PVH: Debunking Mr. Klein's Annuity

I'm often asked why I don't like PVH. That kinda bugs me because I do, in fact, like the company. The Calvin Klein brand (PVH's mothership - 60%+ of cash flow) has a billion+ growth runway ahead of it, and the company has the dominant (35%) share in the men's dress shirt business across its arsenal of brands. There are severe margin challenges ahead for PVH (especially with cotton costs high, and a downturn in the men's dress shirt business), but that appears to be in estimates for this year. My big hang up with PVH is that investors don't really give the company credit for the forward royalty obligations associated with its Calvin Klein business. Consider the following...
  • PVH identified about $1.55bn in forward obligations in its 10K. But this excludes another $575mm in payments (based on my assumptions) required to be distributed to Mr. Klein under the original terms of the purchase agreement. The kicker is that this lasts until 2017, and is at a rate of 1.15% of worldwide net sales of products bearing the Calvin Klein name. When I add it all up, the CK payments are actually greater than the operating lease liabilities - which is the greatest off balance sheet liability for most other companies in this space.
  • When I net it all out, PVH has forward obligations that are going up over the next 10 years, while the industry's is naturally going down. The gap is pretty startling, in fact. This is not bad by any means, but it simply means that the company's bullish CK growth strategy NEEDS to work.
  • The bottom line is that I don't think that this is a short based on ugly accounting practices. That's not the case at all. PVH is a stand-up company. But if I'm going to give PVH credit for CK's growth, I've got to give credit for the liabilities as well. At 8x EBITDA, valuation is not in the ballpark of where I'm interested in owning the stock.