially different from such types of lines of business without Mr. Hilfiger’s consent, or from disparaging or intentionally tarnishing the TOMMY HILFIGER-related marks or Mr. Hilfiger’s personal name.
We own the CALVIN KLEIN marks and derivative marks in all trademark classes and for all product categories through our Calvin Klein and Warnaco subsidiaries’ ownership of the Calvin Klein Trademark Trust (“the Trust”), which is the sole and exclusive title owner of substantially all registrations of the CALVIN KLEIN trademarks. The sole purpose of the Trust is to hold these marks. Calvin Klein maintains and protects the marks on behalf of the Trust. The Trust licenses to Calvin Klein and Warnaco on an exclusive, irrevocable, perpetual and royalty-free basis the use of the marks.
Mr. Calvin Klein retains the right to use his name, on a non-competitive basis, with respect to his right of publicity, unless those rights are already being used in the Calvin Klein business. Mr. Klein has also been granted a royalty-free worldwide right to use the CALVIN KLEIN mark with respect to certain personal businesses and activities, subject to certain limitations designed to protect the image and prestige of the CALVIN KLEIN brands and to avoid competitive conflicts.
Our trademarks are the subject of registrations and pending applications throughout the world for use on a variety of apparel, footwear and related products, as well as licensed product categories, and we continue to expand our worldwide usage and registration of new and related trademarks. In general, trademarks remain valid and enforceable as long as the marks continue to be used in connection with the products and services with which they are identified and, as to registered tradenames, the required registration renewals are filed. In markets where products bearing any of our brands are not sold by us or any of our licensees or other authorized users, our rights to the use of trademarks may not be clearly established.
Our trademarks and other intellectual property rights are valuable assets and we vigorously seek to protect them on a worldwide basis against infringement. We are susceptible to others imitating our products and infringing on our intellectual property rights. This is especially the case with respect to the TOMMY HILFIGER and CALVIN KLEIN brands, as these brands enjoy significant worldwide consumer recognition and their generally higher pricing (as compared to our heritage brands) provides significant opportunity and incentive for counterfeiters and infringers. We have broad, proactive enforcement programs that we believe have been generally effective in controlling the sale of counterfeit products in the United States and in major markets abroad.
Competition
The apparel industry is competitive as a result of its fashion orientation, mix of large and small producers, low barriers to entry, the flow of domestic and imported merchandise and the wide diversity of retailing methods. We compete with numerous domestic and foreign designers, brands owners, manufacturers and retailers of apparel, accessories and footwear, including, in certain circumstances, the private label brands of our wholesale customers. Additionally, with the shift in consumer shopping preferences driving growth in the digital channel, there are more companies in the apparel sector and an increased level of transparency in pricing and product comparisons, which impacts purchasing decisions. As well, as consumers are increasingly focused on circularity with respect to apparel, companies that enable consumers to rent or purchase pre-owned apparel also impact purchasing decisions.
We believe we are well-positioned to compete in the apparel industry on the basis of style, quality, price and service. Our business depends on our ability to stimulate consumer tastes and demands, as well as on our ability to remain competitive in these areas. Our diversified portfolio of brands and products and our use of multiple channels of distribution have allowed us to develop a business that produces results that are not dependent on any one demographic group, merchandise preference, distribution channel or region. We have developed a portfolio of brands that appeals to a broad spectrum of consumers. Our owned brands have long histories and enjoy high recognition and awareness within their respective consumer segments. We
develop our owned and licensed brands to complement each other and to generate strong consumer loyalty. The worldwide recognition of the TOMMY HILFIGER and CALVIN KLEIN brands generally provide us with significant global opportunities and the opportunity to develop businesses that target different consumer groups at higher price points and in higher-end distribution channels than our heritage brands.
Imports and Import Restrictions
A substantial portion of our products is imported into the United States, Canada, Europe, Asiathe Asia-Pacific region and Latin America. These products are subject to various customs laws, which may impose tariffs, as well as quota restrictions. In addition, each of the countries in which our products are sold has laws and regulations covering imports. The United States and other countries in which our products are sold may impose, from time to time, new duties, tariffs, surcharges, or other import controls or restrictions, including the imposition of a “safeguard quota,” or adjust presently prevailing duty or tariff rates or levels. We, therefore, maintain a program of intensive monitoring of import restrictions and developments. We seek to minimize, where possible, our potential exposure to import related risks through, among other measures, adjustments in product design and fabrication, shifts of production among countries, including consideration of countries with tariff preference and free trade agreements, and manufacturers, and geographical diversification of our sources of supply. In some instances, production of a specific product category (e.g., swim goggles), component parts or raw materials may be highly concentrated in one country.
The United States and China are involved in a trade dispute that has seen the imposition in 2019 of significant additional tariffs on the products we sell that are imported into the United States from China. Please see our risk factor “We primarily use foreign suppliers for our products and raw materials, which poses risks to our business operations”in Item 1A, “Risk Factors,” for further discussion.
Environmental Matters
Our facilities and operations are subject to various environmental, health and safety laws and regulations. In addition, we may incur liability under environmental statutes and regulations with respect to the contamination of sites that we own or operate or previously owned or operated (including contamination caused by prior owners and operators of such sites, abutters or other persons) and the off-site disposal of hazardous materials. We believe our operations are in compliance with the terms of all applicable laws and regulations and our compliance with these laws and regulations has not had, and is not expected to have, a material effect on our capital expenditures, cash flows, earnings or competitive position.
Employees
As of February 3, 2019,2, 2020, we employed approximately 20,50021,500 persons on a full-time basis and approximately 17,50018,500 persons on a part-time basis. Approximately 2% of our employees were represented for the purpose of collective bargaining by four different unions in the United States. Additional persons, some represented by these four unions, are employed from time to time based upon our manufacturing schedules and retailing seasonal needs. Our collective bargaining agreements generally are for three-year terms. In some international markets, a significant percentage of employees are covered by governmental labor arrangements. We believe that our relations with our employees are good.
Executive Officers of the Registrant
The following table sets forth the name, age and position of each of our executive officers:
| Name | Age | Position | |||
| Emanuel Chirico | Chairman and Chief Executive Officer | ||||
| Stefan Larsson | 45 | President | |||
| Michael A. Shaffer | Executive Vice President and Chief Operating & Financial Officer | ||||
| Francis K. Duane | Vice Chairman and Chief Executive Officer, Heritage Brands | ||||
| Daniel Grieder | Chief Executive Officer, Tommy Hilfiger Global and PVH Europe | ||||
| Chief Executive Officer, Calvin Klein | |||||
| Mark D. Fischer | Executive Vice President, General Counsel & Secretary | ||||
| David F. Kozel | Executive Vice President, Chief Human Resources Officer | ||||
Mr. Chirico joined us as Vice President and Controller in 1993. Mr. Chirico was named Executive Vice President and Chief Financial Officer in 1999, President and Chief Operating Officer in 2005, Chief Executive Officer in 2006, and Chairman of the Board in 2007.
Mr. Larsson joined us as President in 2019. From 2015 until 2017, Mr. Larsson was President and Chief Executive Officer and a director of Ralph Lauren Corporation. From 2012 until 2015, he was the Global President of Old Navy, Inc., a division of The Gap, Inc.
Mr. Shaffer has been employed by us since 1990. He served as Senior Vice President, Retail Operations immediately prior to being named Executive Vice President, Finance in 2005, Executive Vice President and Chief Financial Officer in 2006, and Executive Vice President and Chief Operating & Financial Officer in 2012.
Mr. Duane served as President of our Izod division from 1998 until 2001, was named Vice Chairman, Sportswear in 2001, Vice Chairman, Wholesale Apparel in 2006, Chief Executive Officer, Wholesale Apparel in 2012, Chief Executive Officer, Heritage Brands and North America Wholesale in 2013, and Vice Chairman and Chief Executive Officer, Heritage Brands in 2018. Mr. Duane will relinquish his title and duties as Vice Chairman and Chief Executive Officer, Heritage Brands in June 2020, in advance of his retirement in February 2021.
Mr. Grieder has been employed by Tommy Hilfiger since 2004. He served as Chief Executive Officer, Tommy Hilfiger Europe from 2008 until 2014, prior to being named Chief Executive Officer, Tommy Hilfiger Global and PVH Europe in July 2014.
Mr. Fischer joined us as Vice President, General Counsel & Secretary in 1999. He became Senior Vice President in 2007 and Executive Vice President in 2013.
Mr. Kozel served as Vice President, Human Resources from 2003 until 2007, was named Senior Vice President, Human Resources in 2007, Executive Vice President, Human Resources in 2013, and Executive Vice President and Chief Human Resources Officer in 2015.
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Item 1A. Risk Factors
The following risk factors should be read in conjunction with the other information set forth in this Annual Report on Form 10-K when evaluating our business and the forward-looking statements contained within this report. The occurrence of one or more of the circumstances or events described below could have a material adverse effect on our business, financial condition or results of operations. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may occur or become material and may also adversely affect our business, financial condition or results of operations.
A substantial portion of our revenue and gross profit is derived from a small number of large wholesale customers and the loss of any of these customers or significant financial difficulties in their businesses could substantially reduce our revenue.
A few of our customers account for significant portions of our revenue. Sales to our five largest customers were 18.4% of our revenue in 2019 and 18.9% of our revenue in each of 2018 and 2017, and 21.3% of our revenue in 2016.2017. No single customer accounted for more than 10%
of our revenue in 2019, 2018 2017 or 2016.2017. Collectively, Macy’s, Inc. (“Macy’s”) and J. C. Penney Company,Corporation, Inc. (“J. C. Penney”), two of our ten largest customers in 2018,2019, have closed over 200approximately 275 stores since 2016 and will be closingMacy’s announced plans to close 125 additional stores.stores over the next three years. These store closings have resulted and may continue to result in a decrease in the total amount of purchases made by Macy’s and J. C. Penney. A continued decline in purchases made over the next several years could have a materially adverse effect on our United States wholesale business.
We had an agreement with Macy’s pursuant to which Macy’s was the exclusive department store distributor in the United States of men’s sportswear under the TOMMY HILFIGER brand; G-III, a licensee of the TOMMY HILFIGER brand, had a similar arrangement with Macy’s for women’s sportswear under the TOMMY HILFIGER brand. As a result of these strategic alliances, the success of Tommy Hilfiger’s North American men’s wholesale business and its licensed women’s wholesale business with G-III were substantially dependent on these relationships and on the ability of Macy’s to maintain and increase sales of TOMMY HILFIGER products. TheBoth exclusive arrangements are both beingwere terminated effective for the Spring 2019 selling season. We cannot assure you that Macy’s will continue to order the same volume of TOMMY HILFIGER products from us, G-III or our other TOMMY HILFIGER licensees, or that other department stores will purchase TOMMY HILFIGER products in sufficient volume to offset any reduction in sales to Macy’s.Macy’s in the future. This could result in a decline in overall revenue and have a material adverse effect on our results of operations.
We do not have long-term agreements with any of our customers and purchases generally occur on an order-by-order basis. A decision by any of our major customers, whether motivated by marketing strategy, competitive conditions, financial difficulties or otherwise, to decrease significantly the amount of merchandise purchased from us or our licensing or other partners, or to change their manner of doing business with us or our licensing or other partners, could substantially reduce our revenue and materially adversely affect our profitability. The retail industry’s recent history has seen a great deal of consolidation, particularly in the United States, and other ownership changes, as well as management changes and store closing programs, and we expect such changes to be ongoing. Store closing programs, such as those described above, decrease the number of stores carrying our products, while the remaining stores may purchase a smaller amount of our products and may reduce the retail floor space designated for our brands. In the future, retailers may further consolidate, undergo restructurings or reorganizations, realign their affiliations or reposition their stores’ target markets or marketing strategies. Any of these types of actions could decrease the number of stores that carry our products or increase the ownership concentration within the retail industry. These changes could decrease our opportunities in the market, increase our reliance on a smaller number of large customers and decrease our negotiating strength with our customers. These factors could have a material adverse effect on our financial condition and results of operations.
We may not be able to continue to develop and grow our Tommy Hilfiger and Calvin Klein businesses.
A significant portion of our business strategy involves growing our Tommy Hilfiger and Calvin Klein businesses. Our achievement of revenue and profitability growth from Tommy Hilfiger and Calvin Klein will depend largely upon our ability to:
| • | continue to maintain and enhance the distinctive brand identities of the TOMMY HILFIGER and CALVIN KLEIN brands; |
continue to maintain good working relationships with Tommy Hilfiger’s and Calvin Klein’s licensees;
| • | continue to enter into new, or renew or extend existing, licensing agreements for the TOMMY HILFIGER and CALVIN KLEIN brands; and |
continue to strengthen and expand the Tommy Hilfiger and Calvin Klein businesses.
We cannot assure you that we can successfully execute any of these actions or our growth strategy for these businesses, nor can we assure you that the launch of any additional product lines or businesses by us or our licensees or that the continued offering of these lines will achieve the degree of consistent success necessary to generate profits or positive cash flow. Our ability to successfully carry out our growth strategy may be affected by, among other things, our ability to enhance our relationships with existing customers to obtain additional selling space or add additional product lines, our ability to develop new relationships with retailers, economic and competitive conditions, changes in consumer spending patterns and changes in consumer tastes and style trends. If we fail to continue to develop and grow the Tommy Hilfiger or Calvin Klein business, our financial condition and results of operations may be materially and adversely affected.
The success of our Tommy Hilfiger and Calvin Kleinbusinesses depends on the value of our “TOMMY HILFIGER” and “CALVIN KLEIN” brands and, if the value of either of those brands were to diminish, our business could be adversely affected.
Our success depends on our brands and their value. The TOMMY HILFIGER name is integral to the existing Tommy Hilfiger business, as well as to our strategies for continuing to grow and expand the business. Mr. Hilfiger, who remains active in the business, is closely identified with the TOMMY HILFIGER brand and any negative perception with respect to Mr. Hilfiger could adversely affect the TOMMY HILFIGER brands. In addition, under Mr. Hilfiger’s employment agreement, if his employment is terminated for any reason, his agreement not to compete with the Tommy Hilfiger business will expire two years after such termination. Although Mr. Hilfiger could not use any TOMMY HILFIGER trademark in connection with a competitive business, his association with a competitive business could adversely affect the Tommy Hilfiger business. We also have exposure with respect to the CALVIN KLEIN brands, which are integral to the existing Calvin Klein business and could be adversely affected if Mr. Klein’s public image or reputation were to be tarnished.
Our retail stores arebusiness is heavily dependent on the ability and desire of consumers to travel and shop.
Our U.S. retail store operations are a material adverse effect oncontributor to our financial conditionrevenue and resultsearnings. The majority of operations, particularly if such events impact our higher-volume retail locations. Additionally, during times of a strengthening United States dollar, particularly againstretail stores are located away from major residential centers or near vacation destinations, making travel a critical factor in their success. These retail businesses historically also have had a significant portion of their revenue and earnings attributable to sales to international tourists. In addition to the euro, the Brazilian real, the Canadian dollar, the Mexican peso and the Chinese yuan renminbi,factors discussed above, international tourism to the United States could be reduced, as could the extent to which international tourists shop at our retail stores, whichduring times of a strengthening United States dollar, particularly the euro, the Brazilian real, the Canadian dollar, the Mexican peso, the Korean won and the Chinese yuan renminbi. A reduction in international tourist traffic or spending therefore could have a material adverse effect on our financial condition and results of operations. In fact in 2019, we did experience a significant decrease in sales to international tourists, which we believe was attributable in ourpart to the strength of the United States dollar and which negatively impacted sales and earnings for our Calvin Klein and Tommy Hilfiger retail stores, as they are material contributors of revenue and profits. businesses in the United States.
Other factors that could affect the success of our stores include:
the location of the store or mall, including the location of a particular store within the mall;
the other tenants occupying space at the mall;
increased competition in areas where the stores are located;
the amount of advertising and promotional dollars spent on attracting consumers to the store or mall;
the changing patterns of consumer shopping behavior;
increased competition from online retailers; and
the diversion of sales from our retail stores due to our digital commerce business.sites.
Acquisitions may not be successful in achieving intended benefits, cost savings and synergies.
