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PVH

PVH Stock Has Ample Liquidity To Weather A Covid Recession

PVH Corp stock (NYSE: PVH) has ample cash reserves to weather a Covid recession. PVH can generate $300 million despite its revenues falling by 40% in FY 2020. Stringent cost-cutting measures, as well as a rebound in demand for luxury products, should help the company to sail through this pandemic.

PVH stock has declined nearly 35% since the beginning of the year due to the outbreak of Covid-19. A Covid recession will impact the company’s revenues, cash flows, and ability to repurchase shares. We estimate that a recession that persists through late Q4 2020 can reduce the company’s revenues by 40% from $9.9 billion in 2019 to $5.9 Billion in 2020. PVH has taken a string of measures to preserve its profitability and cash reserves – including reducing capital expenditures, suspending buybacks, and temporarily reducing its workforce. We believe all these measures will help the company preserve its liquidity even if the situation worsens.

However, PVH has faced the brunt of the outbreak of coronavirus, with the company’s revenues falling by nearly 38% in YTD 2020 (ending July). Fading consumer demand, rising unemployment levels, reduced discretionary spending, and stay-at-home orders resulting in stores remaining closed continue to take their toll on the company’s business. Trefis analyzes the potential impact of the Covid Recession on PVH in an interactive dashboard with a focus on the company’s liquidity reserves and concludes that PVH is in a strong financial position, and a Covid-19 recession will not impact the company’s cash reserves in FY2020. Although a downturn will impact the company’s revenues, cash flows, and ability to repurchase shares, we believe the company has adequate financial reserves at its disposal to get through this pandemic.

Impact On PVH’s Revenues 

  • We estimate that a recession that persists through late Q4 2020 can reduce the company’s revenues by 40% to $5.9 billion in FY2020.
  • Although stores have started opening, store traffic is expected to remain well below pre-pandemic levels for several months, at least. Further, social distancing measures are likely to continue for a while, which will impact store capacity for the company.
  • However, PVH is one of the largest brands in the luxury apparel business, with the company’s revenues growing by more than 11% between 2017-2019. Moreover, the company has two of the most recognized brands in the luxury apparel industry in the name of Tommy Hilfiger and Calvin Klein. PVH’s brand appeal and a diversified geographical business should help the company’s revenue to recover.

Impact On PVH’s Cash Flows

  • PVH’s cash flows are likely to take a hit in FY2020 due to a steep reduction in revenues and a potential hit to profitability.
  • The company will have to offer merchandise at a deep discount to clear out the existing inventory, which will hurt the company’s bottom line.
  • However, PVH has taken a number of measures to mitigate the impact on its cash balance by issuing $685 million of senior credit notes.
  • Also, the company has decided to substantially reduce expenses across all operating heads, including reduced compensation, lower marketing investment, fewer discretionary expenses, and lower capital expenditures, while also suspending share repurchases.

Despite these measures to conserve cash, we estimate that Free cash flow from operations (which is Cash Flow after accounting for non-cash charges and working capital adjustments) (FCFO) will go down from $1 billion in 2019 to around -$238 million in 2020. Also, with expected capital expenditures of $207 million for the year, FCFO-CapEx will be just -$445 million in FY2020.(*exclude goodwill impairment charges)

Cash Balance Impact

  • Taking all these factors together, we estimate that PVH will end the year with a cash balance of $796 million – higher than the figure at the end of 2019.
  • This figure includes $740 million (Includes $111 million of share repurchase and $169 million of proceeds from the sale of the Speedo business) in fresh capital the company recently raised.
  • While the stringent measures taken by the company may dampen growth prospects in the near term, these moves by the company are essential for its long-term survival.

Conclusion

To sum things up, PVH has ample cash reserves and can successfully weather a recession through Q4 and a 40% decline in revenues by cutting Capex and share repurchases, and thanks to the fresh capital it raised recently.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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