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PVH CORP PVH
October 27, 2022 - 1:24pm EST by
bgm722
2022 2023
Price: 52.00 EPS 0 0
Shares Out. (in M): 65 P/E 0 0
Market Cap (in $M): 3,400 P/FCF 0 0
Net Debt (in $M): 2,000 EBIT 0 0
TEV (in $M): 5,400 TEV/EBIT 0 0

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Description

CERTAIN STATEMENTS CONTAINED HEREIN REFLECT THE OPINION OF THE AUTHOR AS OF THE DATE WRITTEN. NO INVESTMENT DECISIONS SHOULD BE BASED IN ANY MANNER ON THE INFORMATION AND OPINIONS SET FORTH IN THIS REPORT. YOU SHOULD VERIFY ALL CLAIMS, DO YOUR OWN DUE DILIGENCE AND/OR SEEK ADVICE FROM YOUR OWN PROFESSIONAL ADVISOR(S) AND CONSIDER THE INVESTMENT OBJECTIVES AND RISKS AND YOUR OWN NEEDS AND GOALS BEFORE INVESTING IN ANY SECURITIES MENTIONED. Please see additional Important Disclaimers at the end of this analysis.

 

PVH owns the Tommy Hilfiger and Calvin Klein brands globally.   Most of the profitability comes from PVH’s European franchises where Tommy in particular has an “almost luxury” positioning (in contrast to the US brand).  Pre Covid, Tommy International consistently put up high single digit same store sales(SSS), Calvin International did mid-single digit SSS and the two are currently putting through ~10% price increases.[1]  

I believe most apparel names are trading cheap right now ahead of a potential consumer recession.  And PVH has unique exposure to Europe and a couple turns of debt.  But in my opinion PVH has a strong core franchise, an active and respected new CEO, several areas to improve (underweight China and Asia, fix Calvin) and is expected to buy back 12% of the shares this year.  The stock is cheap – 5.5x adjusted Jan-20 earnings, 6.5x forward earnings (current consensus) and just 3x Jan-26 earnings based on management’s long term growth plan.[2]       

PVH Current Market Valuation

 * BS figures as of Jul-22.  Jan-20 EBIT is adjusted for one time expenses.  Jan-23 and Jan-24 revenue and EBIT are current consensus.  Jan-26 revenue and EBIT margin are from the Apr-22 Investor Day.  Interest and tax rate are my assumptions.

 

Quick background – PVH reports in five segments – Tommy US, Tommy International, Calvin US, Calvin International and Corporate where costs run a little less than 2% of consolidated sales.  PVH’s struggling Heritage Brands Wholesale and Retail (IZOD, Van Heusen, ARROW and Geoffrey Beene) collapsed during COVID and then were sold for scrap last year.[3] 

The North American businesses (that US investors are probably most familiar with) are overly dependent on outlet and feel creaky.  Pre COVID SSS were flat for Calvin and declining for Tommy.  Tommy and Calvin North Americas adjusted earnings before interest and tax (EBIT) margins (before restructurings and impairments) declined from mid-teens to ten-ish in 2019.  Pre COVID, North America was roughly a third of EBIT.  But the businesses took a hit and haven’t bounced back, possibly from a lack of international tourists, and are currently running break even.[4]

But the International businesses, led by Tommy, are a gem.  International is dominated by Europe where PVH is 80% full priced and is 35% direct.  Asia is relatively small at approximately 16% (China 6%, Japan 5% and Australia 3%) and I believe is underinvested - PVH started buying in its Asian licensors in 2016.  Tommy International SSS grows high single digit and Calvin International SSS grows mid-single digits.  The European products are more premium than those in the US, but PVH pulls off a neat trick by keeping branding consistent across regions – I recommend this Business of Fashion article.  International has been over earning – were able to take advantage of consumer spending and limited inventory during COVID. 

All numbers taken from Jan-2013 through Jan-2022 10-Ks.

 
 

Q2 2022 was messy and PVH took down guidance.  But a big part of this was currency and Russia.  While the North American business continues to be weak, International continues to be strong.  Tommy International was +4% organic, Calvin was +10% organic and both put up high teens margins if you scrub out the losses on exiting Russia.  I understand that Europe is probably getting worse, but Q2 2022 already included a lot of headlines about European gas and power prices. 

