Increased leverage from debt financed acquisitions
The Warnaco merger increased the debt level by $1.7 billion—after considering the settlement made from the gross proceeds of $3.9 billion. As a result of higher debt levels, PVH’s leverage is measured by debt to EBITDA. It spiked to 4.75x at the end of full-year 2013—from 2.88x last year.
Also, net debt levels—term debt less cash and its equivalents—increased by $1.9 billion to $3.4 billion at the end of full-year 2013. While the net repayment of $631 million during the last 12 months, or LTM, 2014, slightly lowered the net debt and leverage levels, the company continues to have a moderate debt burden. It has a debt to EBITDA of four times.
Management intends to utilize its free cash flow to pay off its debt ahead of schedule. It wants deleverage itself and prepare for any future debt financed acquisitions.
Liquidity profile and capital allocation
As of Novemeber 2, 2014, PVH Corp. (PVH) had available liquid sources of funds amounting to $518 million. It included cash of $365 million. Unused working capital lines held in various jurisdictions totaled ~$153 million.
Over the last five-year period, PVH has been cash flow positive. Its operating cash flows have been more than enough to provide for maintenance capital expenditures and support its current dividend policy of $0.12 per share or about $12 million in annual cash dividends. Operating cash flows for full-year 2013 came to $412 million against a capex of $237 million.
The firm’s expansion plans—like the Tommy Hilfiger acquisition in 2010 and the Warnaco merger in 2013—have been financed through funds raised from the capital markets. These initiatives added a considerable debt burden to PVH’s capital structure. Nearly 80% of PVH’s outstanding debt matures in 2019 and beyond.
PVH should be able to address its debt maturities because it continues to generate the current level of free cash flows. It doesn’t squander its cash. Management intends to utilize its free cash flow to reduce its debt levels and possibly return some wealth to shareholders through share buybacks sometime after 2015.
The above chart captures PVH’s debt maturity profile.
According to credit ratings assigned by S&P and Moody’s, PVH is a high yield borrower. A firm is considered investment grade if it’s ranked BBB- or Baa3 or better by S&P and Moody’s, respectively.
S&P’s corporate credit rating of PVH is BB+ with stable outlook. Moody’s corporate family rating for PVH is Ba2 with a stable outlook. Of the two ratings, Moody’s rating is more recent. As a result, we’ll compare Moody’s corporate family ratings for PVH’s peers.
Other retail companies, VF Corp. (VFC) and Ralph Lauren (RL), are rated A3 by Moody’s. This implies a rating that’s superior by four notches to PVH’s rating. It’s higher than Baa3. These firms are viewed as investment-grade borrowers. Hanesbrands (HBI) is rated equivalent to PVH by Moody’s. Perry Ellis International (PERY) is rated two notches below at B1.
Since companies in the fashion industry are somewhat sensitive to the overall economic conditions, investors who seek to avoid industry specific risks can consider broad market ETFs like the SPDR S&P 500 ETF (SPY). It has a 0.05% allocation in its portfolio for PVH.