PVH Making Progress Toward Its Goals, but Near-Term Outlook Uncertain

Senior Equity Analyst

David Swartz

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Once known as a producer of midtier men's shirts, PVH transformed itself by purchasing fashion brand Calvin Klein in 2003, Tommy Hilfiger in 2010, and Calvin Klein licensee Warnaco in 2013. More recently, it disposed of most of its noncore labels to focus on Calvin Klein and Tommy Hilfiger. While now lacking diversification, we think it was prudent for the firm to focus on its highest-potential properties and returning capital to shareholders through share repurchases. However, although they are popular worldwide, we do not believe that either of PVH’s major brands has the pricing power or competitiveness to provide a moat.

PVH is dealing with inflation, a tough US wholesale market, and a slowdown in demand in Western Europe. Due to industry conditions and competition, we project it will fall far short on its PVH+ plan's 2025 targets of $12.5 billion in revenue and 15% operating margin. Our estimates are $9 billion and 11.2%, respectively. Even so, we view the company's key brands as healthy and believe efforts to elevate products, achieve cost efficiencies, and build e-commerce will result in consistent earnings growth after this year. Further, over the next few years, PVH will take back licenses for women’s apparel and other products from G-III, a move that we believe will increase profits in the long run as G-III licensing currently accounts for less than 10% of earnings.

PVH’s revenue generated in the US has declined to just 30% of its total in 2023 from nearly 90% in 2009 as the firm has disposed of some brands and its two major labels have struggled in North America. Indeed, growth rates and operating income for the international segments of Calvin Klein and Tommy Hilfiger have consistently exceeded those of their North American segments over the past few years. We believe PVH has failed to connect with North American consumers as well as some peers have.

Business Strategy & Outlook

We assign a no-moat rating to PVH. The company's brands, Tommy Hilfiger (founded 1985) and Calvin Klein (founded 1968), have global appeal, but we do not think they can maintain premium pricing for 10 years. PVH's adjusted returns on invested capital (goodwill included) have fallen short of our estimated weighted average cost of capital of 10% over the past decade, and we forecast its adjusted ROIC will fall below this level in 2024 as well. 

PVH is one of the largest global apparel companies. Despite having sold some properties and facing unsettled economic conditions, the firm reported revenue of $9.2 billion in 2023, 95% of which came from apparel sales. PVH operates about 1,500 stores worldwide and franchises or licenses roughly 5,000 more, mostly in the Asia-Pacific region. However, we view PVH's dependence on just two brands as a risk, especially as both have had inconsistent results in North America. 

Tommy Hilfiger is a popular designer lifestyle brand, but we do not view it as a premium brand. In fiscal 2023, it produced $4.8 billion in revenue, but it is exposed to struggling retailers in North America, where its revenue has been stagnant over the past decade. No-moat Macy's, for example, has long been a key wholesale partner for Tommy Hilfiger, but it continues to downsize. Likely in response to troubles with its traditional wholesale customers, a limited selection of Hilfiger apparel became available in no-moat Kohl's stores for the first time in 2021. While this should give the brand a boost, it is unlikely to be a major revenue driver as Kohl's, like Macy's, has limited growth and its total sales remain below peak levels. Meanwhile, in Canada, PVH has a retail partnership for Tommy Hilfiger apparel with retailer Hudson's Bay, which, like Macy's and others, has also been struggling and downsizing. 

Tommy Hilfiger has a significant international business, which is also its best opportunity for growth. Despite unfavorable currency movement, international (outside North America) sales accounted for 72% of the brand’s reported revenue in 2023. While about 60% of its revenue is derived from Europe, PVH is making a big push to increase sales of the brand in Asia, where it is less known. 

Calvin Klein is about the same size as Tommy Hilfiger in North America but has had uneven results. In the US, it generates significant sales to major department stores. The number of freestanding Calvin Klein stores in the Americas is only about 280. PVH has limited control over the brand's marketing and pricing because of its dependence on third parties. In Europe and Asia, most Calvin Klein sales are through branded, independent stores. There are roughly 1,100 Calvin Klein stores in Europe and 2,900 in Asia-Pacific. The China market represents approximately 50% of the label's Asia-Pacific revenue. 

