How Well Is PVH Corp Positioned For Recovery After Losing Half Of Its Market Cap?

June 3rd, 2020 by Trefis Team
PVH: PVH logo
PVH
PVH

PVH Corp (NYSE:PVH), formerly known as Phillips-Van Heusen Corporation, is owner of brands such as Tommy Hilfiger, Calvin Klein, Van Heusen, and several others. Like other retail/fashion/clothing companies, PVH Corp’s stock has dropped a massive 50% in 2020. That’s almost 7-times the decline in the broader market (S&P 500). Consumers have cut back on discretionary spending amid economic uncertainty and social distancing, as the Covid-19 pandemic continues to spread globally. Considering this, it makes sense to ask the question – Whether PVH Corp’s financial position will let it survive the demand slump or will it need additional financing to stay afloat? Our dashboard Does PVH Have Enough Liquidity To Survive Covid-19 Demand Shock examines the company’s cash flow generation ability, resilience of cost structure and operational runway, and compares it to that of its peers. We find that while PVH does have the cost structure and cash cushion to absorb the demand shock for the full year, assuming annual revenue decline by 30%, it has very little runway in case the demand plummets to zero.

PVH Corp Can Manage Operational Profits As Long As Revenue Doesn’t Drop By More Than -17%

In 2019, PVH generated revenue of $9.9 billion and net income of $415 million, implying roughly 4% net margin. We estimate that variable operating expenses such as cost of merchandise, freight charges, and direct payroll costs, stood at $6.5 billion, accounting for 66% of revenues and 70% of total operating costs. Based on this we determine that operating income will break even (no profit no loss) if current year revenues drop by -17% compared to 2019. In comparison, the break even revenue change % figure for companies such as Limited Brands, Gap, Ralph Lauren, and Under Armour stand at around -6%, -9%, -15% and -12.5% respectively. Among clothing retailers, it appears that PVH is slightly better positioned to absorb a demand shock.

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What If Full Year Revenue Falls By 30% As Demand Recovery Extends Till Q4?  

If the pandemic is controlled and demand bounces back to a good fraction of the pre-pandemic level by the fourth quarter of 2020, PVH Corp could see a 30% drop in revenue. We assume that it will resort to a 50% cut in capital expenditure and stop any share repurchases to save cash. In this scenario we expect a full year loss of $ -528 million on a base of $6.9 billion revenue. However, the good news is that even in this case, PVH corp will see a cash outflow of under $100 million. That’s not bad considering it has sufficient cash balance to cover it. However, this analysis does not take into account the lean months it will have to face before a demand rebound covers up losses.

What if the situation worsens and there is no demand for the next two months? Can PVH Corp survive? We estimate that in the absence of any revenue, the company has an operational runway of just 2.1 months. This is based on its cost structure and cash balance of roughly $0.5 billion as of end of March 2020. How does this compare to its peers? As it turns out, Gap Inc is not significantly better off. See how Gap has 3.6 months of runway in absence of any revenue.

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