PVH Corp. (PVH) Ratings Affirmed by S&P Ahead of Q1 Report

S&P Global Ratings said that it affirmed its 'BB+' corporate credit rating on PVH Corp. (NYSE: PVH). The outlook remains stable.

(NOTE: PVH will report Q1 results on Wednesday.)

At the same time, we affirmed our 'BBB' issue-level rating on the company's senior secured facilities, indicating our expectation of very high (90% to 100%) recovery in the event of payment default. We also affirmed our 'BB+' issue-level rating on the company's $700 million unsecured notes due 2022. The recovery rating remains '3' indicating our expectation of meaningful (50% to 70%; upper end of the range) recovery in the event of payment default.

We estimate the company's adjusted debt was approximately $4.8 billion at Jan. 31, 2016.

"The affirmation reflects PVH's good market position, portfolio of well-recognized brands, geographic diversification, good profitability, and moderate leverage," said S&P Global Ratings credit analyst Peter Deluca.

We have also considered the company's participation in the highly competitive apparel sector, which is vulnerable to fashion risk, foreign exchange volatility, and changes to consumer preferences and spending patterns.

PVH ranks among the larger U.S. apparel companies, with over $8 billion in sales. The company's market position and scale has been enhanced through acquisitions. The company recently completed the acquisition of 55% interest in TH Asia Ltd., representing the balance of the China joint venture. We believe PVH's acquisitions have leveraged its operating expertise and spurred growth while reducing its reliance on its legacy dress shirt business and U.S. market. The company also has the ability to grow organically and has demonstrated it can develop brands through its sourcing, design, information technology, marketing, and distribution infrastructure. PVH's sales of about $8 billion exceed those of Ralph Lauren Corp. (about $7.4 billion in sales) but continue to lag VF Corp. (over $12.3 billion in sales).

PVH's diversification is good, with broad product offerings across sportswear, dresswear (men's shirts and neckwear), and, to a lesser extent, footwear. The company offers a diverse portfolio of brands including Calvin Klein, Tommy Hilfiger, Van Heusen, IZOD, ARROW, Warner's, and Speedo. Revenues are generated through wholesale distribution, company-operated retail stores, and through licensing arrangements. The company sells products globally across various retail channels ranging from department stores to mass merchandisers, with the five largest customers representing about 22% of revenue with no single client representing more than 10% of sales. PVH's geographic diversification is also good, with more than 45% of revenue from overseas.

PVH's operating performance has been consistently good, in part it is because its global sourcing platform provides for production flexibility. Nearly all of PVH's products (with the exception of a small amount of handmade neckwear) are sourced from off-shore manufacturing facilities. The company's sources are extensive and reach across roughly 50 countries and 1,300 factories. However, the company remains susceptible to rising labor and transportation costs.

The stable outlook reflects our expectation that PVH's operating performance will remain at least near current levels based on continuing good performance of its diversified brands, strong market positions and global supply chain efficiency despite our forecast of weak top-line growth and a difficult consumer environment. We project debt-to-EBITDA leverage to be in the 3x-3.5x range over the next two years. We would maintain a stable outlook following a leveraging acquisition if the company to maintain debt-to-EBITDA leverage below 4x.

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