One component of our growth strategy has been to make acquisitions, such as the Tommy Hilfiger, Calvin Klein and Warnaco acquisitions. Prior to completing any acquisition, our management team identifies expected synergies, cost savings and growth opportunities but, due to legal and business limitations, we may not have access to all necessary information. The integration process may be complex, costly and time-consuming. The potential difficulties of integrating the operations of an acquired business and realizing our expectations for an acquisition, including the benefits that may be realized, include, among other things:
failure to implement our business plan for the combined business;
delays or difficulties in completing the integration of acquired companies or assets;
higher than expected costs, lower than expected cost savings or a need to allocate resources to manage unexpected operating difficulties;
unanticipated issues in integrating manufacturing, logistics, information, communications and other systems;
unanticipated changes in applicable laws and regulations affecting the acquired business;
unanticipated changes in the combined business due to potential divestitures or other requirements imposed by antitrust regulators;
retaining key customers, suppliers and employees;
retaining and obtaining required regulatory approvals, licenses and permits;
operating risks inherent in the acquired business;
diversion of the attention and resources of management;
consumers’ failure to accept product offerings by us or our licensees;
assumption of liabilities not identified in due diligence;
the impact on our or an acquired business’ internal controls and compliance with the requirements under applicable regulation; and
other unanticipated issues, expenses and liabilities.
We have completed acquisitions that have not performed as well as initially expected and cannot assure you that any acquisition will not have a material adverse impact on our financial condition and results of operations.
Future economic conditions, including volatility in the financial and credit markets may adversely affect our business.
Economic conditions in the past have adversely affected, and in the future may adversely affect, our business, our customers and licensees and their businesses, and our financing and other contractual arrangements.arrangements, including, for example, as a result of the current COVID-19 outbreak. Such conditions, among other things, have resulted, and in the future may result, in financial difficulties leading to restructurings, bankruptcies, liquidations and other unfavorable events for our customers and licensees, may continue to cause such customers to reduce or discontinue orders of our products or beand licensed products sold by our licensees, and may result in customers being unable to pay us for products they have purchased from us and licensees being unable to pay us for royalties owed to us. Financial difficulties of customers and licensees may also affect the ability of our customers and licensees to access credit markets or lead to higher credit risk relating to receivables from customers.customers and licensees.
Future volatility in the financial and credit markets, including the recent volatility due, in part, to the current COVID-19 outbreak, could make it more difficult for us to obtain financing or refinance existing debt when the need arises, including upon maturity, which for our senior securedunsecured credit facilities is currently scheduled for May 2021,April 2024, or on terms that would be acceptable to us.
Our business is exposed to foreign currency exchange rate fluctuations and control regulations.
Our Tommy Hilfiger and Calvin Klein businesses each have substantial international components that expose us to significant foreign exchange risk. Our Heritage Brands business also has international components but those components are not significant.significant to the business. Changes in exchange rates between the United States dollar and other currencies can impact our financial results in two ways: a translational impact and a transactional impact.
The translational impact refers to the impact that changes in exchange rates can have on our results of operations and financial position asposition. The functional currencies of our foreign subsidiaries are generally the applicable local currencies. Our consolidated financial statements are presented in United States dollars. The results of operations in local foreign currencies are translated into United States dollars using an average exchange rate over the representative period and our assets and liabilities in local foreign currencies are translated into United States dollars using the closing exchange rate at the balance sheet date. Foreign exchange differences that arise from the translation of our foreign subsidiaries’ assets and liabilities into United States dollars are recorded as foreign currency translation adjustments in other comprehensive (loss) income. Accordingly, our results of operations and other comprehensive (loss) income will be unfavorably impacted during times of a strengthening United States dollar, particularly against the euro, the Brazilian real, the Australian dollar, the Japanese yen, the Korean won, the British pound sterling, the Canadian dollar and the Chinese yuan renminbi, and favorably impacted during times of a weakening United States dollar against those currencies.
A transactional impact on financial results is common for apparel companies operating outside the United States that purchase goods in United States dollars, as is the case with most of our foreign operations. As with translation, our results of operations will be unfavorably impacted during times of a strengthening United States dollar as the increased local currency value of inventory results in a higher cost of goods in local currency when the goods are sold and favorably impacted during times of a weakening United States dollar as the decreased local currency value of inventory results in a lower cost of goods in local currency when the goods are sold. We also have exposure to changes in foreign currency exchange rates related to certain intercompany transactions and selling, general and administrative (commonly referred to as “SG&A”) expenses. We currently use and plan to continue to use foreign currency forward exchange contracts or other derivative instruments to mitigate the cash flow or market value risks associated with these inventory and intercompany transactions, but we are unable to entirely eliminate these risks.
We are also exposed to foreign exchange risk in connection with our licensing businesses. Most of our licenselicensing agreements require the licensee to report sales to us in the licensee’s local currency but to pay us in United States dollars based on the exchange rate as of the last day of the contractual selling period. Thus, while we are not generally exposed to exchange rate gains and losses between the end of the selling period and the date we collect payment, we are exposed to changes in exchange rate changesrates during and up to the last day of the selling period. In addition, certain of our other foreign licenselicensing agreements expose us to changes in exchange rate changesrates up to the date we collect payment or convert local currency payments into United States dollars. As a result, during times of a strengthening United States dollar, our foreign royalty revenue will be negatively impacted, and during times of a weakening United States dollar, our foreign royalty revenue will be favorably impacted.
We also have exposure to changes in foreign currency exchange rates related to our €950 million aggregate principal amount of euro-denominated senior notes. During times of a strengthening United States dollar against the euro, we could be required to use a lower amount of our cash flows from operations to pay interest and make long-term debt repayments on our euro-denominated senior notes, whereas during times of a weakening United States dollar against the euro, we could be required to use a greater amount of our cash flows from operations to pay interest and make long-term debt repayments on our euro-denominated seniorthese notes.
We conduct business, directly or through licensees and other partners, in countries that are or have been subject to exchange rate control regulations and have, as a result, experienced difficulties in receiving payments owed to us when due, with amounts left unpaid for extended periods of time. Although the amounts to date have been immaterial to our results, as our international businesses grow and if controls are enacted or enforced in additional countries, there can be no assurance that such controls would not have a material and adverse effect on our business, financial condition or results of operations.
Our level of debt could impair our financial condition and ability to operate.
We had outstanding as of February 3, 20192, 2020 an aggregate principal amount of $2.839$2.725 billion of indebtedness under our senior securedunsecured credit facilities, our senior unsecured notes and our securedunsecured debentures. In March 2020, we increased our aggregate borrowings outstanding under our senior unsecured revolving credit facilities, other short-term revolving credit facilities and unsecured commercial paper note program from $50 million at February 2, 2020 to approximately $930 million, in order to increase our cash position and preserve financial flexibility in responding to the impacts of the COVID-19 outbreak on our business. Our level of debt could have important consequences to investors, including:
requiring a substantial portion of our cash flows from operations be used for the payment of interest on our debt, thereby reducing the funds available to us for our operations or other capital needs;
limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate because our available cash flow after paying principal and interest on our debt may not be sufficient to make the capital and other expenditures necessary to address these changes;
increasing our vulnerability to general adverse economic and industry conditions because, during periods in which we experience lower earnings and cash flow, such as during the current COVID-19 outbreak, we will be required to devote a proportionally greater amount of our cash flow to paying principal and interest on our debt;
limiting our ability to obtain additional financing in the future to fund working capital, capital expenditures, acquisitions, contributions to our pension plans and general corporate requirements;
placing us at a competitive disadvantage to other relatively less leveraged competitors that have more cash flow available to fund working capital, capital expenditures, acquisitions, share repurchases, dividend payments, contributions to pension plans and general corporate requirements; and
with respect to any borrowings we make at variable interest rates, including under our senior securedunsecured credit facilities, leaving us vulnerable to increases in interest rates to the extent the borrowings are not subject to an interest rate swap agreement.
In addition, our interest rate swap agreements as well as a portion of the borrowings under our senior unsecured credit facilities that have variable interest rates are tied to the London Interbank Offered Rate (“LIBOR”). In July 2017, the Financial Conduct Authority in the United Kingdom announced that it would phase out LIBOR as a benchmark by the end of 2021. It is unclear whether new methods of calculating LIBOR will be established such that it continues to exist after 2021, or whether different benchmark rates used to price indebtedness will develop. We cannot predict the consequences and timing of these developments, which could include an increase in interest expense and may also require the amendment of contracts that reference LIBOR.
We primarily use foreign suppliers for our products and raw materials, which poses risks to our business operations.
The majority of our apparel, footwear and accessories are produced by and purchased or procured from independent manufacturers located in countries in Asia, South America, Europe, the Middle East, North America, Africa, Central America and the Caribbean. Although no single supplier or country is or is expected to become critical to our production needs, any of the following could materially and adversely affect our ability to produce or deliver our products and, as a result, have a material adverse effect on our business, financial condition and results of operations:
political or labor instability or military conflict involving any of the countries in which we, our contractors, or our suppliers operate, which could cause a delay in the transportation of our products and raw materials to us and an increase in transportation costs;
heightened terrorism security concerns, which could subject imported or exported goods to additional, more frequent or more thorough inspections, leading to delays in deliveries or impoundments of goods for extended periods or could result in decreased scrutiny by customs officials for counterfeit goods, leading to lost sales, increased costs for our anti-counterfeiting measures and damage to the reputation of our brands;
a significant decrease in availability or increase in cost of raw materials, including commodities (particularly cotton), or the inabilityability to use raw materials produced in a country that is a major provider due to political, human rights, labor, environmental, animal cruelty or other concerns;concerns
a significant decrease in factory and shipping capacity or increase in demand for such capacity;
a significant increase in wage and shipping costs;
natural disasters, which could result in closed factories and scarcity of raw materials;
disease epidemics and health-relatedhealth related concerns, such as the current COVID-19 outbreak, which could result in (and in the case of the COVID-19 outbreak, has resulted in certain of the following) closed factories, reduced workforces, scarcity of raw materials and scrutiny or embargoing of goods produced in infected areas;
migration and development of manufacturers, which could affect where our products are or are planned to be produced;
imposition of regulations, quotas and safeguards relating to imports and our ability to adjust timely to changes in trade regulations, which, among other things, could limit our ability to produce products in cost-effective countries that have the labor and expertise needed; and
imposition of duties, taxes and other charges on imports.
The United States government imposed tariffs in 2019 and 2018 on a variety of imports from China into the United States, including certain categories of accessories,apparel, footwear and mayaccessories. These additional tariffs, which were included in a trade agreement signed by the United States and China in January 2020, are not expected to be decreased, at least not in the near term, and in the future the United States could impose significantadditional tariffs or increase existing tariffs on additional goods imported from China into the United States. China is the largest sourcing country of apparel, footwear and accessories for us globally and for most of our licensees. We imported approximately $400$215 million of inventory into the United States from China in 2018.2019. Accordingly, any tariffs on apparel, footwear and accessories imported from China into the United States result in an increase in our cost of goods sold for that product. We are looking at alternative sourcing options but we may not be able to shift production of inventory bound for the United States from China to other countries. In addition, higher costs in sourcing from other countries, orincluding because others in the industry are looking to move production for the same reason, may make the move price-prohibitive. We may not be able to pass the entire cost increase resulting from the tariffs onto consumers or could choose not to. Any increase in prices to consumers could have an adverse impact on our direct sales to consumers, as well as sales by our wholesale customers and our licensees. Any adverse impact on such sales or increase in our cost of goods sold could have a material adverse effect on our business and results of operations.
If our manufacturers, the manufacturers used by our licensees, or our licensees themselves fail to use legal and ethical business practices, our business could suffer.
We require our manufacturers, the manufacturers used by our licensees and the licensees themselves to operate in compliance with applicable laws, rules and regulations regarding working conditions, employment practices and environmental compliance. Additionally, we impose upon our business partners operating guidelines that require additional obligations in those areas in order to promote ethical business practices. We audit, or have third parties audit, the operations of these independent parties to determine compliance. We arewere a signatorymember of the Accord on Fire and Building Safety in Bangladesh and are a member of its successor, the mission of each of which is to improve fire and building safety in Bangladesh’s apparel factories and we continue tofactories. We also collaborate with factories, suppliers, industry participants and other engaged stakeholders to improve the lives of our factory workers and others in our sourcing communities. However, we do not control our manufacturers, the manufacturers used by our licensees, or our licensees themselves, or their labor, manufacturing and other business practices.
If any of these manufacturers or licensees violates labor, environmental, building and fire safety, or other laws or implements labor, manufacturing or other business practices that are generally regarded as unethical, in the United States, the shipment of finished products to us could be interrupted, orders could be canceled and relationships could be terminated. Further, we could be prohibited from importing goods by governmental authorities. In addition, we could be the focus of adverse publicity and our reputation could be damaged. Any of these events could have a material adverse effect on our revenue and, consequently, our results of operations.
We are dependent on third parties to source and manufacture our products and any disruption in our relationships with these parties or in their businesses may materially adversely affect our businesses.
We rely upon independent third parties for the manufacturing of the vast majority of our apparel, footwear and accessories. A manufacturer’s failure to ship products to us in a timely manner, which has occurred, and may occur in the future, as a result of the current COVID-19 outbreak, or to meet required quality standards could cause us to miss the delivery date requirements of our customers for those products. As a result, customers could cancel their orders, refuse to accept deliveries or demand reduced prices. Any of these actions taken by our customers could have a material adverse effect on our revenue and, consequently, our results of operations.
We use third party buying offices for a portion of our product sourcing. Any interruption in the operations of these buying offices, or the failure of these buying offices to perform effectively their services for us, could result in material delays, reductions of shipments and increased costs. Furthermore, such events could harm our wholesale and retail relationships. Any disruption in our relationships with these buying offices or in their businesses could have a material adverse effect on our cash flows, business, financial condition and results of operations.
We are dependent on a limited number of distribution facilities. If one becomes inoperable, our business, financial condition and operating results could be negatively impacted.
We operate a limited number of distribution facilities and also engage independently operated distribution facilities around the world to warehouse and ship products to our customers and our retail stores, as well as perform related logistics services. Our ability to meet the needs of our wholesale customers and of our retail stores depends on the proper operation of our primary facilities. If any of our primary facilities were to shut down or otherwise become inoperable or inaccessible, including as a result of disease epidemics and other health-related concerns, such as the current COVID-19 outbreak, we could have a substantial loss of inventory or disruptions of deliveries to our customers and our stores, incur significantly higher costs or experience longer lead times associated with the distribution of our products during the time it takes to reopen or replace the facility. This could materially and adversely affect our business, financial condition and operating results.
A portion of our revenue is dependent on royalties and licensing.
The operating profit associated with our royalty, advertising and other revenue is significant because the operating expenses directly associated with administering and monitoring an individual licenselicensing or similar agreement are minimal. Therefore, the loss of a significant licensee, whether due to the termination or expiration of the relationship, the cessation of the licensee’s operations or otherwise (including as a result of financial difficulties of the licensee), without an equivalent replacement, or a significant decline in our licensees’ sales, for example as occurred as a result of the current COVID-19 outbreak, could materially impact our profitability.
While we generally have significant control over our licensees’ products and advertising, we rely on them for, among other things, operational and financial controls over their businesses. Our licensees’ failure to successfully market licensed products or our inability to replace our existing licensees could materially and adversely affect our revenue both directly from reduced royalty, advertising and other revenue received and indirectly from reduced sales of our other products. Risks are also associated with our licensees’ ability to obtain capital, execute their business plans, timely deliver quality products, manage their labor relations, maintain relationships with their suppliers, manage their credit risk effectively and maintain relationships with their customers.
Our licensing business makes us susceptible to the actions of third parties over whom we have limited control.
We rely on our licensees to preserve the value of our brands. Although we attempt to protect our brands through, among other things, approval rights over design, production quality, packaging, merchandising, distribution, advertising and promotion of our products, we cannot assure you that we can control our licensees’ use of our brands. The misuse of our brands by a licensee could have a material adverse effect on our business, financial condition and results of operations.
We may be unable to protect our trademarks and other intellectual property rights.
