GOODWILL AND OTHER INTANGIBLE ASSETS

3 Months Ended

May 03, 2020

Notes to Financial Statements [Abstract]

GOODWILL AND OTHER INTANGIBLE ASSETS

7. GOODWILL AND OTHER INTANGIBLE ASSETS

The changes in the carrying amount of goodwill for the thirteen weeks ended May 3, 2020, by segment (please see Note 18, “Segment Data,” for further discussion of the Company’s reportable segments), were as follows:

(In millions)	Calvin Klein North America		Calvin Klein International		Tommy Hilfiger North America		Tommy Hilfiger International		Heritage Brands Wholesale		Heritage Brands Retail		Total
Balance as of February 2, 2020
Goodwill, gross	$	780.4	$	896.1	$	204.4	$	1,598.3	$	198.4	$	11.9	$	3,689.5
Accumulated impairment losses	—		—		—		—		—		(11.9)		(11.9)
Goodwill, net	780.4		896.1		204.4		1,598.3		198.4		—		3,677.6
Impairment	(287.3)		(394.0)		—		—		(197.7)		—		(879.0)
Currency translation and other	1.0		(13.3)		(1.4)		(25.1)		(0.7)		—		(39.5)
Balance as of May 3, 2020
Goodwill, gross	781.4		882.8		203.0		1,573.2		197.7		11.9		3,650.0
Accumulated impairment losses	(287.3)		(394.0)		—		—		(197.7)		(11.9)		(890.9)
Goodwill, net	$	494.1	$	488.8	$	203.0	$	1,573.2	$	—	$	—	$	2,759.1

The Company assesses the recoverability of goodwill and other indefinite-lived intangible assets annually, at the beginning of the third quarter of each fiscal year, and between annual tests if an event occurs or circumstances change that would indicate that it is more likely than not that the carrying amount may be impaired. Impairment testing for goodwill is done at the reporting unit level. Impairment testing for other indefinite-lived intangible assets is done at the individual asset level. Intangible assets with finite lives are amortized over their estimated useful life and are tested for impairment, along with other long-lived assets, when events and circumstances indicate that the assets might be impaired. Indefinite-lived intangible assets and intangible assets with finite lives are tested for impairment prior to assessing the recoverability of goodwill.

Goodwill

The COVID-19 pandemic had a significant adverse impact on the Company’s business during the first quarter of 2020, resulting in an unprecedented decline in revenue and earnings, and is driving an extended decline in the Company’s stock price and associated market capitalization. While there is significant uncertainty about the duration and extent of the impact of the pandemic, the Company expects there will be a significant negative impact to its future earnings and cash flows. The Company determined that the impact of COVID-19 was a triggering event that required the Company to perform a quantitative interim goodwill impairment test.

As a result of this interim test, the Company recorded $879.0 million of noncash impairment charges during the first quarter of 2020, which was included in goodwill and other intangible assets impairments in the Company’s Consolidated Statement of Operations. The impairment charges, which related to the Heritage Wholesale North America, Calvin Klein Retail North America, Calvin Klein Wholesale North America, Calvin Klein Licensing and Advertising International, and Calvin Klein International reporting units, were recorded to the Company’s segments as follows: $197.7 million in the Heritage Brands Wholesale segment, $287.3 million in the Calvin Klein North America segment, and $394.0 million in the Calvin Klein International segment. The Company’s impairment assessment was performed in accordance with the accounting guidance adopted in the first quarter of 2020 that simplifies the testing for goodwill impairment, as discussed in Note 20, “Recent Accounting Guidance.”

Of these reporting units, Calvin Klein Wholesale North America, Calvin Klein Licensing and Advertising International, and Calvin Klein International were determined to be only partially impaired. The remaining carrying amount of goodwill allocated to these reporting units as of May 3, 2020 was $162.3 million, $143.4 million and $346.9 million, respectively. Holding all other assumptions constant, a 100 basis point change in the annual revenue growth rate assumptions for these businesses would result in a change to the estimated fair value of the reporting units of approximately $80.0 million, $20.0 million and $140.0 million, respectively. Likewise, a 100 basis point change in the weighted average cost of capital would result in a change to the estimated fair value of the reporting units of approximately $60.0 million, $15.0 million and $125.0 million, respectively. While these reporting units were not determined to be fully impaired, they may be at risk of further impairment in the future in the event the related businesses do not perform as projected, including if they fail to recover as planned following the COVID-19 pandemic, or if market factors utilized in the impairment analysis deteriorate, including an unfavorable change in long-term growth rates or the weighted average cost of capital.

With respect to the Company’s other reporting units that were not determined to be impaired, the Tommy Hilfiger International reporting unit had an estimated fair value that exceeded its carrying amount of $2,948.5 million by 5%. The carrying amount of goodwill allocated to this reporting unit as of May 3, 2020 was $1,557.5 million. Holding all other assumptions constant, a 100 basis point change in the annual revenue growth rate of the Tommy Hilfiger International business would result in a change to the estimated fair value of the reporting unit of approximately $355.0 million. Likewise, a 100 basis point change in the weighted average cost of capital would result in a change to the estimated fair value of the reporting unit of approximately $320.0 million. While the Tommy Hilfiger International reporting unit was not determined to be impaired, it may be at risk of future impairment in the event the related business does not perform as projected, including if it fails to recover as planned following the COVID-19 pandemic, or if market factors utilized in the impairment analysis deteriorate, including an unfavorable change in the long-term growth rate or the weighted average cost of capital.