We do not think either Calvin Klein or Tommy Hilfiger qualifies as a luxury brand. Both labels are fragmented and arguably overexposed, making it very difficult for PVH to position them as premium brands. We think there is a lack of consistency because of their histories as fragmented, licensed brands. The Calvin Klein name is affixed to products at all price points, from socks that cost a few dollars to area rugs that cost thousands of dollars. Similarly, the Tommy Hilfiger name is attached to a huge variety of products, from inexpensive bath towels to luggage. Many of these products are under PVH's control, but many others are not. There are some large categories for both brands, including women's apparel, fragrances, watches, footwear, men's suits, and eyewear, that are licensed in many or all territories. Thus, PVH has limited control over these licensed products' styling, marketing, and pricing, and we think these brands have become diluted. 

PVH's plan to turn Calvin Klein into a fashion brand failed, which we view as evidence that it does not have a moat. In 2016, PVH hired acclaimed fashion designer Raf Simons, formerly of Dior, as Calvin Klein's first chief creative officer. Simons was hired to transform Calvin Klein, whose namesake designer has had minimal influence since the early 2000s, into more of a premium brand. Among other efforts, Simons created a subbrand called 205W39NYC and introduced fashion-forward apparel at high price points. PVH supported this with heavy marketing, but the apparel sold so poorly that it was reportedly dropped by hundreds of department and boutique stores. Simons left PVH in December 2018 with eight months remaining on his contract, and the 205W39NYC brand was discontinued in 2019. PVH even shuttered the Calvin Klein flagship store in Manhattan, which had been completely redesigned in 2017. In public statements, former PVH CEO Manny Chirico admitted that Simons' creations were too fashionable for the typical Calvin Klein consumer. We view this episode as a sign that Calvin Klein, despite its size, cannot hold premium pricing.

Although we do not expect it will build a moat, we believe PVH will benefit from greater control over its brands after the pandemic has subsided. In the past, PVH had minimal direct control over the Calvin Klein brand. As recently as 2012, 89% of Calvin Klein’s global retail sales came from licensing. In 2013, PVH acquired Warnaco. This deal gave PVH direct control over the two largest Calvin Klein categories, jeanswear and underwear, and transformed PVH into a Calvin Klein apparel distributor. Still, much of Calvin Klein’s global retail sales are not under PVH’s direct control. Seven (out of about 45 total) significant Calvin Klein licensees, including G-III in apparel and accessories in North America and no-moat Coty in fragrances, generate more than 80% of PVH’s Calvin Klein license revenue. PVH recorded $220 million in Calvin Klein royalties in 2023, little changed from 2019 (before the pandemic). In some cases, PVH can probably support the brand better than a third party. For this reason, PVH has begun to take back its licenses for women’s apparel and other items from G-III on a staggered basis. Further, we believe PVH will over time end or acquire some of the smaller Calvin Klein licensing deals in areas in which it has expertise. This process will likely take several years and have limited impact on PVH’s ROICs but should help to support Calvin Klein’s modest growth.

We think PVH is also taking steps to improve its control over the Tommy Hilfiger brand. As with Calvin Klein, PVH will take back licenses for Tommy Hilfiger women’s apparel and other items in North America from G-III. PVH has already acted to take back control of Tommy Hilfiger products in other regions, especially Asia, where it is relatively underpenetrated. In April 2016, PVH acquired its former Tommy Hilfiger joint venture company in China. Then, in September 2017, PVH terminated its supply chain relationship with Chinese company Li & Fung. In 2019, PVH acquired the Tommy Hilfiger business in Hong Kong and other parts of Southeast Asia for $74 million. PVH also acquired its joint venture in Australia. Even so, Tommy Hilfiger continues to be distributed through joint ventures in such countries as India, Brazil, and Mexico. We believe PVH will acquire these and other joint ventures over time and profitably improve sales of the brand. There are still about 25 worldwide Tommy Hilfiger licensees.

PVH's operating expenses have been rising, suggestive of a lack of scale. The firm's business model has changed over the years, as it has reduced its dependence on royalties and become more of an apparel manufacturer. While this change has boosted revenue, it has also increased operating costs. Before 2017, PVH's selling, general, and administrative expenses were consistently below 45% of revenue. However, these expenses have exceeded 45% of revenue in the past seven years, and we expect this will continue to be the case for at least the next 10 years. 