Our trademarks and other intellectual property rights are important to our success and our competitive position. We are susceptible to others imitating our products and infringing on our intellectual property rights, especially with respect to the TOMMY HILFIGER and CALVIN KLEIN brands, as they enjoy significant worldwide consumer recognition and the generally premium pricing of TOMMY HILFIGER and CALVIN KLEIN brand products creates additional incentive for counterfeiters and infringers. Imitation or counterfeiting of our products or infringement of our intellectual property rights could diminish the value of our brands or otherwise adversely affect our revenue. We cannot assure you that the actions we take to establish and protect our trademarks and other intellectual property rights will be adequate to prevent imitation of our products by others. We
cannot assure you that other third parties will not seek to invalidate our trademarks or block sales of our products as a violation of their own trademarks and intellectual property rights. In addition, we cannot assure you that others will not assert rights in, or ownership of, trademarks and other intellectual property rights of ours or in marks that are similar to ours or marks that we license or market or that we will be able to successfully resolve these types of conflicts to our satisfaction. In some cases, there may be trademark owners who have prior rights to our marks because the laws of certain foreign countries may not protect intellectual property rights to the same extent as do the laws of the United States. In other cases, there may be holders who have
prior rights to similar marks. For example,trademarks. We have in the past we werebeen and currently are involved both domestically and internationally in proceedings relating to a company’s claim of prior rights to the IZOD mark in Mexico and to another company’s claimsome of prior rights to the CALVIN KLEIN mark in Chile. We are currently involved in opposition and cancellation proceedings with respect toour trademarks or marks similar to some of our brands, both domestically and internationally.brands.
We face intense competition in the apparel industry.
Competition is intense in the apparel industry. We compete with numerous domestic and foreign designers, brand owners, manufacturers and retailers of apparel, accessories and footwear, some of which have greater resources than we do. We also face increased competition from online retailers in the digital channel, which is characterized by low barriers to entry. In addition, in certain instances, we compete directly with our wholesale customers, as they also sell their own private label products in their stores and online. We compete within the apparel industry primarily on the basis of:
anticipating and responding to changing consumer tastes, demands and shopping preferences in a timely manner and developing attractive, quality products;
maintaining favorable brand recognition and relevance, including through digital brand engagement and online and social media presence;
appropriately pricing products and creating an acceptable value proposition for customers;
providing strong and effective marketing support;
ensuring product availability and optimizing supply chain efficiencies with third party manufacturers and retailers; and
obtaining sufficient retail floor space at retail and effective presentation of our products at retail, on digital commerce sites operated by our department store customers and pure play digital commerce retailers, and on our digital commerce sites.
The failure to compete effectively or to keep pace with rapidly changing markets could have a material adverse effect on our business, financial condition and results of operations.
Our profitability may decline as a result of increasing pressure on margins.
The apparel industry, particularly in the United States (our largest market), is subject to significant pricing pressure caused by many factors, including intense competition, consolidation in the retail industry, pressure from retailers and changes in consumer demand.demand including, for example, as a result of the current COVID-19 outbreak. These factors may cause us to reduce our sales prices to retailers and consumers, which could cause our profitability to decline if we are unable to appropriately manage inventory levels or offset price reductions with sufficient reductions in product costs or operating expenses. This could have a material adverse effect on our results of operations, liquidity and financial condition.
If we are unable to manage our inventory effectively and accurately forecast demand for our products, our results of operations could be materially adversely affected.
We have made and continue to make investments in our supply chain management systems and processes that enable us to respond more rapidly to changes in sales trends and consumer demands and enhance our ability to manage inventory. However, we cannot assure you that we will be able to anticipate and respond successfully to changing consumer tastes and style trends or economic conditions and, as a result, we may not be able to manage inventory levels to meet our future order requirements. If we are unable to or fail to accurately forecast consumer demand, including, for example, as a result of the current COVID-19 outbreak, we may experience excess inventory levels or a shortage of product required to meet demand. Inventory levels in excess of consumer demand may result in inventory write-downs and the sale of excess inventory at discounted prices, which could have a material adverse effect on the reputation of our brands and our profitability. If we underestimate consumer demand for our products, we may not have sufficient inventories of product to meet consumer requirements in a timely manner, which could result in lost revenues, as well as damage to our reputation and relationships.
We rely significantly on information technology. Our business and reputation could be adversely impacted if our computer systems, or systems of our business partners and service providers, are disrupted or cease to operate effectively or if we or they are subject to a data security or privacy breach.
Our ability to manage and operate our business effectively depends significantly on information technology systems.systems, including systems operated by third parties and us and systems that communicate with third parties, including website and mobile applications through which we communicate with our consumers and our employees. We process, transmit, store and maintain information about consumers, employees, and our employeesother individuals in the ordinary course of business, including through our digital
commerce operations. This includes personally identifiable information protected under applicable laws. This includeslaws and the collection and processing of customers’ credit and debit card numbers and reliance on systems maintained by third parties with whom we contract to provide payment processing. The failure of any system to operate effectively or disruption in these systems, which may occur as a result of circumstances beyond our control including fire, natural disasters, power outages and systems disruptions, could require significant remediation costs and adversely impact our operations.
We take, and require third party providers to take, measures to protect data but have no control over their efforts and are limited in our ability to assess their systems and processes. Furthermore, while we invest, and believe our service providers invest, considerable resources in protecting systems and information, we all are still subject to security events, including but not limited to cybercrimes and cybersecurity attacks, such as those perpetrated by sophisticated and well-resourced bad actors attempting to disrupt operations or access or steal data. Security events may not be detected for an extended period of time, which could compound the scope and extent of the damages and problems. Such security events could disrupt our business, severely damage our reputation and our relationship with consumers, and expose us to risks of litigation and liability, which may not be covered by insurance or may result in costs in excess of the insurance coverage we maintain.
We regularly implement new systems and hardware and are currently undertaking a major multi-year SAP S/4 implementation to upgrade of our platforms and systems worldwide. The implementation of new software and hardware involves risks and uncertainties that could cause disruptions, delays or deficiencies thatin the design, implementation or application of these systems including:
•adversely impacting our operations;
increased costs;
disruptions in our ability to effectively source, sell or ship our products;
delays in collecting payments from our customers; and
adversely affecting our ability to timely report our financial results.
Our business, results of operations and financial condition could be materially adversely impact our operations.affected as a result of these implementations. In addition, intended improvements may not be realized. Our business partners and service providers face the same risks, which could also adversely impact our business and operations.
We are subject to data privacy and security laws and regulations, the number and complexity of which are increasing globally. We may be the subject of enforcement or other legal actions despite our compliance efforts.
We collect, use, store, and otherwise process or rely upon access to data, including personally identifiable information, of consumers, employees, and other individuals in the daily conduct of our business.business, including through our digital commerce operations. There have been significant developments in the area of data privacy and cybersecurity law and regulation. Significant new laws, such as the European Union’s General Data Protection Regulation, the Brazilian General Data Protection Law and the California Consumer Privacy Act, are continuously being proposed and enacted around the world. These laws and regulations have caused and could continue to cause us to change the way we operate, including in a less efficient manner, in order to comply with local requirements. We have a privacy compliance program but our compliance efforts are not an assurance that we will not be the subject of regulatory or other legal actions. We could expend significant management and associate time and incur significant cost investigating and defending ourselves against the claims in any such matter, which matters also could result in us being the subject of significant fines, judgments or settlements. In addition, any such claim could give rise to significant reputational damage, whether or not we are ultimately successful in defending ourselves.
The loss of members of our executive management and other key employees could have a material adverse effect on our business.
We depend on the services and management experience of our executive officers, who have substantial experience and expertise in our business. We also depend on other key executives in various areas of our businesses and operations. Competition for qualified personnel in the apparel industry is intense and competitors may use aggressive tactics to recruit our key employees. The unexpected loss of services of one or more of these individuals could have a material adverse effect on us.
A significant shift in the relative sources of our earnings, adverse decisions of tax authorities or changes in tax treaties, laws, rules or interpretations could have a material adverse effect on our results of operations and cash flow.
We have direct operations in many countries and the applicable tax rates vary by jurisdiction. As a result, our overall effective tax rate could be materially affected by the relative level of earnings in the various taxing jurisdictions to which our earnings are subject. In addition, the tax laws and regulations in the countries where we operate may be subject to change. Moreover, there may be changes from time to time in interpretation and enforcement of tax law. As a result, we may pay additional taxes if tax rates increase or if tax laws, regulations or treaties in the jurisdictions where we operate are modified by the authorities in an adverse manner.
In addition, various national and local taxing authorities periodically examine us and our subsidiaries. The resolution of an examination or audit may result in us paying more than the amount that we may have reserved for a particular tax matter, which could have a material adverse effect on our cash flows, business, financial condition and results of operations for any affected reporting period.
We and our subsidiaries are engaged in a number of intercompany transactions. Although we believe that these transactions reflect arm’s length terms and that proper transfer pricing documentation is in place, which should be respected for tax purposes, the transfer prices and conditions may be scrutinized by local tax authorities, which could result in additional tax liabilities.
If we are unable to fully utilize our deferred tax assets, our profitability could be reduced.
Our deferred income tax assets are valuable to us. These assets include tax loss and foreign tax credit carryforwards in various jurisdictions. Realization of deferred tax assets is based on a number of factors, including whether there will be adequate levels of taxable income in future periods to offset the tax loss and foreign tax credit carryforwards in jurisdictions where such assets have arisen. Valuation allowances are recorded in order to reduce the deferred tax assets to the amount expected to be realized in the future. In assessing the adequacy of our valuation allowances, we consider various factors including reversal of deferred tax liabilities, forecasted future taxable income and potential tax planning strategies. These factors could reduce the value of the deferred tax assets, which could have a material effect on our profitability.
Volatility in securities markets, interest rates and other economic factors could increase substantially our defined benefit pension costs and liabilities.
We have significant obligations under our defined benefit pension plans. The funded status of our pension plans is dependent on many factors, including returns on invested plan assets and the discount rate used to measure pension obligations. Unfavorable returns on plan assets, which, for example, may result from recent market volatility due, in part, to the COVID-19 outbreak, a lower discount rate or unfavorable changes in the applicable laws or regulations could materially change the timing and amount of pension funding requirements, which could reduce cash available for our business.
Our operating performance also may be significantly impacted by the amount of expense recorded for our pension plans. Pension expense recorded throughout the year is calculated using actuarial valuations that incorporate assumptions and estimates about financial market, economic and demographic conditions. Differences between estimated and actual results give rise to gains and losses that are recorded immediately in pension expense, generally in the fourth quarter of the year. These gains and losses can be significant and can create volatility in our operating results.
Our balance sheet includes a significant amount of intangible assets and goodwill. A decline in the estimated fair value of an intangible asset or of a reporting unit could result in an impairment charge recorded in our operating results, which could be material.
Goodwill and other indefinite-lived intangible assets are tested for impairment annually and between annual tests if an event occurs or circumstances change that would indicate the carrying amount may be impaired. Also, we review our amortizable intangible assets for impairment if an event occurs or circumstances change that would indicate the carrying amount may not be recoverable. If the carrying valueamount of our goodwill or an otheranother intangible asset were to exceed its fair value, the asset would be written down to its fair value, with the impairment charge recognized as a noncash expense in our operating results. Adverse changes in future market conditions or weaker operating results compared to our expectations, including, for example, as a result of the current COVID-19 outbreak, may impact our projected cash flows and estimates of weighted average cost of capital, which could result in a potentially material impairment charge if we are unable to recover the carrying value of our goodwill and other intangible assets.
As of February 3, 2019,2, 2020, we had approximately $3.671$3.678 billion of goodwill and $3.569$3.481 billion of other identifiable intangible assets on our balance sheet, which together represented 61%53% of our total assets. No impairment was recorded in 20182019 based on our annual goodwill and other indefinite-lived intangible assets impairment tests. However, during the fourth quarter of 2019, we entered into a definitive agreement to sell our Speedo North America business, which prompted the need for us to perform an interim impairment assessment of our Speedo perpetual license right. As a result of this interim test, the perpetual license right was determined to be impaired and an impairment charge of $116.4 million was recorded. The Speedo transaction was also a triggering event that prompted the need for us to perform an interim goodwill impairment test for the Heritage Brands Wholesale reporting unit, the reporting unit that includes the Speedo North America business. No goodwill impairment resulted from this interim test.
Our balance sheet includes a significant amount of long-lived assets in our retail stores, including operating lease right-of-use assets and property, plant and equipment. A decline in the current and projected cash flows in our retail stores could result in impairment charges, which could be material.
Long-lived assets, such as operating lease right-of-use assets and property, plant and equipment in our retail stores, are tested for impairment if an event occurs or circumstances change that would indicate the carrying amount may not be recoverable. If the carrying amount of a long-lived asset were to exceed its fair value, the asset would be written down to its fair value and an impairment charge recognized as a noncash expense in our operating results. Adverse changes in future market conditions or weaker operating results compared to our expectations, including, for example, as a result of the current COVID-19 outbreak, may impact our projected cash flows and estimates of weighted average cost of capital, which could result in a potentially material impairment charge if we are unable to recover the carrying value of our long-lived assets.
Provisions in our certificate of incorporation and our by-laws and Delaware General Corporation Law could make it more difficult to acquire us and may reduce the market price of our common stock.
Our certificate of incorporation and by-laws contain certain provisions, including provisions requiring supermajority voting (80% of the outstanding voting power)stockholders who seek to approveintroduce proposals at a stockholders meeting or nominate a person to become a director to provide us with advance notice and certain business combinations,information, as well as meet certain ownership criteria; permitting the Board of Directors to fill vacancies on the BoardBoard; and authorizing the Board to issue shares of preferred stock without approval of our stockholders. These provisions could also have the effect of deterring changes of control.
In addition, Section 203 of the Delaware General Corporation Law imposes restrictions on mergers and other business combinations between us and any holder of 15% or more of our common stock. The existence of this provision may have an anti-takeover effect with respect to transactions not approved in advance by the Board.
The United Kingdom’s proposed withdrawal from the European Union could harm our business and financial results.
Voters in the United Kingdom approved a referendum to withdraw from the European Union (commonly referred to as “Brexit”). Subsequently, in March 2017, theThe United Kingdom submitted a formal notification of its intention to withdrawformally withdrew from the European Union which beganon January 31, 2020 and is now in a two-year negotiation period that culminated in an agreement uponof transition until December 31, 2020. During the withdrawal terms, which was subject to approval by British Parliament. Parliament rejectedtransition period, the agreement and the British Prime Minister requested an extension to June 30, 2019 of the March 29, 2019 effective date for Brexit. On March 21, 2019, the leaders of the other member countries ofUnited Kingdom’s trading relationship with the European Union agreedis expected to extendremain largely the deadline for Brexit until April 12, 2019. However, ifsame while the British Parliament approves the previously rejected termstwo parties negotiate a trade agreement as well as other aspects of withdrawal, then the deadline would be further extended to May 22, 2019. Additionally, if the United Kingdom agrees to hold elections for European Parliament that are scheduled for May 23, 2019, the deadline could be further extended. As a result, there remains considerable uncertainty around the withdrawal. If the British Parliament does not agree to terms of withdrawal and the United Kingdom does not agree to participate inKingdom’s relationship with the European Parliament elections, the United Kingdom would leave the European Union on April 12, 2019 without an agreement. There is also significant discussion regarding submitting Brexit to a second referendum.Union. The uncertainty surrounding the terms of the United Kingdom’s withdrawalfuture relationship with the European Union after December 31, 2020 and its consequences could adversely impact consumer and investor confidence and the level of consumer purchases of discretionary items and retail products, including our products. The eventual terms upon which the withdrawal occurs (which could leave the United Kingdom without a trade agreement with the European Union) also could significantly disrupt the free movement of goods, services and people between the United Kingdom and the European Union and may result in increased legal and regulatory complexities and higher costs of conducting business in Europe. Volatility in the value of the British pound sterling, the euro and other European currencies could also result. Any of these effects, among others, could adversely affect our business, results of operations and financial condition.
Item 1B. Unresolved Staff Comments
None.
