There are not too many truly cheap stocks out there, nor a surplus of stories that are completely spot-free. In times like these, investors have to move on to stories where certain concerns are inflated or where undervaluation lies beyond the quick valuation ratios and in the cash flow capabilities of the company. Clothing wholesaler and retailer Phillips-Van Heusen (NYSE:PVH) is one such candidate - a quality company that is not necessarily cheap on first blush, but looks like a quality undervalued opportunity.

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A Solid End to the Year
PVH's earnings are not necessarily easy to digest - the company made a major acquisition (Tommy Hilfiger) and that makes the year-on-year comparisons a little more difficult. To the company's credit, though, they give investors an unusually-extensive amount of financial detail and it looks like the quarter was solid with or without the acquisition.

As reported, revenue jumped almost 128% to just under $1.4 billion, and beat the average analyst guess. The inclusion of over $700 million in Tommy Hilfiger revenue clearly made a major difference, though the core organic growth rate looks like it came in at more than 12%. In particular, the Calvin Klein business rose over 18%, with licensing revenue (from the likes of Warnaco (Nasdaq:WRNC) and G-III Apparel (Nasdaq:GIII)) up 11%.

Profitability was more of a mixed story. Gross margin did improve almost three points, but that was still less than most analysts expected. Likewise, adjusted operating margin of over 9% was not bad but not great relative to expectations. All in all, then, PVH's outperformance this quarter was fueled by higher sales and lower taxes, offset by some margin challenges.

The Road Ahead
PVH looks to be taking a different option than Hanesbrands (NYSE:HBI) or Polo Ralph Lauren (NYSE:RL) in dealing with higher input costs. Cotton is about 30% of the company's cost of goods and the company is not going to try to pass all of the costs through higher prices. Clearly that will pressure margins ... but the company may be able to pull other levers to reduce operating costs and may regard it as a long-term consumer-friendly strategy that will build sticky market share.

Competition is fierce in clothing, but that is nothing new. Phillips-Van Heusen has been dealing with the likes of V.F. Corp (NYSE:VFC), Perry Ellis (Nasdaq:PERY) and so on for years, and competing with them on the shelves of Kohl's (NYSE:KSS), BJ's (NYSE:BJ) and other retailers. Throughout that time, PVH has shown a pretty solid record of delivering appealing products at reasonable price points and there is no reason to think that is going to change now.

That said, there are relatively few apparel companies that have delivered impressive long-term operating margins and returns on capital and PVH is a borderline case in that regard. Getting bigger may help the company do better in that regard, particularly as the incremental profits of pushing more product (Tommy Hilfiger) through the existing distribution network should be appealing.

The Bottom Line
Phillips-Van Heusen stock had been floating just around its moving averages before delivering an earnings report that pleased the Street. With another above-expectation report in the bag, the company seems to have a solid combination of earnings momentum and opportunities to deliver further operating leverage. The stock is not dirt-cheap but it is undervalued and it looks like a quality name that can hold up, so long as consumer spending does not fade again. (For more, see Slip Into These Comfortable Clothing Stocks.)

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Tickers in this Article: PVH, WRNC, GIII, HBI, RL, VFC, PERY

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