We do not think PVH has a moat based on its intangible assets or any other criteria. Nearly 100% of its production is handled by roughly 1,100 factories in 40 countries that are not owned by the company, indicating that PVH has no cost advantage over the many other apparel companies with similar outsourcing models. We do not believe PVH has a moat based on efficient scale, either, because it lacks a company-owned supply chain or superior access to raw materials. There is no network effect in the apparel business, and switching costs are nonexistent.

None

Economic Moat

PVH Corp. engages in the design and marketing of branded dress shirts, neckwear, sportswear, jeans wear, intimate apparel, swim products, handbags, footwear, and other related products. It operates through the following segments: Calvin Klein North America, Calvin Klein International, Tommy Hilfiger North America, Tommy Hilfiger International, Heritage Brands Wholesale, and Heritage Brands Retail. The Calvin Klein North America and Calvin Klein International segments operate in North America, Europe, Asia, and Brazil. It sells its products under the brand names CALVIN KLEIN 205 W39 NYC, CK Calvin Klein, and CALVIN KLEIN. The Tommy Hilfiger North America and Tommy Hilfiger International segments wholesale in North America, Europe, and China. It consists of Tommy Hilfiger, Hilfiger Denim, Hilfiger Collection, and Tommy Hilfiger Tailored brands. The Heritage Brands Wholesale segment markets its products to department, chain, and specialty stores, digital commerce sites operated by select wholesale partners and pure play digital commerce retailers in North America. The Heritage Brands Retail segment manages retail stores, primarily located in outlet centers throughout the United States and Canada. PVH was founded in 1881 and is headquartered in New York, NY.

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PVH Corp reports strong Q1 earnings, focuses on supply chain improvements and brand growth

PVH Corp's Q1 2023 performance reflects strong revenue growth and exceeded earnings per share. The company's PVH+ Plan is driving brand performance and consumer engagement, while improvements in the supply chain present opportunities for favorable product costs. Despite challenges in the macro environment, PVH remains confident in driving top-line growth and profitability.

PVH Corp. reports strong Q2 earnings, focuses on brand desirability

PVH Corp. reported strong revenue growth, particularly in direct-to-consumer businesses, leading to an increased full-year outlook for non-GAAP EPS guidance. The company made significant progress in developing a demand and data-driven supply chain and took cost efficiency actions to simplify operations. While challenges exist in North America, the company is well-positioned for continued growth and profitability improvements.

PVH Corp reports robust Q3 earnings, eyes margin growth opportunities

PVH Corp's Q3 performance reflects resilience and strategic focus, with strong financial metrics and a commitment to enhancing operational efficiency. Despite short-term revenue challenges, the company remains optimistic about profitability and growth opportunities.

PVH exceeds Q4 expectations, eyes global growth and margin expansion

PVH's strong Q4 performance, focus on brand growth, and strategic initiatives position the company for continued success. Despite challenges like inventory levels and shifting consumer behaviors, PVH remains optimistic about growth opportunities in all regions. The commitment to executing the PVH+ Plan and delivering on targets underscores a proactive approach to driving value and efficiency.

PVH surpasses Q1 expectations, focuses on PVH+ plan execution

PVH's Q1 performance exceeded expectations, showcasing strength in revenue growth, product development, and supply chain improvements. The company remains focused on executing the PVH+ plan, emphasizing product excellence, consumer engagement, and cost efficiencies. Despite macroeconomic challenges, PVH sees opportunities in D2C execution and strategic investments.

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PVH Corp. engages in the design and marketing of dress shirts, neckwear, sportswear, jeans wear, intimate apparel, swim products, handbags, footwear, and other related products. It operates through the following segments: Tommy Hilfiger, Calvin Klein, and Heritage Brands. The Tommy Hilfiger segment consists of the Tommy Hilfiger North America and Tommy Hilfiger International. The Calvin Klein segment includes Calvin Klein North America and Calvin Klein International. The Heritage Brands segment focuses on the Heritage Brands Wholesale segment. The company was founded in 1881 and is headquartered in New York, NY.

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