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Item 2. Properties
The general location, use, ownership status and approximate size of the principal properties that we occupied as of February 3, 20192, 2020 are set forth below:
| Location | Use | Ownership Status | Approximate Area in Square Feet | |||
| New York, New York | Corporate and Heritage Brands administrative offices and showrooms | Leased | 209,000 | |||
| New York, New York | Calvin Klein administrative offices and showrooms | Leased | ||||
| New York, New York | Tommy Hilfiger administrative offices and showrooms | Leased | ||||
| Bridgewater, New Jersey | Corporate and retail administrative offices | Leased | 285,000 | |||
| Banksmeadow, Australia | Tommy Hilfiger, Calvin Klein and Heritage Brands administrative offices, showrooms, warehouse and distribution center | Leased | 243,000 | (1) | ||
| Milperra, Australia | Warehouse and distribution center | Leased | 86,000 | (1) | ||
| Amsterdam, The Netherlands | Tommy Hilfiger and Calvin Klein administrative offices, warehouse and showrooms | Leased | 499,000 | |||
| Venlo/Oud Gastel, The Netherlands | Warehouse and distribution centers | Leased | 2,051,000 | |||
| McDonough, Georgia | Warehouse and distribution center | Leased | 851,000 | |||
| Palmetto, Georgia | Warehouse and distribution center | Leased | 983,000 | |||
| Jonesville, North Carolina | Warehouse and distribution center | Owned | 778,000 | |||
| Montreal, Canada | Administrative offices, warehouse and distribution center | Leased | 183,000 | |||
| Hong Kong SAR, China | Corporate, Tommy Hilfiger and Calvin Klein administrative offices | Leased | ||||
| Hawassa, Ethiopia | Manufacturing facility | Leased | 155,000 | |||
| Dusseldorf, Germany | Tommy Hilfiger and Calvin Klein administrative offices and showrooms | Leased | 91,000 | |||
| Cypress, California | Speedo administrative offices | Leased | 69,000 | |||
| Shanghai, China | Tommy Hilfiger and Calvin Klein administrative offices | Leased | ||||
(1) | We occupy properties in Australia since May 2019 in connection with the Australia acquisition. |
(2) | Our Speedo administrative offices in Cypress, California will no longer be occupied by us following the pending sale of our Speedo North America business to Pentland, which is expected to close in the first quarter of 2020, subject to customary conditions. Please see Note 4, “Assets Held For Sale,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion. |
In addition, as of February 3, 2019,2, 2020, we leased certain other administrative offices and showrooms in various domestic and international locations. We also leased and operated as of February 3, 20192, 2020 over 1,7001,800 retail locations in the United States, Canada, Europe, AsiaAsia-Pacific, and Brazil.
Information with respect to minimum annual rental commitments under leasesmaturities of the Company’s lease liabilities in which we are a lessee is included in Note 16,17, “Leases,” in the Notes to Consolidated Financial Statements included in Item 8 of this report.
Item 3. Legal Proceedings
We are a party to certain litigations which, in management’s judgment based, in part, on the opinions of legal counsel, will not have a material adverse effect on our financial position.
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Item 4. Mine Safety Disclosures
Not applicable.
29
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the New York Stock Exchange under the symbol “PVH.” Certain information with respect to the dividends declared on our common stock appear in the Consolidated Statements of Changes in Stockholders’ Equity and Redeemable Non-Controlling Interest included in Item 8 of this report. Please see Note 8,9, “Debt,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for a description of the restrictions to our paying dividends on our common stock. As of March 18, 2019,19, 2020, there were 590562 stockholders of record of our common stock.
ISSUER PURCHASES OF EQUITY SECURITIES
| Period | (a) Total Number of Shares (or Units) Purchased(1)(2) | (b) Average Price Paid per Share (or Unit)(1)(2) | (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs(1) | (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs(1) | ||||||||||
| November 5, 2018 - | ||||||||||||||
| December 2, 2018 | 158,007 | $ | 116.13 | 157,695 | $ | 292,665,255 | ||||||||
| December 3, 2018 - | ||||||||||||||
| January 6, 2019 | 240,657 | 95.72 | 240,352 | 269,662,940 | ||||||||||
| January 7, 2019 - | ||||||||||||||
| February 3, 2019 | 110,154 | 103.76 | 110,000 | 258,257,007 | ||||||||||
| Total | 508,818 | $ | 103.80 | 508,047 | $ | 258,257,007 | ||||||||
| Period | (a) Total Number of Shares (or Units) Purchased(1)(2) | (b) Average Price Paid per Share (or Unit)(1)(2) | (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs(1) | (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs(1) | ||||||||||
| November 4, 2019 - | ||||||||||||||
| December 1, 2019 | 333,392 | $ | 97.47 | 332,451 | $ | 752,514,829 | ||||||||
| December 2, 2019 - | ||||||||||||||
| January 5, 2020 | 381,889 | 102.92 | 381,441 | 713,255,373 | ||||||||||
| January 6, 2020 - | ||||||||||||||
| February 2, 2020 | 307,761 | 98.67 | 304,259 | 683,257,019 | ||||||||||
| Total | 1,023,042 | $ | 99.87 | 1,018,151 | $ | 683,257,019 | ||||||||
___________________
(1) |
(2) | Our 2006 Stock Incentive Plan provides us with the right to deduct or withhold, or require employees to remit to us, an amount sufficient to satisfy any applicable tax withholding requirements applicable to stock-based compensation awards. To the extent permitted, employees may elect to satisfy all or part of such withholding requirements by tendering previously owned shares or by having us withhold shares having a fair market value equal to the minimum statutory tax withholding rate that could be imposed on the transaction. Included in this table are shares withheld during the fourth quarter of |
The following performance graph and return to stockholders information shown below are provided pursuant to Item 201(e) of Regulation S-K promulgated under the Exchange Act. The graph and information are not deemed to be “filed” under the Exchange Act or otherwise subject to liabilities thereunder, nor are they to be deemed to be incorporated by reference in any filing under the Securities Act or Exchange Act unless we specifically incorporate them by reference.
The performance graph compares the yearly change in the cumulative total stockholder return on our common stock against the cumulative return of the S&P 500 Index and the S&P 500 Apparel, Accessories & Luxury Goods Index for the five fiscal years ended February 3, 2019.2, 2020.
| Value of $100.00 invested after 5 years: | ||||||
| Our Common Stock | $ | 90.62 | $ | 79.62 | ||
| S&P 500 Index | $ | 168.36 | $ | 179.17 | ||
| S&P 500 Apparel, Accessories & Luxury Goods Index | $ | 88.04 | $ | 78.24 | ||
Item 6. Selected Financial Data
Selected Financial Data appears under the heading “Five Year Financial Summary” on pages F-63F-70 and F-64.F-71.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
The following discussion and analysis is intended to help you understand us, our operations and our financial performance. It should be read in conjunction with our consolidated financial statements and the accompanying notes, which are included elsewhere in this report.
We are one of the largest brandedglobal apparel companies in the world withand, in March 2020, we marked our 100-year anniversary as a history going back over 135 years. Ourlisted company on the New York Stock Exchange. We manage a diversified brand portfolio, consists of nationally and internationally recognized trademarks, including TOMMY HILFIGER, CALVIN KLEIN, Van Heusen, IZOD, ARROW, Speedo(licensed (licensed in perpetuity for North America and the Caribbean from Speedo International Limited)Caribbean), Warner’s, Olga, True&Co. and Geoffrey Beene. Beene. Our brand portfolio also consists of various other owned, licensed and, to a lesser extent, private label brands. We entered into a definitive agreement on January 9, 2020 to sell our Speedo North America business to Pentland and, upon closing of the sale, we will no longer license the Speedo trademark. The Speedo transaction is expected to close in the first quarter of 2020. The closing is subject to customary closing conditions, including clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, which has been received.
Our business strategy is to position our brands to sell globally at various price points and in multiple channels of distribution. This enables us to offer products to a broad range of consumers, while minimizing competition among our brands and reducing our reliance on any one demographic group, product category, price point, distribution channel or region. We also license the use of our trademarks to third parties and joint ventures for product categories and in regions where we believe our licensees’ expertise can better serve our brands.
Our revenue was $9.657$9.9 billion in 2018,2019, of which over 50% was generated outside of the United States. Our global designer lifestyle brands, TOMMY HILFIGER and CALVIN KLEIN, together generated over 80%approximately 85% of our revenue.
RESULTS OF OPERATIONS
COVID-19 Outbreak
The COVID-19 outbreak is having a significant impact on our business, financial condition, cash flows and results of operations in 2020.
Virus-related concerns, reduced travel, temporary store closures and government-imposed restrictions have resulted in sharply reduced traffic and consumer spending trends and sales stoppages in our retail stores and in the stores of our wholesale customers in virtually all key markets during the first quarter of 2020. In addition, our supply chain had been disrupted and may experience future disruptions as a result of either closed factories or factories with reduced workforces. Our licensees’ sales and their supply chain are also being negatively impacted by the COVID-19 outbreak, which in turn negatively impacts our royalty revenue.
There is significant uncertainty about the duration and extent of the impact of the COVID-19 outbreak; however, there will be a significant negative impact to our 2020 revenue and net income.
Further, our fourth quarter of 2019 earnings were negatively impacted compared to the prior year period by $22 million of additional inventory reserves that we recorded in anticipation of the lower sales trends projected in 2020 as a result of the onset of the COVID-19 outbreak.
Operations Overview
We generate net sales from (i) the wholesale distribution to retailers, franchisees, licensees and distributors of dress shirts, neckwear, sportswear (casual apparel), jeanswear, performance apparel, intimate apparel, underwear, swimwear, swim products, handbags, accessories, footwear and other related products under owned and licensed trademarks, including through digital commerce sites operated by our wholesale partners and pure play digital commerce retailers, and (ii) the sale of certain of these products through (a) approximately 1,7001,830 Company-operated free-standing retail store locations worldwide under our TOMMY HILFIGER, CALVIN KLEIN and certain of our heritage brands trademarks, (b) approximately 1,500 Company-operated shop-in-shop/concession locations worldwide under our TOMMY HILFIGER and CALVIN KLEIN trademarks, and (c) digital commerce sites in over 30 countries under each of our TOMMY HILFIGER and CALVIN KLEIN trademarks and in the United States through our SpeedoUSA.com, TrueAndCo.com, VanHeusen.com, IZOD.com and styleBureau.comdirectly operated digital commerce sites.sites for Speedo, True&Co., Van Heusen, and IZOD, as well as our
styleBureau.com site. Additionally, we generate royalty, advertising and other revenue from fees for licensing the use of our trademarks. We manage our operations through our operating divisions, which are presented as six 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) Heritage Brands Retail.
We have entered into the following transactions which impactthat have impacted our results of operations and the comparability among the years, including our 20192020 expectations as compared to 2018,2019, as discussed in the section entitled “Result of Operations” below:
| • | We entered into a definitive agreement on January 9, 2020 to sell our Speedo North America business to Pentland for $170 million in cash, subject to a working capital adjustment, as described above. We recorded a pre-tax noncash loss of $142 million in the fourth quarter of 2019 related to the Speedo transaction and expected deconsolidation of the net assets of the business, consisting of (i) a noncash impairment of our perpetual license right for the Speedo trademark and (ii) a noncash loss to reduce the carrying value of the business to its estimated fair value, less costs to sell. |
| • | We entered into agreements on July 3, 2019 to terminate early the licenses for the global Calvin Klein and Tommy Hilfiger North America socks and hosiery businesses in order to consolidate the socks and hosiery businesses for all of our brands in the United States and Canada in a newly formed joint venture, PVH Legwear, in which we own a 49% economic interest, and to bring in-house the international Calvin Klein socks and hosiery wholesale businesses. PVH Legwear was formed with a wholly owned subsidiary of our former Heritage Brands socks and hosiery licensee, and licenses from us the rights to distribute and sell TOMMY HILFIGER, CALVIN KLEIN, IZOD, Van Heusen and Warner’s socks and hosiery beginning in December 2019. We recorded a pre-tax charge of $60 million during 2019 in connection with these agreements. |
| • | We completed the Australia and TH CSAP acquisitions in the second quarter of 2019. The Australia acquisition closed on May 31, 2019. Prior to the closing, we, along with Gazal, jointly owned and managed a joint venture, PVH Australia, which licensed and operated businesses under the TOMMY HILFIGER, CALVIN KLEIN and Van Heusen brands, along with other owned and licensed brands. PVH Australia came under our full control as a result of the Australia acquisition and we now operate directly those businesses. The aggregate net purchase price for the shares acquired was $59 million, net of cash acquired and after taking into account the proceeds from the divestiture to a third party of an office building and warehouse owned by Gazal in June 2019. We completed the TH CSAP acquisition on July 1, 2019 for $74 million, as a result of which we now operate directly the Tommy Hilfiger retail business in the Central and Southeast Asia market. Please see Note 3, “Acquisitions,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion. |
| • | We entered into a licensing agreement on May 30, 2019 with G-III for the design, production and wholesale distribution of CALVIN KLEIN JEANS women’s jeanswear collections in the United States and Canada, which resulted in the discontinuation of our directly operated Calvin Klein North America women’s jeanswear wholesale business in 2019. |
We refinanced on April 29, 2019 our senior credit facilities and recorded pre-tax debt modification and extinguishment charges of $5 million. Please see the section entitled “Liquidity and Capital Resources” below for ourCalvin Klein business (the “Calvin Klein restructuring”). The strategic changes includefurther discussion.
| • | We closed our TOMMY HILFIGER flagship and anchor stores in the United States (the “TH U.S. store closures”)in the first quarter of 2019 and recorded pre-tax costs of $55 million, primarily consisting of noncash lease asset impairments. Please see Note 12, “Fair Value Measurements,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion of the noncash lease asset impairments. |
| • | We announced on January 10, 2019 a restructuring in connection with strategic changes for ourCalvin Klein business (the “Calvin Klein restructuring”). The strategic changes included (i) the closure of the CALVIN KLEIN 205 W39 NYC brand (formerly Calvin Klein Collection), (ii) the closure of the flagship store on Madison Avenue in New York, New |
York (collectively with (i), the closure of the CALVIN KLEIN 205 W39 NYC brand (formerly Calvin Klein“CK Collection closure”), (ii) the closure of the flagship store on Madison Avenue in New York, New York, (iii) the restructuring of the Calvin Klein creative and design teams globally, and (iv) the consolidation of operations for the men’s Calvin Klein Sportswear and Calvin Klein Jeans businesses. All costs related to this restructuring were incurred by the end of 2019. We recorded pre-tax costs of $103 million during 2019 in connection with the Calvin Klein restructuring, consisting of a $30 million noncash lease asset impairment resulting from the closure of the flagship store on Madison Avenue in New York, New York, $26 million of contract termination and other costs, $26 million of severance, $9 million of other noncash asset impairments and $13 million of inventory markdowns. We recorded pre-tax costs of $41 million in the fourth quarter of 2018, consisting of $27 million of severance, $7 million of noncash asset impairments, $4 million of contract termination and other costs and $2 million of inventory markdowns. We expect to incur additional pre-tax costs of approximately $130 million during 2019 in connection with the Calvin Klein restructuring, primarily consisting of severance, noncash asset impairments, lease and other contract termination costs, and inventory markdowns. Please see Note 17,18, “Exit Activity Costs,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion.
| • | We acquired on April 20, 2018 the Geoffrey Beene tradename from Geoffrey Beene for $17 million, of which $16 million was paid in cash. Prior to the acquisition, we had licensed the rights to design, market and distribute Geoffrey Beene dress shirts and neckwear from Geoffrey Beene. |
We issued on December 21, 2017 €600 million euro-denominated principal amount of 3 1/8% senior notes due December 15, 2027. We redeemed on January 5, 2018 our $700 million principal amount of 4 1/2% senior notes due December 15, 2022 (using the proceeds of the senior notes due December 15, 2027) and recorded pre-tax debt extinguishment charges of $24 million. Please see the section entitled “Liquidity and Capital Resources” below for further discussion.
We amended on December 20, 2017 Mr. Tommy Hilfiger’s employment agreement, pursuant to which we made a cash buyout of a portion of the future payment obligation (the “Mr. Hilfiger amendment”). We recorded pre-tax charges of $83 million in 2017 in connection with the amendment.
We restructured our supply chain relationship with Li & Fung Trading Limited (“Li & Fung”) in a transaction that closed on September 30, 2017. Our non-exclusive buying agency agreement with Li & Fung was terminated in connection with this transaction.transaction (the “Li & Fung termination”). We recorded pre-tax charges of $54 million in 2017 in connection with the termination.
We acquired on September 1, 2017 the Tommy Hilfiger and Calvin Klein wholesale and concessions businesses in Belgium and Luxembourg from a former agent (the “Belgian acquisition”). for $12 million. As a result of this acquisition, we now operate directly our Tommy Hilfiger and Calvin Klein businesses in this region. The total consideration for the acquisition was $12 million.
