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September 01, 2020 1:41pm
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PVH: Is This Value Back In Style?

PVH corporation stock price - Calvin Klein brand

PVH Corporation (NYSE: PVH) shares pulled back in the wake of the Q1 release and guidance, which begs the question, is the value a buy? The stock is certainly a value compared to peers like Ralph Lauren (NYSE: RL) and Levi Strauss (NYSE: LEVI), but offsetting factors may make this stock less than attractive to investors. The Q1 results were decent, and there is growth in the outlook but nothing more than what was expected.

Given that this stock isn’t paying much of a dividend and share repurchases have dwindled to nothing, there is an excellent chance PVH stock could be heading for the bargain basement. 

The problem with the valuation is the capital returns. The stock trades at 8.5X its earnings outlook, which aligns with VF Corporation but well below industry leaders Ralph Lauren and Levi’s while paying less than 0.25% in yield. The other stocks trade at higher 11X and 10X multiples because of the capital position and the capital returns, which include dividends and share repurchases. Even VF Corporation (NYSE: VFC), which recently cut its distribution, is paying a much higher yield, and its outlook is at least as good as PVH’s. Ralph Lauren pays the lowest yield, about 2.8%, with VFC being the highest at nearly 7.0%

PVH Has Solid Quarter; Growth Plans Are On Track

PVH had a solid quarter with revenue of $2.16, growing nearly 2.0% compared to last year. The revenue was better than expected and driven by gains in the Tommy Hilfiger segment. Calvin Klein's revenue was flat YOY, while Heritage Brands fell 12% due primarily to divestitures. Regionally, International sales were strongest, led by a 44% increase in China and strength in the EU. China sales are up due to economic reopening and should remain strong through the end of the year.

DTC grew 8% on a channel basis, with strength in the US, while Wholesale fell by 2%. This is evidence of high inventory levels in the retail sector and the power of DTC channels for apparel manufacturers. DTC is also a higher-margin business seen in the bottom line results. 

The company’s margins contracted compared to last year but much less than expected, providing leverage on the bottom line. The gross margin contracted by 50 bps, and SG&A by 40 bps, leaving the GAAP income at $198 million and down slightly compared to last year. The takeaway is that the net income and the GAAP EPS of $2.14 are up YOY and ahead of the Marketbeat.com consensus estimates. The EPS beat by $0.19 or more than 100 basis points compared to the 140 bps outperformance on the top line. 

The company reiterated its previous guidance, which is good news. However, the guidance isn't all that great when you factor in the Q1 strength and indications of Q2 weakness that have echoed others in the retail sector. The FY outlook is in line with the consensus, but the Q2 is not, and there is a risk the Q3 guidance will come in weak when it is delivered. 

The Analysts Have Been Supporting PVH, Will That Continue? 

The analysts have supported PVH stock this year, but the rating is only Hold, and the last updates came out following the Q4 release. The guidance update is unlikely to spur upward revisions to the price target, only a few percentage points above the pre-release action. Assuming the analysts begin to trim their targets as they’ve down with VFC, this stock will likely move lower, sideways at best. 

The charts suggest a stop is in play already. The market hit a top at $90, confirmed twice in the past few months. This top may keep the action from progressing this year, and the post-release bias is downward. If the market does not support the stock at the 150-day moving average, it could move to $70 or lower. 

PVH stock chart

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