Shifting Focus To Calvin Klein And Tommy Hilfiger Drives Brand Revitalization And Margin Growth

Key Takeaways

• Streamlining operations through focus on Calvin Klein and Tommy Hilfiger brands and efficiency measures should improve net margins and revenue.
  
• Strategic shifts towards direct-to-consumer sales and implementing the PVH+ Plan aim to enhance profitability through better inventory and supply chain management.
  
• PVH's shifts towards quality sales and reduced promotions, amid global economic challenges, risk revenue if volume declines outpace margin improvements.

Catalysts

Operates as an apparel company in the United States and internationally.

• The planned cost efficiency actions completed in 2023 are likely to result in lower operating expenses, improving the company's net margins.
  
• Focusing on Calvin Klein and Tommy Hilfiger brands after divesting from Heritage Brands should streamline operations and enhance brand desirability, positively affecting revenue.
  
• Inventory management improvements, as evidenced by a 12% year-over-year inventory reduction, are expected to lead to higher gross margins through less discounting and better product mix, impacting net margins.
  
• The company’s shift towards more direct-to-consumer (D2C) sales, evidenced by strategic actions to improve D2C trends despite a temporary downturn, is expected to increase margins and control over brand presentation, potentially boosting revenue.
  
• Implementations in the PVH+ Plan, including product innovations and a demand-driven supply chain, are designed to increase stock freshness and lower average unit cost (AUC), which should enhance profitability and drive revenue growth.

Assumptions

• Analysts are assuming PVH's revenue will grow by 1.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.4% today to 8.7% in 3 years time.
• Analysts expect earnings to reach $802.0 million (and earnings per share of $16.61) by about September 2027, up from $742.8 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.0x on those 2027 earnings, up from 7.1x today. This future PE is lower than the current PE for the US Luxury industry at 17.4x.
• Analysts expect the number of shares outstanding to decline by 7.56% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.52%, as per the Simply Wall St company report.

Risks

• The challenging global macroeconomic headwinds could negatively impact consumer spending, affecting PVH's revenue and net margins.
  
• The focus on higher quality sales, while beneficial for brand health and margin expansion, introduces risks if volume declines exceed improvements in margins, potentially impacting overall revenue and earnings.
  
• The strategic shift to reduce promotional activities and focus on full-price sales may lead to reduced competitiveness if consumers become more price-sensitive, impacting revenues and net margins.
  
• Geographic performance variability, especially the downturn in consumer spending in China and Australia, could lead to lower than expected international revenues, affecting the company's overall performance.
  
• The planned efficiency actions and restructuring costs, while aiming for long-term savings, could incur short-term expenses and distractions, potentially affecting net margins and earnings in the transition period.

Valuation

• The analysts have a consensus price target of $127.94 for PVH based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $174.0, and the most bearish reporting a price target of just $100.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $9.2 billion, earnings will come to $802.0 million, and it would be trading on a PE ratio of 9.0x, assuming you use a discount rate of 8.5%.
• Given the current share price of $94.96, the analyst's price target of $127.94 is 25.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.