We acquired on March 30, 2017 True & Co., a direct-to-consumer intimate apparel digital commerce retailer.digital-centric retailer, for $28 million, net of $400,000 of cash acquired. This acquisition enabled us to participate further in the fast-growing online channel and provided a platform to increase innovation, data-driven decisions and speed in the way we serve our consumers across our channels of distribution. The total consideration for the acquisition was $28 million, net of $400,000 of cash acquired.
We completed the relocation of our Tommy Hilfiger office in New York in 2017 and recorded related pre-tax charges of $19 million, including noncash depreciation expense.
We purchased a group annuity in 2017 for certain participants of our retirement plans under which certain of our benefit obligations were transferred to an insurer. We recorded a pre-tax loss of $9 million in connection with the noncash settlement of such benefit obligations.
| • | We acquired on April 13, 2016 the 55% ownership interests in our former joint venture for TOMMY HILFIGER in China that we did not already own (the “TH China acquisition”). As a result of the TH China acquisition, we now operate directly our Tommy Hilfiger business in this market. We recorded pre-tax charges of $24 million and $27 million in 2018 and 2017, respectively, primarily consisting of noncash amortization of short-lived assets. |
Our Tommy Hilfiger and Calvin Klein businesses each have substantial international components that expose us to significant foreign exchange risk. Our Heritage Brands business also has international components but those components are not significant to the business. Our results of operations in local foreign currencies are translated into United States dollars using an average exchange rate over the representative period. Accordingly, our results of operations are unfavorably impacted during times of a strengthening United States dollar against the foreign currencies in which we generate significant revenue and earnings and favorably impacted during times of a weakening United States dollar against those currencies. Over 50% of our $9.657 billion of2019 revenue in 2018 was subject to foreign currency translation. The United States dollar strengthened against most major currencies
in the latter part of 2018 and in 2019, particularly the euro, which is the foreign currency in which we transact the most business. As a result, our 2019 revenue and net income decreased by approximately $215 million and $25 million, respectively, as compared to 2018 due to the impact of foreign currency translation. We currently expect a decrease in our revenue and net income in 2020 as compared to 2019 due to the impact of foreign currency translation.
There is also a transactional impact on our financial results because inventory typically is purchased in United States dollars by our foreign subsidiaries. As with translation, our results of operations will be unfavorably impacted during times of a strengthening United States dollar, as the increased local currency value of inventory results in a higher cost of goods in local currency when the goods are sold, and favorably impacted during times of a weakening United States dollar, as the decreased local currency value of inventory results in a lower cost of goods in local currency when the goods are sold. We use foreign currency forward exchange contracts to hedge against a portion of the exposure related to this transactional impact. The contracts cover at least 70% of the projected inventory purchases in United States dollars by our foreign subsidiaries. These contracts are generally entered into 12 months in advance of the related inventory purchases. Therefore, the impact of fluctuations of the United States dollar on the cost of inventory purchases covered by these contracts may be realized in our results of operations in the year following their inception, as the underlying inventory hedged by the contracts is sold.
Our 2019 net income included a slight benefit as compared to 2018 as a result of this transactional impact. However, the unfavorable impact of a strengthening United States dollar against most major currencies in the latter part of 2018 and in 2019, particularly the euro, is expected to negatively impact our gross margin during 2020. Additionally, there is a transactional impact related to changes in SG&A expenses as a result of fluctuations in foreign currency exchange rates.
Further, we have exposure to changes in foreign currency exchange rates related to our €950 million aggregate principal amount of euro-denominated senior notes asthat we had issued in the United States. The strengthening of the United States dollar against the euro would require us to use a lower amount of our cash flows from operations to pay interest and make long-term debt repayments, whereas the weakening of the United States dollar against the euro would require us to use a greater amount of our cash flows from operations to pay interest and make long-term debt repayments. We designated the carrying amount of these euro-denominated senior notes that we had issued in the United States as net investment hedges of our investments in certain of our foreign subsidiaries that use the euro as their functional currency. As a result, the remeasurement of these foreign currency borrowings at the end of each period is recorded in equity.
Retail comparable store sales discussed below refer to sales from Company-operated retail stores that have been open and operated by us for at least 12 months, as well as sales from Company-operated digital commerce sites for those businesses and regions that have operated the related digital commerce site for at least 12 months. Sales from retail stores and Company-operated digital commerce sites that are closed or shut down during the year are excluded from the calculation of retail comparable store sales. Sales for retail stores that are relocated, materially altered in size or closed for a certain numberprolonged period of consecutive daystime and sales from Company-operated digital commerce sites that are materially altered are also excluded from the calculation of retail comparable store sales until such stores or sites have been in their new location or in their newly renovated state, as applicable, for at least 12 months. Retail comparable store sales are based on local currencies and comparable weeks. As a result of the 53rd week in 2017, the 2018 retail comparable store sales are more appropriately compared with the 52 week period ended February 4, 2018 (which excludes for this purpose the first week of 2017). AllAs such, all 2018 retail comparable store sales are presented on this shifted basis. 2017 retail comparable store sales exclude the extra week in 2017.
The following table summarizes our income statements in 2019, 2018 2017 and 2016:2017:
| 2018 | 2017 | 2016 | 2019 | 2018 | 2017 | |||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||
| Net sales | $ | 9,154 | $ | 8,439 | $ | 7,791 | $ | 9,400 | $ | 9,154 | $ | 8,439 | ||||||||||
| Royalty revenue | 376 | 366 | 321 | 380 | 376 | 366 | ||||||||||||||||
| Advertising and other revenue | 127 | 109 | 91 | 129 | 127 | 109 | ||||||||||||||||
| Total revenue | 9,657 | 8,915 | 8,203 | 9,909 | 9,657 | 8,915 | ||||||||||||||||
| Gross profit | 5,308 | 4,894 | 4,370 | 5,388 | 5,308 | 4,894 | ||||||||||||||||
| % of total revenue | 55.0 | % | 54.9 | % | 53.3 | % | 54.4 | % | 55.0 | % | 54.9 | % | ||||||||||
| SG&A | 4,433 | 4,245 | 3,678 | 4,715 | 4,433 | 4,245 | ||||||||||||||||
| % of total revenue | 45.9 | % | 47.6 | % | 44.8 | % | 47.6 | % | 45.9 | % | 47.6 | % | ||||||||||
| Non-service related pension and postretirement cost (income) | 5 | 3 | (41 | ) | ||||||||||||||||||
| Non-service related pension and postretirement cost | 90 | 5 | 3 | |||||||||||||||||||
| Debt modification and extinguishment costs | — | 24 | 16 | 5 | — | 24 | ||||||||||||||||
| Other noncash gain, net | — | — | 71 | |||||||||||||||||||
| Other noncash loss, net | 29 | — | — | |||||||||||||||||||
| Equity in net income of unconsolidated affiliates | 21 | 10 | 0 | 10 | 21 | 10 | ||||||||||||||||
| Income before interest and taxes | 892 | 632 | 789 | 559 | 892 | 632 | ||||||||||||||||
| Interest expense | 121 | 128 | 121 | 120 | 121 | 128 | ||||||||||||||||
| Interest income | 5 | 6 | 6 | 5 | 5 | 6 | ||||||||||||||||
| Income before taxes | 776 | 510 | 674 | 444 | 776 | 510 | ||||||||||||||||
| Income tax expense (benefit) | 31 | (26 | ) | 125 | 29 | 31 | (26 | ) | ||||||||||||||
| Net income | 745 | 536 | 549 | 415 | 745 | 536 | ||||||||||||||||
| Less: Net loss attributable to redeemable non-controlling interest | (2 | ) | (2 | ) | 0 | (2 | ) | (2 | ) | (2 | ) | |||||||||||
| Net income attributable to PVH Corp. | $ | 746 | $ | 538 | $ | 549 | $ | 417 | $ | 746 | $ | 538 | ||||||||||
Total Revenue
Total revenue was $9.909 billion in 2019, $9.657 billion in 2018 and $8.915 billion in 2017 and $8.203 billion in 2016.2017. Revenue in 2017 included the benefit of a 53rd week. The increase in revenue of $252 million, or 3%, in 2019 as compared to 2018 was due principally to the net effect of the following items:
| • | The net addition of an aggregate $367 million of revenue, or an 8% increase over the prior year, attributable to our Tommy Hilfiger International and Tommy Hilfiger North America segments, which included a negative impact of $129 million, or 3%, related to foreign currency translation. Tommy Hilfiger International segment revenue increased 15% (including a 5% negative foreign currency impact), driven principally by outperformance in Europe and the addition of revenue resulting from the Australia and TH CSAP acquisitions. Tommy Hilfiger International comparable store sales increased 9%, including a benefit of 4% from sales on our digital commerce sites. Revenue in our Tommy Hilfiger North America segment decreased 1%, as growth in the North America wholesale business was more than offset by a 6% decline in Tommy Hilfiger North America comparable store sales due to weakness in traffic and consumer spending trends, especially in stores located in international tourist locations. |
The net reduction of an aggregate $63 million of revenue, or a 2% decrease compared to the prior year, attributable to our Calvin Klein International and Calvin Klein North America segments, which included a negative impact of $85 million, or 2%, related to foreign currency translation. Calvin Klein International segment revenue increased 3% (including a 4% negative foreign currency impact), as continued solid growth in Europe and the addition of revenue resulting from the Australia acquisition were partly offset by the negative impacts of (i) softness experienced in Asia due, in part, to the business disruptions caused by the protests in Hong Kong SAR and the trade tensions between the United States and China and (ii) the reduction of revenue resulting from the CK Collection closure. Calvin Klein International comparable store sales decreased 1%. Revenue in our Calvin Klein North America segment decreased 7%, driven by the effect of the G-III license and a 2% decrease in Calvin Klein North America comparable store sales due to weakness in traffic and consumer spending trends, especially in stores located in international tourist locations.
The reduction of an aggregate $52 million of revenue, or a 3% decrease compared the prior year, attributable to our Heritage Brands Retail and Heritage Brands Wholesale segments, primarily due to weakness in the North America wholesale business and a 2% decline in comparable store sales.
The increase in revenue of $742 million, or 8%, in 2018 as compared to 2017 was due principally to the effect of the following items:
The addition of an aggregate $451 million of revenue, or a 12% increase over the prior year, attributable to our Tommy Hilfiger International and Tommy Hilfiger North America segments, which included the addition of $49 million, or 1%, related to the impact of foreign currency translation. Tommy Hilfiger International segment revenue increased 15% (including a 2% positive foreign currency impact), driven by continued strong performance across all regions and channels. Tommy Hilfiger International comparable store sales increased 13%. Revenue in our Tommy Hilfiger North America segment increased 6%, principally attributable to strength in the wholesale business and a 5% increase in Tommy Hilfiger North America comparable store sales increase.sales.
The addition of an aggregate $270 million of revenue, or an 8% increase over the prior year, attributable to our Calvin Klein International and Calvin Klein North America segments, which included the addition of $12 million related to the impact of foreign currency translation. Calvin Klein International segment revenue increased 10%, driven by growth in Europe and Asia. Calvin Klein International comparable store sales increased 5%. Revenue in our Calvin Klein North America segment increased 5% primarily as a result of growth in the wholesale business and a 1% increase in Calvin Klein North America comparable store sales increase.sales.
The addition of an aggregate $21 million of revenue, or a 1% increase over the prior year, attributable to our Heritage Brands Retail and Heritage Brands Wholesale segments. Comparable store sales increased 1%.
partners. We currently expect that revenue will increase 4%decrease significantly in 20192020 compared to 2018,2019, inclusive of a negative impact of approximately 1% related to foreign currency translation.translation, primarily due to the negative impacts to our businesses caused by the COVID-19 outbreak. Revenue forin 2020 is also expected to decrease by approximately $150 million due to the Tommy Hilfiger businessaggregate net effect of reductions resulting from (i) the Speedo transaction, which is expected to increase approximately 6% compared to 2018, inclusiveclose in the first quarter of a negative impact2020, and (ii) the G-III license, which commenced in 2019, partially offset by an addition of approximately 2% related to foreign currency translation. Revenue for the Calvin Klein business is expected to increase approximately 2% compared to 2018, inclusive of a negative impact of approximately 1% related to foreign currency translation. Revenue for our Heritage Brands business is expected to increase approximately 3% compared to 2018. Our 2019 guidance assumes that bothrevenue resulting from (iii) the Australia acquisition and the TH CSAP acquisition will closeacquisitions, which closed in the second quarter of 2019. These pending acquisitions are expected to add approximately $150 million of revenue in 2019.
Gross Profit
Gross profit is calculated as total revenue less cost of goods sold and gross margin is calculated as gross profit divided by total revenue. Included as cost of goods sold are costs associated with the production and procurement of product, such as inbound freight costs, purchasing and receiving costs and inspection costs. Also included as cost of goods sold are the amounts recognized on foreign currency forward exchange contracts as the underlying inventory hedged by such forward exchange contracts is sold. Warehousing and distribution expenses are included in SG&A expenses. All of our royalty, advertising and other revenue is included in gross profit because there is no cost of goods sold associated with such revenue. As a result, our gross profit may not be comparable to that of other entities.
The following table shows our revenue mix between net sales and royalty, advertising and other revenue, as well as our gross margin for 2019, 2018 2017 and 2016:2017:
| 2018 | 2017 | 2016 | 2019 | 2018 | 2017 | |||||||||||
| Components of revenue: | ||||||||||||||||
| Net sales | 94.8 | % | 94.7 | % | 95.0 | % | 94.9 | % | 94.8 | % | 94.7 | % | ||||
| Royalty, advertising and other revenue | 5.2 | 5.3 | 5.0 | 5.1 | 5.2 | 5.3 | ||||||||||
| Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||
| Gross margin | 55.0 | % | 54.9 | % | 53.3 | % | 54.4 | % | 55.0 | % | 54.9 | % | ||||
Gross profit in 2019 was $5.388 billion, or 54.4% of total revenue, as compared to $5.308 billion, or 55.0% of total revenue, in 2018. The 60 basis point decrease in gross margin was principally driven by (i) a gross margin decline in our Tommy Hilfiger North America business due to more promotional selling as compared to the prior year, (ii) the impact of additional inventory reserves recorded in the fourth quarter of 2019 in anticipation of lower 2020 sales trends as a result of the onset of the COVID-19 outbreak, (iii) short-lived noncash inventory valuation adjustments recorded in connection with the Australia and TH CSAP acquisitions, and (iv) the negative impact of tariffs imposed on goods imported from China into the United States. These decreases were partially offset by the favorable impact of faster growth in our Tommy Hilfiger
International and Calvin Klein International segments than in our North America segments, as our International segments generally carry higher gross margins, as well as gross margin improvements realized in our Calvin Klein North America business.
Gross profit in 2018 was $5.308 billion, or 55.0% of total revenue, as compared to $4.894 billion, or 54.9% of total revenue, in 2017. The 10 basis point increase in gross margin was principally driven by (i) a favorable mix of business due to faster growth in our Tommy Hilfiger International and Calvin Klein International segments than in our North America segments, as our International segments generally carry higher gross margins, and (ii) gross margin improvement in our Tommy Hilfiger business. Partially offsetting these increases were gross margin declines in our Calvin Klein and Heritage Brands businesses principally due to more promotional selling.
