PVH: Too Much Debt And Declining Sales

Summary

• PVH Corp.'s debt-to-EBITDA ratio is at 3, almost triple that of its competitors.
• The men's business could be a highlight in the business, as it is more price competitive and has the brand asset behind it.
• It is a premium retailer with a financially challenged consumer.

Investment Thesis

PVH (NYSE:PVH) could be an undervalued company in this crisis. However, severe declines in North America sales before COVID-19 could indicate an inherent weakness in the business. Additionally, the company is still selling clothes at a premium price, and with the established brand that it has, PVH has failed to innovate in terms of marketing and consumer appeal. Additionally, its debt-to-EBITDA ratio is at 3, which is almost double that of its competitors such as Gap (GPS) and V.F. Corp. (VFC), indicating PVH has too much debt in an age that now depends on cash. Also, its men’s business could be a bright spot in the business, as its more affordable price point could appeal to consumers. Lastly, the P/B ratio is below 1, indicating the stock is undervalued. However, with the wild fluctuations in stock price, it could be difficult to pinpoint a good price, as the company has lost and gained almost half of its stock price within a month.

Pandemic Effect

With the pandemic in full swing across the globe, it has put many legacy brands in jeopardy. And while PVH has been flying high internationally, it has been declining severely in North America. Throughout the last few years, the company has been relying severely on its brand name rather than innovating clothing-wise. As consumers have moved towards cheaper and more innovative brands, Calvin Klein, specifically, is unable to generate the same interest with a North America comp store sales decline of 2% and an international comp store sales decline of 1%. Especially with the rise of Aerie (AEO) in the women's intimate market, Calvin Klein's lucrative intimate business has come under more fire. And its new #MyCalvins campaign is not striking a chord with consumers either, as consumers have moved on to products that resonate with them, given Aerie has a strong message of body positivity, while Calvin Klein pursues the same marketing strategy of shock value or celebrity-driven campaigns. And while Calvin Klein has taken steps to incorporate plus-size models, it can be seen as too little too late, as other companies such as Aerie have already established themselves as industry leaders.

Tommy Hilfiger, on the other hand, had international comp store sales increase by 9%, and a 6% decline in North America comp store sales due to weakness in traffic. Both brands have failed to innovate clothing-wise, while still maintaining a premium price point, and in addition to the new swarm of competition in the retail sector and pressure from consumer finances, this could lead to further declines in sales.

Premium Pricing

PVH is a premium retailer in a challenged landscape. In addition, its current products can barely justify the price point, with retailers like Gap creating similar styles of clothing for half the price.

(Source: Tommy Hilfiger USA)

(Source: Gap)

PVH as a whole has also failed to innovate in any of its designs, and while its Calvin Klein jeans business is now licensed to G-III Apparel Group, Tommy Jeans still belong to the company. In terms of Tommy Jeans, their innovative designs start at $100, while American Eagle Outfitters starts at $30. And the jeans that can be considered affordable are priced at around $50 and look the same as AEO’s $30 jeans.

(Source: Tommy Hilfiger USA)

(Source: American Eagle Outfitters)

Even with discounts and promo codes given, consumers are tired of paying for overpriced clothing, and as I previously mentioned in my Lululemon (LULU) article, even consumers who love the clothing being offered are pulling back, as they are forced to conserve cash. And the difference between Lululemon and PVH is that Lululemon's consumers were avidly buying and enjoying its offering before the crisis, while PVH was already seeing some softness in its Calvin Klein business.

Liabilities and Debt

While PVH has a considerable amount of assets, its liabilities and debt pose a considerable risk to the business.

(Source: SEC)

The company's debt-to-EBITDA ratio is around 3, and overall revenues have declined 1% on a constant currency basis. What’s even worse is North America comp sales were down 6%, and even though inventory was down 7% year over year, PVH's balance sheet is heavily laden with debt.

(Source: TIKR.com - Features forward estimates)

Data by YCharts

Compared to other retailers in the industry, PVH has one of the highest debt-to-EBITDA ratios, and with this unpredictable economy, the risk of the company overleveraging itself has increased dramatically.

Data by YCharts

Additionally, PVH is one of the only clothing companies with a price-to-book ratio of below 1, indicating that the stock is undervalued, and while P/B ratio does not take into account intangible assets, it does suggest that PVH is considerably undervalued. However, with this crisis, I do believe that many of the weaker competitors in the retail industry could be in deeper trouble, even though PVH was delivering 2% YoY revenue growth that was right in line with the U.S. GDP growth and it was benefiting from growth in Asian markets.

Data by YCharts

In the U.S., especially, consumers have been shifting to lower-cost retailers for their clothing needs, while off-price retailers like T.J. Maxx (TJX) have started taking more market share.

Men’s Business

Calvin Klein and Tommy Hilfiger’s offerings both focus on the ever-basic contemporary style, and with men’s t-shirts ranging from $20 and up, the highlight of both brands' business could be their men’s business.

(Source: Calvin Klein)

(Source: Calvin Klein)

It brings some price competitiveness that is necessary, and it delivers on a style of fashion that is still relevant in today’s market. At the same time, Calvin Klein and Tommy Hilfiger both still do have some brand appeal, so the extra price increase could be justified.

With all things considered involving PVH, it still has a brand value. However, with more competition and consumer pressure, the company is facing declining sales in an increasingly competitive market. Its debt-to-EBITDA ratio is 3 almost triple that of its competitors, however, their price-to-book ratio is 0.695, which suggests the company is undervalued. The premium price point of PVH’s clothing could drive consumers away as they search for lower-cost options, but its more affordable men’s business could keep customers entertained. However, since March 23, 2020, the stock price has nearly doubled, and in this highly fluctuating environment, it could crash again in the near future. Therefore, at the price of ~$54, it can be seen as a little high, as the stock price was merely $29 a month ago and could come down again soon.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.