The fair value of the reporting units for goodwill impairment testing was determined using an income approach and validated using a market approach. The income approach was based on discounted projected future (debt-free) cash flows for each reporting unit. The discount rates applied to these cash flows were based on the weighted average cost of capital for each reporting unit, which takes market participant assumptions into consideration. Estimated future operating cash flows were discounted at rates of 10.0%, 10.5% or 11.0%, depending on the reporting unit, to account for the relative risks of the estimated future cash flows. For the market approach, used to validate the results of the income approach method, the Company used both the guideline company and similar transaction methods. The guideline company method analyzes market multiples of revenue and EBITDA for a group of comparable public companies. The market multiples used in the valuation are based on the relative strengths and weaknesses of the reporting unit compared to the selected guideline companies. Under the similar transactions method, valuation multiples are calculated utilizing actual transaction prices and revenue and EBITDA data from target companies deemed similar to the reporting unit. The Company classified the fair values of its reporting units as Level 3 fair value measurements due to the use of significant unobservable inputs.

Indefinite-Lived Intangible Assets

The Company also determined that the impact of the COVID-19 pandemic on its business was a triggering event that prompted the need to perform interim impairment testing of its indefinite-lived intangible assets. For the TOMMY HILFIGER, CALVIN KLEIN, Van Heusen, Warner’s and Olga tradenames and the reacquired perpetual license rights for TOMMY HILFIGER in India, the Company elected to first assess qualitative factors to determine whether it was more likely than not that the fair value of any asset was less than its carrying amount. For these assets, no impairment was identified as a result of the Company’s annual indefinite-lived intangible asset impairment test for 2019 and the fair values of these indefinite-lived intangible assets substantially exceeded their carrying amounts. The asset with the least excess fair value had an estimated fair value that exceeded its carrying amount by approximately 85% as of the date of the Company’s 2019 annual test. Considering this and other factors, the Company determined qualitatively that it was not more likely than not that the fair values of these indefinite-lived intangible assets were less than their carrying amounts and concluded that the quantitative impairment test was not required.

For the ARROW and Geoffrey Beene tradenames and the reacquired perpetual license rights recorded in connection with the Australia acquisition, the Company elected to bypass the qualitative assessment and proceeded directly to the quantitative impairment test. As a result of this quantitative interim impairment testing, the Company recorded $47.2 million of noncash impairment charges during the first quarter of 2020 to write down the two tradenames. This included $35.6 million to write down the ARROW tradename, that had a carrying amount of $78.9 million, to a fair value of $43.3 million, and $11.6 million to write down the Geoffrey Beene tradename, that had a carrying amount of $17.0 million, to a fair value of $5.4 million. The $47.2 million of impairment charges was included in goodwill and other intangible assets impairments in the Company’s Consolidated Statement of Operations and allocated to the Company’s Heritage Brands Wholesale segment. Holding all other assumptions constant, a 100 basis point change in the annual revenue growth rate of the Arrow business would result in a change to the estimated fair value of the tradename of approximately $5.0 million. Likewise, a 100 basis point change in the weighted average cost of capital would result in a change to the estimated fair value of the tradename of approximately $5.0 million. Holding all other assumptions constant, a 100 basis points change to the annual revenue growth rate or weighted average cost of capital in the Geoffrey Beene business would result in an immaterial change to the estimated fair value of the tradename.

With regard to the reacquired perpetual license rights recorded in connection with the Australia acquisition, the Company determined that its fair value substantially exceeded its carrying amount and, therefore, the asset was not impaired.

The fair value of the ARROW and Geoffrey Beene tradenames was determined using an income-based relief-from-royalty method. Under this method, the value of an asset is estimated based on the hypothetical cost savings that accrue as a result of

not having to license the tradename from another party. These cash flows are discounted to present value using a discount rate that factors in the relative risk of the intangible asset. The Company discounted the cash flows used to value the ARROW and Geoffrey Beene tradenames at a rate of 10.0%. The fair value of the Company’s reacquired perpetual license rights recorded in connection with the Australia acquisition was determined using an income approach which estimates the net cash flows directly attributable to the subject intangible asset. These cash flows are discounted to present value using a discount rate that factors in the relative risk of the intangible asset. The Company discounted the cash flows used to value the reacquired perpetual license rights recorded in connection with the Australia acquisition at a rate of 10.0%. The Company classified the fair values of these indefinite-lived intangible assets as Level 3 fair value measurements due to the use of significant unobservable inputs.

Finite-Lived Intangible Assets

Additionally, the Company recorded $7.3 million of noncash impairment charges during the first quarter of 2020 to write down certain finite-lived customer relationship intangible assets, to a fair value of zero. These impairments were included in goodwill and other intangible assets impairments in the Company’s Consolidated Statement of Operations and allocated to the Company’s segments as follows: $4.7 million in the Heritage Brands Wholesale segment and $2.6 million in the Calvin Klein North America segment. The Company determined qualitatively that these assets, which have a relatively short remaining useful life, were not recoverable and, therefore, impaired due to the adverse impact of the COVID-19 pandemic on the current and projected performance of the underlying businesses.