SG&A Expenses
Our SG&A expenses were sold.as follows:
| 2019 | 2018 | 2017 | |||||||||
| (In millions) | |||||||||||
| SG&A expenses | $ | 4,715 | $ | 4,433 | $ | 4,245 | |||||
| % of total revenue | 47.6 | % | 45.9 | % | 47.6 | % | |||||
SG&A expenses in 2019 will increasewere $4.715 billion, or 47.6% of total revenue, as compared to 2018$4.433 billion, or 45.9% of total revenue in 2018. The 170 basis point increase in SG&A expenses as a percentage of total revenue was principally attributable to (i) an increase in costs incurred in connection with the Calvin Klein restructuring, (ii) the costs incurred in connection with the Socks and Hosiery transaction, and (iii) the costs incurred in connection with the TH U.S. store closures. Also contributing to the increase was a change in the mix of business due to (i) the impact of expected faster growth in our Tommy Hilfiger International and Calvin Klein International segments than in our North America segments, as our International segments generally carry higher gross margins, and (ii) an expected increase in gross margin in our Calvin Klein business due to less promotional selling resulting from the restructuring initiatives being implemented related to our creative and design functions. These increases will be partially offset by short-lived noncash valuation adjustments expected to be recorded principally in connection with the Australia acquisition.
| 2018 | 2017 | 2016 | |||||||||
| (Dollars in millions) | |||||||||||
| SG&A expenses | $ | 4,433 | $ | 4,245 | $ | 3,678 | |||||
| % of total revenue | 45.9 | % | 47.6 | % | 44.8 | % | |||||
SG&A expenses in 2018 were $4.433 billion, or 45.9% of total revenue, as compared to $4.245 billion, or 47.6% of total revenue in 2017. The 170 basis point decrease in SG&A expenses as a percentage of total revenue was principally
attributable to the absence in 2018 of costs that were recorded in 2017 in connection with (i) the Mr. Hilfiger amendment, (ii) the Li & Fung termination, and (iii) the relocation of our Tommy Hilfiger office in New York, including noncash depreciation expense, and (iv) the consolidation within our warehouse and distribution network in North America.expense. Also contributing to the decrease was a leveraging of expenses in the Tommy Hilfiger business. These decreases were partially offset by (i) a change in the mix of business due to faster growth in our Tommy Hilfiger International and Calvin Klein International segments than in our North America segments, as our International segments generally carry higher SG&A expenses as percentages of total revenue, (ii) the costs incurred in connection with the Calvin Klein restructuring and (iii) an increase in corporate expenses due, in part, to investments in digital and information technology initiatives.
In light of the negative impacts on our business resulting from the COVID-19 outbreak, we are taking measures to significantly reduce SG&A expenses in 2017 were $4.245 billion, or 47.6% of total revenue,2020. As such, we currently expect our SG&A expenses in 2020 will be significantly lower as compared to $3.678 billion, or 44.8% of total revenue in 2016. The 280 basis point increase in SG&A expenses2019, including as a percentageresult of total revenue was principally attributablethe reductions resulting from these measures and the absence in 2020 of costs related to (i) a change in the mix of business due to faster growth in our Tommy Hilfiger International and Calvin Klein International segments than in our North America segments, as our International segments generally carry higher SG&A expenses as percentages of total revenue, (ii) the costs incurred in connection with the Mr. Hilfiger amendment, (iii) the costs incurred in connection with the Li & Fung termination, (iv) an increase in marketing expenditures, particularly in the Calvin Klein business, (v) an increase in corporate expenses due, in part, to investments in digital and sourcing initiatives, including start-up costs associated with PVH Ethiopia, (vi) the costs incurred in connection with the relocation of our Tommy Hilfiger office in New York, including noncash depreciation expense, (vii) the absence of the gain recorded in 2016 in connection with a payment made to us to exit a TOMMY HILFIGER flagship store in Europe and (viii) the costs incurred in connection with the consolidation within our warehouse and distribution network in North America. These increases were partially offset by (i) a reduction of costs incurred in connection with the TH China acquisition, primarily consisting of noncash valuation adjustments and amortization of short-lived assets,restructuring, (ii) the absence of the costs incurred in connection with the TH men’s tailored license terminationSocks and Hosiery transaction and (iii) the absence of costs incurred in connection with the Warnaco integration and related restructuring.
Non-Service Related Pension and Postretirement Cost (Income)
Non-service related pension and postretirement cost in 2019 was $90 million as compared to $5 million in 2018. Non-service related pension and postretirement cost in 2019 and 2018 included actuarial losses on our retirement plans of $98 million and $15 million, respectively. Please see Note 13, “Retirement and Benefit Plans,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion.
Non-service related pension and postretirement cost in 2018 was $5 million as compared to $3 million in 2017. Non-service related pension and postretirement cost in 2018 included a $15 million actuarial loss on our retirement plans. Non-service related pension and postretirement cost in 2017 included a $9 million loss recorded in connection with the noncash settlement of certain of our benefit obligations related to our retirement plans as a result of a group annuity purchased for certain participants under which such obligations were transferred to an insurer, as well as a $3 million actuarial loss on our retirement plans. Please see Note 12,13, “Retirement and Benefit Plans,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion.
We currently expect that non-service related pension and postretirement income(income) for 20192020 will be approximately $7$15 million compared to non-service related pension and postretirement cost of $5$90 million in 2018.2019. Our 2019 non-service related pension and postretirement cost included a $98 million actuarial loss on our retirement plans recorded in the fourth quarter. Non-service related pension and postretirement (income) cost recorded throughout the year is calculated using actuarial valuations that incorporate assumptions and estimates about financial market, economic and demographic conditions. Differences between estimated and actual results give rise to gains and losses that are recorded immediately in earnings, generally in the fourth quarter of the year, which can create volatility in our results of operations. Our 2018expectation of 2020 non-service related pension and postretirement cost included a $15
Debt Modification and Extinguishment Costs
We incurred costs totaling $5 million in 2019 in connection with the refinancing of our senior credit facilities. Please see the section entitled “Liquidity and Capital Resources” below for further discussion.
We incurred costs totaling $24 million in 2017 in connection with the early redemption of our $700 million 4 1/2% senior notes due December 15, 2022. Please see the section entitled “Liquidity and Capital Resources” below for further discussion.
Other Noncash Gain,Loss, Net
We recorded a pre-tax noncash loss of $142 million in the fourth quarter of 2019 related to the Speedo transaction and expected deconsolidation of the net assets of the Speedo North America business, consisting of a noncash impairment of our perpetual license right for the Speedo trademark, and a noncash loss to reduce the carrying value of the business to its estimated fair value, less costs to sell. Please see Note 4, “Assets Held For Sale,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion.
We recorded a pre-tax noncash gain of $153$113 million in 2016the second quarter of 2019 to write up our equity investmentinvestments in TH ChinaGazal and PVH Australia to fair value in connection with the TH ChinaAustralia acquisition. Please see Note 3, “Acquisitions,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion.
Equity in Net Income of Unconsolidated Affiliates
The equity in net income of unconsolidated affiliates was $10 million in 2019 as compared to $21 million in 2018 as compared toand $10 million during 2017 and $100,000 during 2016.in 2017. These amounts relate to our share of income (loss) from our PVH Australia joint venture, PVH Mexico joint venture (since(prior to acquiring it on May 31, 2019 through the formation of PVH Mexico on November 30, 2016)Australia acquisition), our former joint venture for the TOMMY HILFIGER, brand CALVIN KLEIN, Warner’s, Olga and Speedo brands in China (prior to the TH China acquisition on April 13, 2016), andMexico, our joint ventures for the TOMMY HILFIGER brand in India and Brazil, andour joint venture for the CALVIN KLEIN brand in India.India, and our newly formed PVH Legwear joint venture for the TOMMY HILFIGER, CALVIN KLEIN, IZOD, Van Heusen and Warner’s brands and other owned and licensed trademarks in the United States and Canada. (PVH Legwear began operations in December 2019.) Also included is our share of income (loss) income from our investments in Karl Lagerfeld Holding B.V. (“Karl Lagerfeld”) and beginning in Gazal (prior to acquiring it on May 31, 2019 through the third quarterAustralia
acquisition). The equity in net income for 2019 decreased as compared to 2018, primarily due to having only a partial year of 2016,income from our investments in Gazal.Gazal and PVH Australia and one-time expenses of $2 million recorded on our equity investments in Gazal and PVH Australia prior to the Australia acquisition closing. Our investments in the continuing joint ventures and Karl Lagerfeld and Gazal are being accounted for under the equity method of accounting. Subsequent to the closing of the Australia acquisition, we began to consolidate the operations of Gazal and PVH Australia into our financial statements. Please see the section entitled “Investments in Unconsolidated Affiliates” within “Liquidity and Capital Resources” below for further discussion. The equity in net income of unconsolidated affiliates in 2016 included a one-time expense of $6 million recorded on our equity investment in TH China prior to the acquisition closing.
We currently expect that our equity in net income of unconsolidated affiliates for 2020 will include an increase in income on our investment in PVH Legwear as compared to 2019, willas we recognize a full year of income in 2020, offset by a decrease in income on our investments due to the negative impact of the COVID-19 outbreak on our unconsolidated affiliates’ businesses in 2020.
Interest Expense, Net
Net interest expense decreased to $115 million in 2019 from $116 million in 2018 primarily due to lower interest rates on our senior unsecured credit facilities as compared to 2018, aspartially offset by the income we recognize$9 million loss on remeasurement of our investmentsmandatorily redeemable non-controlling interest that was recognized in Gazal and PVH Australia in 2019 will only be for a partial year. Following the closing ofconnection with the Australia acquisition, which is expected to occur inacquisition. Please see the second quarter of 2019, we will consolidate the results of Gazalsection entitled “Financing Arrangements” within “Liquidity and PVH Australia into our financial statements.Capital Resources” below for further discussion.
Net interest expense decreased to $116 million in 2018 from $122 million in 2017 primarily due to (i) the net impact of the early redemption of our $700 million 4 1/2% senior notes in January 2018 and issuance of €600 million euro-denominated 3 1/8% senior notes in December 2017 and (ii) the cumulative impact of long-term debt repayments made during 2018 and 2017, partially offset by an increase in short-term borrowings and interest rates as compared to 2017. Please see the section entitled “Financing Arrangements” within “Liquidity and Capital Resources” below for further discussion.
Income Taxes
Income tax expense (benefit) was as follows:
| 2018 | 2017 | 2016 | 2019 | 2018 | 2017 | |||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||
| Income tax expense (benefit) | $ | 31 | $ | (26 | ) | $ | 125 | $ | 29 | $ | 31 | $ | (26 | ) | ||||||||
| Income tax expense (benefit) as a % of pre-tax income | 4.0 | % | (5.1 | )% | 18.6 | % | 6.5 | % | 4.0 | % | (5.1 | )% | ||||||||||
The U.S.United States Tax LegislationCuts and Job Act of 2017 (the “U.S. Tax Legislation”) was enacted on December 22, 2017. The U.S. Tax Legislation is comprehensive and significantly revised the United States tax code. The revisions that significantly impact us are (i) the reduction of the corporate income tax rate from 35.0% to 21.0%, (ii) the imposition of a one-time transition tax on earnings of foreign subsidiaries deemed to be repatriated, (iii) the implementation of a modified territorial tax system, (iv) the introduction of a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations (known as “GILTI”) and a beneficial tax rate to be applied against foreign derived intangible income (known as “FDII”) and (v) the introduction of a base erosion anti-abuse tax measure (known as “BEAT”) that taxes certain payments between United States corporations and their subsidiaries.
We recorded a provisional net tax benefit of $53 million in the fourth quarter of 2017 in connection with the U.S. Tax Legislation, consisting of a $265 million benefit primarily from the remeasurement of our net United States deferred tax liabilities, partially offset by a $38 million valuation allowance on our foreign tax credits and a $174 million transition tax on earnings of foreign subsidiaries deemed to be repatriated. In the fourth quarter of 2018, we completed our final analysis of the impacts of the U.S. Tax Legislation and recorded a net tax benefit of $25 million to adjust the provisional amount recorded in 2017, during the measurement period allowed by the Securities and Exchange Commission. The $25 million net
tax benefit included the release of a $26 million valuation allowance on our foreign tax credits, partially offset by a $2 million expense related to the remeasurement of our net United States deferred tax liabilities.
We file income tax returns in more than 40 international jurisdictions each year. Most of the international jurisdictions in which we file tax returns had lower statutory tax rates than the United States statutory tax rate in 2016 and in 2017 prior to the effective date of the U.S. Tax Legislation. A substantial amount of our earnings comes from ourare in international operations,jurisdictions, particularly in the Netherlands and Hong Kong SAR, where income tax rates, coupled with special rates levied on income from certain of our jurisdictional activities, continue to beare lower than the United States statutory income tax rate, after giving effect to the U.S. Tax Legislation, and reduced our consolidated effective income tax rate during 2019, 2018 2017 and 2016.2017. We expect to benefit from these special rates until 2022. The reduction in the United States statutory income tax rate from 35.0% to 21.0% as a result of the U.S. Tax Legislation did not have a significant impact on our overall effective tax rate due to our mix of earnings.
Our effective income tax rate for 2019 was lower than the 21.0% United States statutory income tax rate primarily due to (i) the favorable impact on certain liabilities for uncertain tax positions resulting from the expiration of applicable statutes of limitation and the settlement of a multi-year audit from an international jurisdiction, which together resulted in a benefit to our effective income tax rate of 11.8%, and (ii) the favorable impact of a tax exemption on the noncash gain recorded to write-up our existing equity investments in Gazal and PVH Australia to fair value in connection with the Australia acquisition, which resulted in a 5.4% benefit to our effective income tax rate.
The effective income tax rate for 2019 was 6.5% compared with 4.0% in 2018. The 2019 effective income tax rate was higher than the effective income tax rate for 2018 primarily due to (i) the absence of a 5.3% benefit to our 2018 effective income tax rate related to the remeasurement of certain of our net deferred tax liabilities in connection with the legislation enacted in the Netherlands known as the “2019 Dutch Tax Plan” and (ii) the absence of a 3.2% benefit to our 2018 effective income tax rate related to the U.S. Tax Legislation, partially offset by (iii) a favorable change in our uncertain tax positions activity of 8.1%, which includes the benefit to our 2019 effective income tax rate resulting from settlement of a multi-year audit from an international jurisdiction. The variance between the 2019 and 2018 effective income tax rates is also affected by the substantial change in our pre-tax income, which was $444 million in 2019 and $776 million in 2018. As a result, the effect that discrete tax amounts have on the effective income tax rate in each year is not comparable.
Our effective income tax rate for 2018 was lower than the 21.0% United States statutory income tax rate primarily due to (i) a $41 million benefit from the remeasurement of certain of our net deferred tax liabilities in connection with the enactment of legislation in the Netherlands known as the “20192019 Dutch Tax Plan,” which became effective on January 1, 2019 and includes a gradual reduction of the corporate income tax rate by 2021, and resulted in a benefit to our effective income tax rate of 5.3%, (ii) the favorable impact on certain liabilities for uncertain tax positions resulting from the expiration of applicable statutes of limitation, which resulted in a benefit to our effective income tax rate of 3.7%, (iii) a net tax benefit of $25 million recorded in 2018 to adjust the provisional amount recorded in 2017 in connection with the U.S. Tax Legislation, which resulted in a benefit to our effective income tax rate of 3.2%, and (iv) the benefit of overall lower tax rates in certain international jurisdictions where we file tax returns.
The effective income tax rate for 2018 was 4.0% compared with (5.1)% in 2017. The 2018 effective income tax rate was higher than the effective income tax rate for 2017 primarily due to (i) a lower net benefit recorded in connection with the U.S. Tax Legislation, which resulted in a 3.2% benefit to our 2018 effective income tax rate compared with a 10.4% benefit to our 2017 effective income tax rate, (ii) an unfavorable change in our uncertain tax positions activity of 3.8%, and (iii) the absence of a 3.0% benefit to our 2017 effective income tax rate resulting from an excess tax benefit from the exercise of stock
options by our Chairman and Chief Executive Officer. These unfavorable impacts to our effective income tax rate for 2018 were partially offset by a 5.3% benefit to our 2018 effective income tax rate from the remeasurement of certain of our net deferred tax liabilities in connection with the 2019 Dutch Tax Plan.
As a result of the U.S. Tax Legislation, which reduced the United States statutory income tax rate from 35.0% to 21.0% effective January 1, 2018, our United States statutory income tax rate for 2017 was a blended rate of 33.7%. Our effective income tax rate for 2017 was lower than the United States statutory income tax rate primarily due to (i) the provisional net benefit of $53 million recorded in connection with the U.S. Tax Legislation, which resulted in a benefit to our 2017 effective income tax rate of 10.4%, (ii) the benefit of overall lower tax rates in certain international jurisdictions where we file tax returns, and (iii) the overall benefit of certain discrete items, including the favorable impact on certain liabilities for uncertain tax positions and an excess tax benefit from the exercise of stock options by our Chairman and Chief Executive Officer, which resulted in benefits to our 2017 effective income tax rate of 7.5% and 3.0%, respectively.
Our tax rate is affected by many factors, including the mix of international and domestic pre-tax earnings, discrete events arising from specific transactions, and new regulations, as well as audits by tax authorities and the receipt of new information, which can cause us to change our estimate for uncertain tax positions. Please see Note 9,10, “Income Taxes,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion.
