What is PVH
PVH owns the apparel brands Tommy Hilfiger and Calvin Klein. These two brands make up >95% of company profits. The rest comes from PVH’s immaterial and declining exposure to a few other non-core apparel brands. So, the value of PVH comes down to TH and CK. The geographical revenue split is approximately: Europe (45%), Americas (35%), and Asia Pacific (20%).
An “okay” but not great business - brand
Brands can be valuable in several different ways. Obviously, TH and CK are not luxury brands such as Gucci or Louis Vuitton where a belt can be sold for $500. Nevertheless, I believe that “mid-tier” apparel companies such as TH and CK can be durable companies long-term. They can’t demand >$500 price tags for basic items, but consumers know what they get in terms of quality. The brands are familiar to them and have been so for many years or even decades if the consumer is old enough. As most will know, the majority of apparel brands fail. The few ones that have managed to build up significant reach (let us say +$1bn in annual sales), however, generally stick.
Fashion is often associated with change and evolution. While that holds true, I believe TH and CK exhibit more “staple” than “fashion” characteristics. A new TH or CK collection will consist of basic pants, basic T-shirts and sweatshirts, the popular CK underwear line and so on. These products do not change significantly from year to year (and the two brands’ main customer base also does not expect them to), which I believe makes the brands’ trajectory less uncertain.
The table below shows that TH and CK have historically delivered consistent profitability:
PVH is currently generating ca. $550mn in normalized free cash flow. Normalized meaning that working capital changes are averaged across years. As you can imagine, any single year’s free cash flow is heavily influenced by the timing of PVH’s buying and selling of inventory, the timing of payments received from wholesalers, and the timing of PVH’s payments to their third-party production partners in Asia.
There were ca. 54mn outstanding shares of PVH at the end of FY24 which ended February 2025. $550mn in free cash flow is around $10 per share. The share price is $70 so the market is currently paying ca. 7x trailing FCF.
Stefan Larsson (CEO) and Zachary Coughlin (CFO), unlike most management teams in the apparel industry, are currently allocating significant capital to repurchasing shares. They intend to repurchase shares for $500mn in 2025 through an accelerated share repurchase program. At the current price of $70/share, this is equivalent to a 13% share count reduction per year.
Why does this situation exist? – I believe there are a couple of key reasons why
In early 2025, MOFCOM (China’s ministry of commerce) placed PVH on their “unreliable entities list” after PVH allegedly boycotted cotton sourced from the Xinjiang region. No official action towards PVH has been taken yet. In a worst-case scenario, PVH would be banned from operating in China. This would eliminate 20% of PVH’s EBIT and trigger one-off costs associated with the exit. I estimate these one-off costs would amount to less than one year of PVH’s free cash flow.
30% of PVH’s EBIT is derived from the US and there is uncertainty related to these profits. First from the tariffs imposed on Asian countries where most of PVH’s third-party manufacturing partners are located. These tariffs would raise product costs for TH and CK in the US, pressuring profitability either through lower margins, lower volumes, or a combination. Do note, however, that since PVH does not own the production facilities, relocating production volume does not require capital outlays. Also, PVH is not at a relative disadvantage to their competitors regarding tariff implications. Additional uncertainty comes from the risk of persistently lower levels of tourism in the US. Tourists make up 30-40% of PVH’s US revenues. Both of these uncertainties could very well turn out to have no real long-term implications and therefore not really impact the value of PVH – but I don’t know.
Furthermore, the market generally does not pay high free cash flow multiples for mid-tier apparel companies. I believe that is justified. The structural growth for mid-tier apparel companies is low and consumer preferences fluctuate. That combination creates revenue uncertainty. At the same time, there is significant operating leverage for apparel companies. The combination of revenue uncertainty and operating leverage means that profits of an apparel company can drop sharply with even just modest business weakness. A seemingly attractive 7x P/FCF can quickly become not attractive at all.
A real-time example is VF Corp owned “Vans”. Vans is a major component of VF’s “Active segment”. Vans is currently experiencing difficulties and the implications from operating leverage are clear:
I note that TH and CK are less connected to a specific trend or theme compared to a brand like Vans. A 25% drop in revenue for TH and CK over a 2-year period therefore seems highly unlikely.
To provide an idea of the potential outcomes, I have given 3 different 2-year scenarios below. This is for illustrative purposes only. The scenarios:
In 2025 and 2026, TH and CK report stable revenues and margins compared to 2024. Nothing significant happens.
TH and CK grow 3% per annum and reach 12% EBIT margins in 2026 from their current cost-cutting initiatives together with some operating leverage. This is more in line with management’s expectations. Do note, however, that management’s expectations have historically proven to be very optimistic.
PVH is banned from China and US profits are cut in half. At the same time, the remaining business does relatively poorly with revenues declining 3% per annum and margins falling from 10% in 2024 to 9% in 2025 and 8% in 2026. This would be a decade-low margin level ignoring the covid plagued 2020.
I will leave it to you to derive your own probability-weighted IRR at the current price of $70/share.
A last note: Net debt was ca. $1.3bn at the end of FY24, equivalent to approximately 2 years of free cash flow.
DISCLAIMER: THIS IS NOT INVESTMENT ADVICE. I MAY OWN SHARES OF COMPANIES MENTIONED. SOME INFORMATION MAY TURN OUT TO BE INCORRECT. DO YOUR OWN RESEARCH.