Last year, Stefan Larrson took over from long time CEO Manny Chirico.  Larrson helped build H&M, turned around Old Navy and then did a stint at Ralph Lauren where he clashed with Ralph.   Again, from Business of Fashion, “But what’s really motivating Larsson is the strength of the company’s core…  Larsson's CV made him a sought-after talent in an industry that finds it increasingly hard to recruit CEOs.”  It should also be noted that Michael Calbert, who led KKR’s Retail team and is Chairman of Dollar General, came on as Chairman.  There’s been a lot of additional executive turnover – new CFO, new team at Americas and Calvin, new heads of HR and IR, etc.  At the April 2022 Investor Day, Larrson put forward very aggressive growth plans calling for $12.5B in top line, 15% operating margins and $3B of cumulative free cash flow (FCF) to 2025.[5]  We’ll see… 

China/Asia are under penetrated and management thinks they can grow at a high teens clip.  I think that there is also an opportunity to fix Calvin by rebuilding the brand around basics and jeans – Calvin has had a tumultuous recent history[BB2]  and they just recently parted ways with Trish Donnelly who Larrson brought in to run the brand.[6]  Coasting off of Tommy should obviously help.  Management says there is an opportunity to do a lot more digital direct to consumer – but all apparel brands say that.  I don’t know what you do about the US business – its not obvious to me that they can climb out of the outlet and off price morass without a lot of investment.

One more check on value.  PVH is currently trading at 65% of BV, 6.5x EBIT and 60% of sales.   PVH was built through a couple of big transactions 10 years ago.  In March 2010, PVH bought Tommy Hilfiger from Apax for $3B or 1.3x sales and 14x EBIT.[7]  In October 2012, PVH bought out its large licensee, Warnaco, for $2.9B or 1.2x sales and 13x EBIT.[8]  Multiples were obviously lower then…

 

Important Disclaimers

The provision of this report does not constitute (and should not be construed as) a recommendation, financial promotion, investment advice, encouragement or solicitation to buy, sell, or hold the security of the subject issuer (the “Security”), or any other securities, discussed herein. This report is for informational purposes only. All of the information contained herein is based on publicly available information with respect to the security and the author’s analysis of such information. Past performance is no guarantee, nor is it indicative, of future results.

 

Certain statements reflect the opinions of the author as of the date written, may be forward-looking and/or based on current expectations, projections, and/or information currently available. The author cannot assure future results and disclaims any obligation to update or alter any statistical data and/or references thereto, as well as any forward-looking statements, whether as a result of new information, future events, or otherwise. Such statements/information may not be accurate over the long-term. The views are those of the author acting in his individual capacity and not as a representative of the firm.  The author’s opinions on this Security may change at any time in the future and the author will not, and disclaims any obligation to, update this report to reflect any change in opinion. The author further disclaims any obligation to respond to any comments or questions posted regarding the Security discussed herein.

 

NO INVESTMENT DECISIONS SHOULD BE BASED IN ANY MANNER ON THE INFORMATION AND OPINIONS SET FORTH IN THIS REPORT.  YOU SHOULD VERIFY ALL CLAIMS, DO YOUR OWN DUE DILIGENCE AND/OR SEEK ADVICE FROM YOUR OWN PROFESSIONAL ADVISOR(S) AND CONSIDER THE INVESTMENT OBJECTIVES AND RISKS AND YOUR OWN NEEDS AND GOALS BEFORE INVESTING IN ANY SECURITIES MENTIONED. AN INVESTMENT IN THE SECURITY DOES NOT GUARANTEE A POSITIVE RETURN AS STOCKS ARE SUBJECT TO MARKET RISKS, INCLUDING THE POTENTIAL LOSS OF PRINCIPAL.

 

The author or his or her respective employer or employer’s clients, affiliates, officers, managers, directors, and other associated parties, may or may not hold positions in the Security noted in this article. These parties may trade at any time, without notification to this community, and will not disclose this information to this community. The author and his employer disclaim any liability for investment losses that you may incur under any circumstances.

The author does not hold a position with the issuer of the Security such as employment, directorship, or consultancy.

 


[1] Source: Jan-13 through Jan-20 10-Ks.  Apr-22 earnings call.

[2] Source: Announced at the Apr-22 investor day. 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Buyback??!?!!

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