Redeemable Non-Controlling Interest
We have a joint venture in Ethiopia with Arvind named PVH Ethiopia,Limited, in which we own a 75% interest. We consolidate the results of PVH Ethiopia in our consolidated financial statements. PVH Ethiopia was formed to operate a manufacturing facility that produces finished products for us for distribution primarily in the United States. The manufacturing facility began operations in 2017.
The net loss attributable to the redeemable non-controlling interest in PVH Ethiopia was immaterial in 2019, 2018 2017 and 2016.2017. We currently expect that the net loss attributable to the redeemable non-controlling interest for 20192020 will also be immaterial. Please see Note 6,7, “Redeemable Non-Controlling Interest,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Summary
Cash and cash equivalents at February 3, 20192, 2020 was $452$503 million, a decreasean increase of $42$51 million from the amount at February 4, 20183, 2019 of $494$452 million. The change in cash and cash equivalents included the impact of (i) $302$325 million of common stock repurchases under the stock repurchase program, (ii) $150$71 million of long-term debt repayments, (iii) a $16$59 million net payment made in connection with the Australia acquisition, and (iv) a $74 million payment made in connection with the acquisition of the Geoffrey Beene tradename, and (iv) a $10 million contribution to our defined benefit pension plans.TH CSAP acquisition.
Cash flow in 20192020 will be impacted by various factors in addition to those noted below in this “Liquidity and Capital Resources” section, including (i) expectedmandatory long-term debt repayments of approximately $150$14 million, subject to exchange rate fluctuations, (ii) expected common stock repurchases under the stock repurchase program of approximately $200$111million, which reflects stock repurchases through March 2020 with no further repurchases planned for the remainder of 2020, and (iii) the expected net considerationproceeds of $170 million, subject to be paid fora working capital adjustment, related to the Australia acquisition of A$124 million (approximately $90 million based on the current exchange rate in effect), and (iv) the expected consideration to be paid for the TH CSAP acquisition,Speedo transaction, which is estimatedexpected to close in the first quarter of 2020. In addition, in March 2020 we increased the aggregate borrowings outstanding under our senior unsecured revolving credit facilities, other short-term revolving credit facilities and unsecured commercial paper note program to approximately $930 million, in order to increase our cash position and preserve financial flexibility in responding to the impacts of the COVID-19 outbreak on our business. Given the dynamic nature of the COVID-19 outbreak, our estimates of cash flows in 2020 may be approximately $75 million.subject to material significant change, including as a result of the actual impact of the COVID-19 outbreak on our 2020 earnings, additional borrowings under existing or new financing arrangements, excess inventories, delays in collection of, or inability to collect on, certain trade receivables, and other working capital changes that we may experience as a result of the COVID-19 outbreak.
As of February 3, 2019,2, 2020, approximately $415$405 million of cash and cash equivalents was held by international subsidiaries. Prior to the enactment of the U.S. Tax Legislation, our undistributed foreign earnings were considered permanently reinvested and, as such, United States federal and state income taxes were not previously recorded on these earnings. As a result of the U.S. Tax Legislation, substantially all of our earnings in foreign subsidiaries generated prior to the enactment of the U.S. Tax Legislation were deemed to have been repatriated and, as a result, we recorded a one-time transition tax of $174 million in 2017. Our intent is to reinvest indefinitely substantially all of our earnings in foreign subsidiaries outside of the United States. However, if management decides at a later date to repatriate these earnings to the United States, we may be required to accrue and pay additional taxes, including any applicable foreign withholding tax and United States state income taxes. It is not practicable to estimate the amount of tax that might be payable if these earnings were repatriated due to the complexities associated with the hypothetical calculation.
Operations
Cash provided by operating activities was $1.020 billion in 2019 compared to $852 million in 2018 compared to $644 million in 2017.2018. The increase in cash provided by operating activities as compared to the prior year was primarily driven by an increasechanges in working capital, including a favorable change in trade receivables and inventories, partially offset by a decrease in net income as adjusted for noncash charges, partially offset by changes in working capital, including (i) an increase in trade receivables due, in part, to an increase in wholesale sales and (ii) an increase in inventories, primarily due to an expected increase in sales for the first quarter of 2019 as compared to the prior year period, as well as an acceleration of receipts in advance of potential tariffs on goods imported from China.charges.
In connection with our acquisition of Calvin Klein, we were obligated to pay Mr. Calvin Klein contingent purchase price payments based on 1.15% of total worldwide net sales (as defined in the acquisition agreement, as amended) of products bearing any of the CALVIN KLEIN brands with respect to sales made through February 12, 2018. A significant portion of the
sales on which the payments to Mr. Klein have beenwere made were wholesale sales by us and our licensees and other partners to retailers. Contingent purchase price payments totaled $16 million and $56 million and $53 millionin 2018 and 2017, and 2016, respectively. All paymentsThe final payment due to Mr. Klein under the agreement have been made. All contingent purchase price payments are subject to audit, as per the terms of the acquisition agreement. As a result of accounting guidance adoptedwas made in the firstsecond quarter of 2018, contingent purchase price payments to Mr. Klein are now classified as operating activities in our Consolidated Statements of Cash Flows, instead of the previous classification as investing activities. Please see Note 1, “Summary of Significant Accounting Policies,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion of the accounting guidance.2018.
Capital Expenditures
Our capital expenditures in 20182019 were $379$345 million compared to $358$379 million in 2017.2018. The capital expenditures in 2018 primarily related to (i) upgrading and enhancing our operating, supply chain and logistics systems and our digital commerce platforms, (ii) the renovation and expansion of our administrative offices in Amsterdam, and (iii) investments in new stores and store expansions. We currently expect that capital expenditures for 2019 will increase to approximately $425 million and will include expenditures primarily related to (i) investments in new stores and store expansions, (ii) continued investments to upgrade and enhance our operating, supply chain and logistics systems and our digital commerce platforms and (iii) the expansion of our warehouse and distribution network in North America. We currently expect that capital expenditures for 2020 will decrease to approximately $190 million and will include only certain minimum required expenditures in our retail stores and expenditures for projects currently in progress, primarily related to (i) investments to support the multi-year upgrade of our platforms and systems worldwide and (ii) enhancements to our warehouse and distribution network. Given the dynamic nature of the COVID-19 outbreak, our estimates of capital expenditures in 2020 may be subject to change. Our capital expenditures may differ materially compared to our current expectations as a result.
Investments in Unconsolidated Affiliates
We own a 50%49% economic interest in our newly formed PVH Australia.Legwear joint venture. We made payments of $28 million to PVH Legwear during 2019 to contribute our share of the joint venture funding.
We held an approximately 22% ownership interest in Gazal and a 50% ownership interest in PVH Australia until the closing of the Australia acquisition on May 31, 2019. These investments were accounted for under the equity method of accounting. We derecognized our equity investments in Gazal and PVH Australia and began to consolidate the operations of Gazal and PVH Australia in our financial statements effective with the closing of the transaction. We received aggregate dividends of $6 million, $3$8 million and $1$4 million from Gazal and PVH Australia during 2018, 2017 and 2016, respectively.
We acquired a 51% economic interest in a joint venture, Calvin Klein Arvind Fashion Private Limited (“CK India”) in 2013. We sold 1% of our interest for $400,000 in 2017, decreasing our economic interest in CK India to 50%. Prior to the sale, we were not deemed to hold a controlling interest in CK India as the shareholders agreement provided the partners with equal rights. CK India licenses from one of our subsidiaries the rights to the CALVIN KLEIN trademarks in India for certain product categories. We made payments of $2 million to CK India in each ofduring 2017 and 2016 to contribute our share of the joint venture funding.
We own a 50% economic interest in a joint venture, Tommy Hilfiger Arvind Fashion Private Limited (“TH India”). TH India licenses from one of our subsidiaries the rights to the TOMMY HILFIGER trademarks in India for certain product categories. Arvind, our joint venture partner in PVH Ethiopia and CK India, is also our joint venture partner in TH India. We made payments of $3 million to TH India during 2017 to contribute our share of the joint venture funding.
We acquired a 40% economic interest informed with two other parties a joint venture, Tommy Hilfiger do Brasil S.A. (“TH Brazil”), in 2012.2012, in which we have a 40% economic interest. We acquired an approximately 1% additional interest for $300,000 in 2017, increasing our economic interest in TH Brazil to approximately 41%. TH Brazil licenses from one of our subsidiaries the rights to the TOMMY HILFIGER trademarks in Brazil for certain product categories. We made payments of $3 million and $2 million to TH Brazil during 2017 and 2016, respectively, to contribute our share of the joint venture funding. We issued a note receivable to TH Brazil in 2016 for $12 million, of which $6 million was repaid in 2016 and the remaining balance, including accrued interest, was repaid in 2017.
We, andalong with Grupo Axo, S.A.P.I. de C.V., formed a joint venture (“PVH MexicoMexico”) in 2016. We2016, in which we own a 49% economic interest in the joint venture.interest. PVH Mexico licenses from certain of our wholly owned subsidiaries the rights to distribute and sell certain TOMMY HILFIGER, CALVIN KLEIN, Warner’s, Olga and Speedo brand products in Mexico. PVH Mexico was formed by merging our wholly owned subsidiary that principally operated and managed the Calvin Klein business in Mexico (the “Mexico business”) with a wholly owned subsidiary of Grupo Axo that distributes certain TOMMY HILFIGER brand products in Mexico. In connection with the formation of PVH Mexico, we deconsolidated the Mexico business and began accounting for our 49% interest under the equity method of accounting in 2016. We made paymentsreceived dividends of $7 million tofrom PVH Mexico during 20162019.
Payments made to contribute our share of the joint venture funding. Please see Note 5, “Investments in Unconsolidated Affiliates,” inventures funding and the Notesrepayment of the note receivable we issued to Consolidated Financial StatementsTH Brazil were included in Item 8our net cash used by investing activities in our Consolidated Statements of this reportCash Flows for further discussion.the respective period. The dividends received from our investments in unconsolidated affiliates were included in our net cash provided by operating activities in our Consolidated Statements of Cash Flows for the respective period.
Loan to a Supplier
Wuxi Jinmao Foreign Trade Co., Ltd. (“Wuxi”), one of our finished goods inventory suppliers, has a wholly owned subsidiary with which we entered into a loan agreement in 2016. Under the agreement, Wuxi’s subsidiary borrowed a principal amount of $14 million for the development and operation of a fabric mill. Principal payments are due in semi-annual installments beginning March 31, 2018 through September 30, 2026. The outstanding principal balance of the loan bears interest at a rate of (i) 4.50% per annum until the sixth anniversary of the closing date of the loan and (ii) London interbank offered rate (“LIBOR”)LIBOR plus 4.00% thereafter. We received principal payments of $400,000 and $200,000 during 2018.2019 and 2018, respectively. The outstanding balance, including accrued interest, was $13 million and $14 million as of bothFebruary 2, 2020 and February 3, 2019, respectively.
TH CSAP Acquisition
We completed the acquisition of the Tommy Hilfiger retail business in Central and February 4, 2018.Southeast Asia on July 1, 2019 for $74 million. Please see Note 3, “Acquisitions,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion.
Australia Acquisition
We completed the Australia acquisition on May 31, 2019. This acquisition resulted in a net cash payment of $59 million, including (i) a payment of $118 million, net of cash acquired of $7 million, as cash consideration for the acquisition and (ii) proceeds of $59 million related to the sale of an office building and warehouse owned by Gazal. Please see Note 3, “Acquisitions,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion.
Acquisition of the Geoffrey Beene Tradename
We acquired the Geoffrey Beene tradename on April 20, 2018 for $17 million, of which $16 million was paid in cash. Please see Note 3, “Acquisitions,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion.
Acquisition of the Wholesale and Concessions Businesses in Belgium and Luxembourg
We completed the Belgian acquisition on September 1, 2017. We paid $12 million as cash consideration for this transaction. Please see Note 3, “Acquisitions,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion.
Acquisition of True & Co.
We acquired True & Co. on March 30, 2017. We paid $28 million, net of $400,000 of cash acquired, as cash consideration for this transaction. Please see Note 3, “Acquisitions,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion.
We completedentered into a definitive agreement on January 9, 2020 to sell our Speedo North America business to Pentland for $170 million in cash, subject to a working capital adjustment. The Speedo transaction is expected to close in the TH China acquisition on April 13, 2016. Priorfirst quarter of 2020, subject to this acquisition, we had a 45% interest in TH China, which we accounted for under the equity method of accounting. We paid $158 million, net of cash acquired of $105 million, as cash consideration for this transaction.customary closing conditions. Please see Note 3, “Acquisitions,4, “Assets Held For Sale,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion.
Dividends
Our common stock currently payshas historically paid annual dividends, totalingwhich totaled $0.15 per share.share in each of 2019, 2018 and 2017. Dividends on common stock totaled $11 million in 2019 and $12 million in each of 2018 2017 and 2016.2017.
We currently project thatdeclared a $0.0375 per share dividend payable to our common stockholders of record as of March 4, 2020, in respect of which we made dividend payments totaling approximately $3 million on March 31, 2020. We have suspended our dividend policy in order to increase our cash position and preserve financial flexibility in responding to the impacts of the COVID-19 outbreak on our business. If we were to pay cash dividends totaling $0.15 per share on our common stock in 2019 will be2020, such dividends would total approximately $11 million based on our current dividend rate, the number of shares of our common stock outstanding as of
February 3, 2019,2, 2020, our estimate of stock to be issued during 20192020 under our stock incentive plans and our estimate of stock repurchases during 2019.2020.
Acquisition of Treasury Shares
Our Board of Directors has authorized a $500 million three-yearover time since 2015 an aggregate $2.0 billion stock repurchase program effective June 3, 2015. On March 21, 2017, the Board of Directors authorized a $750 million increase to the program and extended it to June 3, 2020. On March 26, 2019, the Board of Directors authorized a further $750 million increase to the program and extended it tothrough June 3, 2023. 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 we deem appropriate. Purchases are made based on a variety of factors, such as price, corporate requirements and overall market conditions, applicable legal requirements and limitations, restrictions under our debt arrangements, trading restrictions under our 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.
During 2019, 2018 2017 and 2016,2017, we purchased approximately 3.4 million shares, 2.2 million 2.2 millionshares and 3.22.2 million shares, respectively, of our common stock under the program in open market transactions for $325 million, $300 million and $250 million, and $315 million, respectively. Purchases of $500,000 were accrued for in the Consolidated Balance Sheet as of February 2, 2020. Purchases of $2 million that were accrued for in the Consolidated Balance Sheet as of February 4, 2018 were paid in 2018. The repurchased shares were held as treasury stock and $258$683 million of the authorization remained available for future share repurchases as of February 3, 2019.2, 2020.
Treasury stock activity also includes shares that were withheld principally in conjunction with the settlement of vested restricted stock, restricted stock units and performance share units to satisfy tax withholding requirements.
The Australia acquisition agreement provided for key members of Gazal and PVH Australia management to exchange a portion of their interests in Gazal for approximately 6% of the outstanding shares in our previously wholly owned subsidiary that acquired 100% of the ownership interests in the Australia business. We reacquiredare obligated to purchase this 6% interest within two years of the acquisition closing in 2011two tranches as follows: tranche 1 – 50% of the rightsshares one year after the closing, but the holders had the option to defer half of this tranche to tranche 2; and tranche 2 – all remaining shares two years after the closing. With respect to tranche 1, the holders elected not to defer their shares to tranche 2 and as a result we are obligated to purchase all of the tranche 1 shares in India to the TOMMY HILFIGER trademarks that had been subject to a perpetual license previously granted to a third party. We were required to make annual contingentsecond quarter of 2020. The purchase price payments tofor the sellertranche 1 and tranche 2 shares is based on a percentage of sales of TOMMY HILFIGER products in India in excess of an agreed upon threshold during each of six consecutive 12-month periods immediately following the acquisition, with the final payment made in 2017. We made contingent purchase price payments of approximately $1 million in each of 2017 and 2016. As a result of accounting guidance adopted in 2018, these contingent purchase price payments are now classified as financing activities in our Consolidated Statements of Cash Flows, insteadmultiple of the previous classificationsubsidiary’s adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) less net debt as investing activities.of the end of the measurement year, and the multiple varies depending on the level of EBITDA compared to a target. The liability for the mandatorily redeemable non-controlling interest was $33.8 million as of February 2, 2020 based on exchange rates in effect on that date, of which $16.9 million is payable in the second quarter of 2020 for the purchase of the tranche 1 shares. Please see to Note 1, “Summary of Significant Accounting Policies,3, “Acquisitions,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion of the accounting guidance.discussion.
