EUR 850.00 For Business Accounts Only

Morningstar | Narrow-Moat PVH Is Expanding Tommy Hilfiger and Calvin Klein in New Markets

Despite facing competitive and macro pressures at home and abroad, we believe narrow-moat PVH will continue to build on its two key brands, Calvin Klein and Tommy Hilfiger. PVH, long known as a producer of mid-tier men’s shirts in the U.S., purchased fashion brand Calvin Klein in 2003. Later, it acquired a second large fashion brand in Tommy Hilfiger (2010) and Calvin Klein-licensee Warnaco (2013). Apparel of both Calvin Klein and Tommy Hilfiger is now distributed in more than 100 countries, and the share of PVH’s revenue generated in the U.S. has fallen to just 48.1% in 2018 from nearly 90% in 2010. Despite the inherent currency, political, and economic volatility, growth rates and operating incomes for the international segments of both Calvin Klein and Tommy Hilfiger have exceeded those of the North American segments of both brands over the past three years. We believe sales outside of North America for PVH’s two big brands will approach 60% of their total sales in 2019. There is opportunity for both brands in Latin America and Asia, which currently represent about 13% of PVH’s revenue. Moreover, PVH is acquiring or terminating some licensing and distribution deals, a strategy we view as favorable as it allows for better control of marketing and e-commerce. We believe PVH’s dependence on Calvin Klein and Tommy Hilfiger (which we forecast will produce more than 90% of PVH’s operating income over the next decade) poses risk. PVH’s U.S. business, like that of narrow-moat peers Ralph Lauren and VF, is exposed to struggling department stores. No-moat Macy’s and J.C. Penney were two of PVH's 10 largest customers in 2018. However, PVH is working to reduce its dependence on these channels, by increasing sales through branded stores and e-commerce. We agree with this strategy. Aside from its two key brands, PVH also owns and licenses a few smaller brands. Despite the positive cash flow, we anticipate PVH will dispose of some to focus its resources (financial and personnel) on its big brands. Further, we think it could look to leverage its prudent capital allocation and acquire a third major brand.