Summary
- Most of the company's revenue comes from the two famous and globally recognized Brands, Tommy Hilfiger and Calvin Klein.
- Recently, management has been working on the PVH+ plan to focus on consumer preferences and a data-driven operating model, which will further increase competitive strength and produce long-term value.
- With the implementation of the new plan, the company's revenue is estimated to reach $12 billion, along with $1 billion in FCF by FY2025.
- Considering this, the stock is trading at just 3.5 times its 2025 FCF.
PVH Corp. ( PVH ), is one of the largest global apparel companies in the world. It operates a portfolio of iconic brands, such as Tommy Hilfiger and Calvin Klein, along with many international brands. The company designs and markets sportswear, Jeanswear, intimate apparel, underwear, swimwear, and other products.
Most of PVHs revenue comes from the two famous and globally recognized brands, Tommy Hilfiger and Calvin Klein; these brands have performed exceptionally well and produced substantial cash flows for the company. Currently, about 60% of the revenue is generated outside the United States, which is expected to increase significantly in the future.
In 2020, Covid-19 had affected the business significantly, and as a result of the failure of the arrow and Geoffrey Beene business, the company had to incur a huge impairment charge , but in 2021 due to the higher price selling, high international demand along with the low administration cost company could achieve all-time high net profits.
Currently, Due to the adverse market sentiment and the recent fall in FCF, the stock has dropped significantly despite its strong recent quarter performance. At such a low price, the stock offers a substantial margin of safety and huge upside potential, PVH is a strong buy.
Historical performance
In 2006, Emanuel Chirico became the company's CEO; in his leadership, the company achieved substantially attractive results . And as a growth strategy, Emanual acquired many companies, which helped PVH to expand its business and develop world-leading fashion brands. In 2010, Management acquired TOMMY HILFIGER for about $3 billion ; this acquisition contributed a lot to the company's success.
Also, note that over the period, management came up with the acquisitions of many more brands, but due to their underperformance, the company had to sell them, which brought significant impairment charges, as those businesses were consuming vast sums of money.
Currently, management has sold most of the underperforming businesses, which had brought substantial impairment charges in 2020, but the overall thing is due to the sale of those businesses the company could reduce the load on working capital and unnecessary expenses. As a result, in 2021, the company could post significant net profits.
Furthermore, till the year 2019, the company's revenue has grown significantly due to the acquisitions of its retail shops, which were on royalty contracts previously, but the recent drop in revenue is due to the current supply chain constraint and adverse economic conditions, which will be resolved as the economy recovers.
Strength in the business model
Having a strong brand value along with management focusing on long-term value creation provides significant stability to the company's business model.
Strong financial position
Over the period, debt levels have been managed at moderate levels, and in the last few years, the company has been paying down significant debt.
Raising debt has become extremely tough in the current environment, and having debt at moderate levels provides the company an edge in managing financial risk.
Cash flow from operation (Author)
Over the period, significant cash has been generated through operation, which shows the business model is substantially strong and sound.
It should be noted that, as the businesses started becoming profitable, the company kept on acquiring retail stores which were previously on royalty contracts to benefit from the strong brand awareness; over the period.
These two brands turned out to be highly profitable, having such strong and well-recognized brands gives the business a competitive advantage, and as you can see the company's margins are much more attractive.
Recent change in management
In 2021, Stephen Larsen became the new CEO of PVH. As per the new plan led by management, the new CEO has been focusing on core business to drive efficiency and brand relevance, with the entry of new management, the company sold heritage brands that had been offering lower future growth prospects and lower profitability.
In the leadership of Stephen, the company has started focusing on business efficiency and digital growth, along with the share purchase plan led this year, also, PVH has paid down significant debt, and bought back considerable shares, it seems that management wants to create long-term value for the shareholders and their interest is wholly aligned with shareholders.
Shareholding pattern (Proxy statement)
Furthermore, Fidelity management, majorly owned by Abigail p. Johnson's family, is a long-term shareholder and the controller of the company, which is the reason why over the period, the company's key philosophy of achieving conservative long-term growth has not changed.
Risk factors
As per the management, the recent increase in gross margins, along with the current increase in freight cost, is passed on to the customer; such an act might reduce customer traffic, because in the current inflationary environment people are facing significant cash constraints, which can lead to loss of market share.
Furthermore, over $2 billion in debt obligations are due by 2024; the company has significant cash reserves and is financially very strong. Along with that, cash flows are substantial; in such a condition, the company might not face any considerable trouble complying with these obligations.
Currently, I don't see any significant long-term potential threats, but if the management's focus changes from the current expansion plan and management enter into any loss-making and expensive acquisition, then this will bring a major concern to me because, in such cases, the company might have to incur high operating costs which will further hamper the profitability as we have seen in the history.
Recent development
Quarterly revenue (Quarterly report)
Despite adverse economic conditions, the business has remained considerably profitable. During the quarter the company has seen strong performance in its various initiatives to drive international growth, it seems that management is entirely focused on developing its two leading brands, and this focus will bring huge value for the long-term shareholders.
Growth target (Investor presentation)
Recently, management has been working on the PVH+ plan to focus on consumer demand and a data-driven operating model, which will further increase competitive strength and produce long-term value.
According to the project, management targets for:
- High single-digit revenue growth, targeting over $12 billion in revenue by 2025.
- Expanding operating margins to over 15%.
- With an FCF of more than $1 billion.
Due to the current inflationary environment, Management has revised the outlook for the full year, projecting a high-single-digit revenue growth driven by continued strength in the direct-to-customer business, with the projected operating margins expected to reach 9%. But as the management is focusing extensively on developing a strong brand value, the long-term outlook for the company remains very much favorable.
The current market value of PVH is $3.5 billion. Note that, in FY 2021 the company had produced more than a billion in CFO and $900 million in net profits. Also, with the implementation of the new plan, the company's revenue is estimated to reach $12 billion, along with $1 billion in FCF by FY2025. Considering this it seems that, the stock is trading at just 3.5 times its 2025 FCF, which seems very much cheap, and even if the company couldn't achieve the result and produces just about $600 million in net profit even then the stock is trading at a very cheap valuation of about 6 times its earnings, despite its consistently attractive cash flows and strong business models, whereas its peers like Carter's are trading at more than 10 times their earnings despite weak business prospects.
As per the management, there is a huge opportunity for both of the brands to grow in the international market, due to the current economic situation, the stock has become significantly undervalued and provides huge upside potential. PVH is a buy.
For further details see:
PVH Corp.: Strong Growth Prospects