Financing Arrangements
Our capital structure was as follows:follows at the end of 2019 and 2018:
| (In millions) | February 3, 2019 | February 4, 2018 | February 2, 2020 | February 3, 2019 | ||||||||||
| Short-term borrowings | $ | 13 | $ | 20 | $ | 50 | $ | 13 | ||||||
| Current portion of long-term debt | — | — | 14 | — | ||||||||||
| Capital lease obligations | 17 | 16 | ||||||||||||
| Finance lease obligations | 15 | 17 | ||||||||||||
| Long-term debt | 2,819 | 3,061 | 2,694 | 2,819 | ||||||||||
| Stockholders’ equity | 5,828 | 5,536 | 5,811 | 5,828 | ||||||||||
In addition, we had $452$503 million and $494$452 million of cash and cash equivalents as of February 2, 2020 and February 3, 2019, and February 4, 2018, respectively.
Short-Term Borrowings
We have the ability to draw revolving borrowings under our senior unsecured credit facilities, as discussed in the section entitled “2019 Senior Unsecured Credit Facilities” below. We had no borrowings outstanding under these facilities as of
February 2, 2020. The maximum amount of revolving borrowings outstanding under these facilities during 2019 was $378 million. We had $8 million outstanding under our prior senior secured credit facilities as of February 3, 2019 as discussed in the section entitled “2016 Senior Secured Credit Facilities” below. We had $8 million outstanding under these facilities as of February 3, 2019. The weighted average interest rate on the funds borrowed as of February 3, 2019 was 4.45%. The maximum amount of revolving borrowings outstanding under these facilities during 2018 was $274 million. There were no borrowings outstanding under these facilities as of February 4, 2018.
Additionally, we have the availability to borrow under short-term lines of credit, overdraft facilities and short-term revolving credit facilities denominated in various foreign currencies. These facilities, which now include a facility in Australia as a result of the Australia acquisition, provided for borrowings of up to $102$132 million based on exchange rates in effect on February 3, 20192, 2020 and are utilized primarily to fund working capital needs. We had $5$50 million and $20$5 million outstanding under these facilities as of February 2, 2020 and February 3, 2019, andrespectively. The $50 million of borrowings outstanding as of February 4, 2018, respectively.2, 2020 included borrowings under the facility in Australia. The weighted average interest rate on funds borrowed as of February 2, 2020 and February 3, 2019 was 2.56% and February 4, 2018 was 0.21% and 1.19%, respectively. The maximum amount of borrowings outstanding under these facilities during 20182019 was $39$99 million.
We established on November 5, 2019 an unsecured commercial paper note program in the United States primarily to fund working capital needs. The program enables us to issue, from time to time, unsecured commercial paper notes with maturities that vary but do not exceed 397 days from the date of issuance. We had no borrowings outstanding under the commercial paper note program as of February 2, 2020. The maximum amount of borrowings outstanding under the program during 2019 was $370 million.
The commercial paper program allows for borrowings of up to $675 million to the extent that we have borrowing capacity under our United States dollar-denominated revolving credit facility, as discussed in the section entitled “2019 Senior Unsecured Credit Facilities” below. Accordingly, the combined aggregate amount of (i) borrowings outstanding under the commercial paper note program and (ii) the revolving borrowings outstanding under the United States dollar-denominated revolving credit facility at any one time cannot exceed $675 million. The maximum aggregate amount of borrowings outstanding under the commercial paper program and the United States dollar-denominated revolving credit facility during 2019 was $567 million, which reflects a brief period of higher aggregate borrowings at the time that we launched the commercial paper program.
Finance Lease Obligations
Our cash payments for capitalfinance lease obligations totaled $5 million $5 millionin each of 2019, 2018 and $7 million in 2018, 2017 and 2016, respectively.2017.
2016 Senior Secured Credit Facilities
2019 Senior Unsecured Credit Facilities
We refinanced the 2016 facilities on April 29, 2019 (the “Closing Date”) by entering into senior unsecured credit facilities (the “2019 facilities”), the proceeds of which, along with cash on hand, were used to repay all of the outstanding borrowings under the 2016 facilities, bear interest at variable rates calculated inas well as the manner as described below. related debt issuance costs.
The 2019 facilities consist of a $1.093 billion United States dollar-denominated Term Loan A facility (the “USD TLA facility”), a €500 million euro-denominated Term Loan A facility (the “Euro TLA facility” and together with the USD TLA facility, the “TLA facilities”) and senior securedunsecured revolving credit facilities consisting of (i) a $675 million United States dollar-denominated revolving credit facility, (ii) a CAD $70 million Canadian dollar-denominated revolving credit facility available in United States dollars or Canadian dollars, (iii) a €200 million euro-denominated revolving credit facility available in euro, British pound sterling, Japanese yen, Swiss francs, Australian dollars and other agreed foreign currencies and (iv) a $50 million United States dollar-denominated revolving credit facility available in United States dollars or Hong Kong dollars. The
2019 facilities are due on April 29, 2024. In connection with the refinancing of our senior credit facilities, we paid debt issuance costs of $10 million (of which $3 million was expensed as debt modification costs and $7 million is being amortized over the term of the debt agreement) and recorded debt extinguishment costs of $2 million to write off previously capitalized debt issuance costs.
Each of the senior unsecured revolving facilities, except for the $50 million United States dollar-denominated revolving credit facility available in United States dollars or Hong Kong dollars, also include amounts available for letters of credit. Acredit and have a portion of each of the United States dollar-denominated revolving credit facilities is also available for the making of swingline loans. The issuance of such letters of credit and the making of any swingline loan reduces the amount available under the applicable revolving credit facility.
We had loans outstanding of $1.644$1.570 billion, net of original issue discounts and debt issuance costs and based on applicable exchange rates, under the Term Loan A facility, $8 million of borrowings outstanding under the senior secured revolving creditTLA facilities and $20 million of outstanding letters of credit under the senior securedunsecured revolving credit facilities as of February 3,2, 2020. We had no borrowings outstanding under the senior unsecured revolving credit facilities as of February 2, 2020.
The terms of the TLA facilities require us to make quarterly repayments of amounts outstanding under the 2019 facilities, which commenced with the calendar quarter ended September 30, 2019. Such required repayment amounts equal 2.50% per annum of the principal amount outstanding on the Closing Date for the first eight calendar quarters following the Closing Date, 5.00% per annum of the principal amount outstanding on the Closing Date for the four calendar quarters thereafter and 7.50% per annum of the principal amount outstanding on the Closing Date for the remaining calendar quarters, in each case paid in equal installments and in each case subject to certain customary adjustments, with the balance due on the maturity date of the TLA facilities. The outstanding borrowings under the 2019 facilities are prepayable at any time without penalty (other than customary breakage costs). Any voluntary repayments we make would reduce the future required repayment amounts.
We made payments of $71 million on our term loans under the 2019 facilities and we repaid the 2016 facilities in connection with the refinancing of the senior credit facilities during 2019. We made payments of $150 million $250 million and $350$250 million during 2018 2017 and 2016,2017, respectively, on our term loans under the 2016 facilities and 2014 facilities. As a result of the voluntary repayments we have made to date, as of February 3, 2019, we are not required to make a long-term debt repayment until June 2020.
The United States dollar-denominated borrowings under the 20162019 facilities bear interest at a rate equal to an applicable margin plus, as determined at our option, either (a) a base rate determined by reference to the greater of (i) the prime rate, (ii) the United States federal funds effective rate plus 1/2 of 1.00% and (iii) a one-month reserve adjusted Eurocurrency rate plus 1.00% or (b) an adjusted Eurocurrency rate, calculated in a manner set forth in the 20162019 facilities.
The Canadian dollar-denominated borrowings under the 20162019 facilities bear interest at a rate equal to an applicable margin plus, as determined at our option, either (a) a Canadian prime rate determined by reference to the greater of (i) the rate of interest per annum that Royal Bank of Canada establishes as the reference rate of interest in order to determine interest rates for loans in Canadian dollars to its Canadian borrowers and (ii) the sum of (x) the average of the rates per annum for Canadian dollar bankers’bankers' acceptances having a term of one month and (y) 0.75%, or (b) an adjusted Eurocurrency rate, calculated in a manner set forth in the 20162019 facilities.
Borrowings available in Hong Kong dollars under the 2019 facilities bear interest at a rate equal to an applicable margin plus an adjusted Eurocurrency rate, calculated in a manner set forth in the 2019 facilities.
The borrowings under the 20162019 facilities in currencies other than United States dollars, Canadian dollars or CanadianHong Kong dollars bear interest at a rate equal to an applicable margin plus an adjusted Eurocurrency rate, calculated in a manner set forth in the 20162019 facilities.
The current applicable margin with respect to the Term Loan A facilityTLA facilities and each revolving credit facility is 1.50%1.375% for adjusted Eurocurrency rate loans and 0.50%0.375% for base rate loans, respectively. Afteror Canadian prime rate loans. The applicable margin for borrowings under the TLA facilities 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 our fiscal quarters, the applicable margin for borrowings under the Term Loan A facility and the revolving credit facilities is subject to adjustment based upon our net leverage ratio.ratio or (ii) after the date of delivery of notice of a change in our public debt rating by Standard & Poor’s or Moody’s.
We entered into interest rate swap agreements designed with the intended effect of converting notional amounts of our variable rate debt obligation to fixed rate debt. Under the terms of the agreements, for the outstanding notional amount, our exposure to fluctuations in the one-month LIBOR is eliminated and we pay a fixed rate plus the current applicable margin. The following interest rate swap agreements were entered into or in effect during 2019, 2018 2017 and 2016:2017:
| (In millions) | |||||||||||||||||||||||
| Designation Date | Commencement Date | Initial Notional Amount | Notional Amount Outstanding as of February 3, 2019 | Fixed Rate | Expiration Date | Commencement Date | Initial Notional Amount | Notional Amount Outstanding as of February 2, 2020 | Fixed Rate | Expiration Date | |||||||||||||
| August 2019 | February 2020 | $ | 50 | $ | — | 1.1975% | February 2022 | ||||||||||||||||
| June 2019 | February 2020 | 50 | — | 1.409% | February 2022 | ||||||||||||||||||
| June 2019 | June 2019 | 50 | 50 | 1.719% | July 2021 | ||||||||||||||||||
| January 2019 | February 2020 | $ | 50 | $ | — | 2.4187% | February 2021 | February 2020 | 50 | — | 2.4187% | February 2021 | |||||||||||
| November 2018 | February 2019 | 139 | — | 2.8645% | February 2021 | February 2019 | 139 | 127 | 2.8645% | February 2021 | |||||||||||||
| October 2018 | February 2019 | 116 | — | 2.9975% | February 2021 | February 2019 | 116 | 103 | 2.9975% | February 2021 | |||||||||||||
| June 2018 | August 2018 | 50 | 50 | 2.6825% | February 2021 | August 2018 | 50 | 50 | 2.6825% | February 2021 | |||||||||||||
| June 2017 | February 2018 | 306 | 182 | 1.566% | February 2020 | February 2018 | 306 | 56 | 1.566% | February 2020 | |||||||||||||
| July 2014 | February 2016 | 683 | — | 1.924% | February 2018 | February 2016 | 683 | — | 1.924% | February 2018 | |||||||||||||
The notional amounts of the outstanding interest rate swapswaps that commenced in February 2018 and the interest rate swaps that will commence in February 2019 will beare adjusted according to pre-set schedules during the terms of the swap agreements such that, based on our projections for future debt repayments, our outstanding debt under the 2016 facilitiesUSD TLA facility is expected to always equal or exceed the combined notional amount of the then-outstanding interest rate swaps.
4 1/2% Senior Notes Due 2022
We had outstanding $700 million principal amount of 4 1/2% senior notes due December 15, 2022. We redeemed these notes on January 5, 2018 in connection with the issuance of €600 million euro-denominated principal amount of 3 1/8% senior notes due December 15, 2027, as discussed below. We paid a premium of $16 million to the holders of these notes in connection with the redemption and recorded debt extinguishment costs of $8 million to write-off previously capitalized debt issuance costs associated with these notes during 2017.
7 3/4% Debentures Due 2023
We have outstanding $100 million of debentures due November 15, 2023 that accrue interest at the rate of 7 3/4%. The debentures are not redeemable at our option prior to maturity.
3 5/8% Euro Senior Notes Due 2024
We issued on June 20, 2016have outstanding €350 million euro-denominated principal amount of 3 5/8% senior notes due July 15, 2024. Interest on the notes is payable in euros. We paid €6 million (approximately $7 million based on exchange rates in effect on the payment date) of fees during 2016 in connection with the issuance of these notes, which are amortized over the term of the notes. We 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, we may redeem some or all of these notes on or after April 15, 2024 at their principal amount plus any accrued and unpaid interest.
3 1/8% Euro Senior Notes Due 2027
We issued on December 21, 2017 €600 million euro-denominated principal amount of 3 1/8% senior notes due December 15, 2027. Interest on the notes is payable in euros. We paid €9 million (approximately $10 million based on exchange rates in effect on the payment date) of fees during 2017 in connection with the issuance of these notes, which are amortized over the term of the notes. We 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, we may redeem some or all of these notes on or after September 15, 2027 at their principal amount plus any accrued and unpaid interest.
Our financing arrangements contain financial and non-financial covenants and customary events of default. As of February 3, 2019,2, 2020, we were in compliance with all applicable financial and non-financial covenants under our financing arrangements.
As of February 3, 2019,2, 2020, our issuer credit was rated BBB- by Standard & Poor’s with a stable outlook and our corporate credit was rated Ba1Baa3 by Moody’s with a positive outlook.stable outlook, and our commercial paper was rated A-3 by Standard & Poor’s and P-3 by Moody’s. In assessing our credit strength, we believe that both Standard & Poor’s and Moody’s considered, among other things, our capital structure and financial policies, our consolidated balance sheet, our historical acquisition activity and other financial information, as well as industry and other qualitative factors.
Please see Note 8,9, “Debt,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion of our debt.
Contractual Obligations
The following table summarizes, as of February 3, 2019,2, 2020, our contractual cash obligations by future period:
| Payments Due by Period | Payments Due by Period | |||||||||||||||||||||||||||||||||||||||
| Description | Total Obligations | 2019 | 2020-2021 | 2022-2023 | Thereafter | Total Obligations | 2020 | 2021-2022 | 2023-2024 | Thereafter | ||||||||||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||||||||||||||
Long-term debt(1) | $ | 2,839 | $ | — | $ | 1,649 | $ | 100 | $ | 1,090 | $ | 2,725 | $ | 14 | $ | 142 | $ | 1,906 | $ | 663 | ||||||||||||||||||||
| Interest payments on long-term debt | 469 | 111 | 178 | 87 | 93 | 419 | 86 | 159 | 112 | 62 | ||||||||||||||||||||||||||||||
| Short-term borrowings | 13 | 13 | — | — | — | 50 | 50 | |||||||||||||||||||||||||||||||||
Operating and capital leases(2) | 2,171 | 408 | 694 | 447 | 621 | |||||||||||||||||||||||||||||||||||
Operating and finance leases(2) | 2,274 | 445 | 740 | 443 | 646 | |||||||||||||||||||||||||||||||||||
Inventory purchase commitments(3) | 1,074 | 1,074 | — | — | — | 883 | 883 | |||||||||||||||||||||||||||||||||
Minimum contractual royalty payments(4) | 32 | 18 | 12 | 2 | — | 23 | 8 | 11 | 4 | |||||||||||||||||||||||||||||||
Non-qualified supplemental defined benefit plan(5) | 9 | 1 | 2 | 1 | 5 | 8 | 1 | 2 | 1 | 4 | ||||||||||||||||||||||||||||||
Sponsorship and model payments(6) | 57 | 28 | 25 | 3 | 1 | |||||||||||||||||||||||||||||||||||
Information-technology, sponsorships and other commitments(6) | 134 | 103 | 29 | 2 | ||||||||||||||||||||||||||||||||||||
| Total contractual cash obligations | $ | 6,664 | $ | 1,653 | $ | 2,560 | $ | 640 | $ | 1,810 | $ | 6,516 | $ | 1,590 | $ | 1,083 | $ | 2,468 | $ | 1,375 | ||||||||||||||||||||