Morningstar - Q4 2020 - 71

Growing Abroad
PVH's key brands have growth opportunities in Europe and Asia.

BEST IDEAS: EQUITY

David Swartz

PVH PVH

This article is adapted from a Morningstar equity research report dated
Sept. 30, 2020.

Stats 09/30/2020

PVH's leading designer brands, Calvin Klein and Tommy Hilfiger, generate
about 85% of its revenue. We do not believe that they have the pricing power
or competitiveness to provide a moat for the company. We do, however,
see growth opportunities for both outside of North America and expect PVH
to return to consistent profitability after the COVID-19 crisis has passed.
PVH's dependence on these key brands (which we forecast will produce
more than 95% of PVH's operating income over the next decade) poses a risk.
PVH's U.S. business is exposed to department stores that were closing
stores even before the virus. However, PVH is working to reduce its
dependence on these channels by increasing sales through branded stores
and e-commerce. PVH also owns and licenses a few smaller brands of
minimal strategic value. We anticipate PVH will dispose of some of these
to focus its resources on its big brands.

In an expected move, PVH announced that current president Stefan Larsson
will replace Manny Chirico as CEO on Feb. 1. Chirico, PVH's CEO since 2006, will
continue to serve as company chairman. Larsson joined PVH in 2019 after
serving as CEO at narrow-moat Ralph Lauren. We think he was an instrumental
part of that company's mostly successful turnaround and largely attribute
his short tenure to the founder's unwillingness to share power. Before his
tenure at Ralph Lauren, Larsson had successful stints as president of no-moat
Gap's GPS Old Navy and head of sales at no-moat H&M HNNMY.
PVH trades well below our fair value estimate of $108 per share on concerns
about its exposure to department stores in the United States and the
severe impact of the COVID-19 pandemic. We expect Larsson will continue to
work to stabilize Calvin Klein and Tommy Hilfiger in North America while
building their international operations through organic growth, acquisitions of
licensees, and expansions of their direct-to-consumer efforts. Both brands
now generate most of their sales and income outside North America, and we
believe that international growth opportunities remain, especially for
Tommy Hilfiger in Asia and Calvin Klein in Europe.

Morningstar Rating
QQQQQ

Sector
t Consumer Cyclical

Industry
Apparel Manufacturing

Price
$59.64

Fair Value Estimate
$108.00

Uncertainty
High

Economic Moat
None

Stewardship Rating
Standard

Market Cap
$4.24 Billion

Price/Fair Value 09/30/2020

$200

Fair Value Estimate Per Share

150
108.00 100
59.64

Month-End Closing Price

10/2017

10/2018

50
0

10/2019

segments of both brands have exceeded those of their North American
segments over the past four years. Tommy Hilfiger and Calvin Klein suffered
sales declines in North America in 2019, which we view as a sign of weakness
in these brands. Moreover, due to the pandemic, we do not expect PVH to
eclipse its 2019 total sales until 2025.
We do not expect any major changes in PVH's capital-allocation strategy
as a result of the CEO change, nor do we expect our Standard stewardship
rating to be affected. PVH was an active buyer of its own shares before
the pandemic, and we expect Larsson will continue this practice after the
crisis has passed. We forecast $600 million in average annual share
repurchases during 2022-29. K
David Swartz is an equity analyst with Morningstar.

The share of PVH's revenue generated in the U.S. fell to just 43% in 2019 from
nearly 90% in 2010. Growth rates and operating income for the international

morningstar.com/lp/magazine

71


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