PVH - Maybe Not Spectacular, But Solid Will Do

By Stephen D. Simpson, CFA | November 30, 2012 AAA

'Tis the season when shoppers and retail investors are a little more prone to losing their ever-loving minds, so it wasn't altogether shocking to see PVH Corp (NYSE:PVH) do well on strong volume after a respectable, but not spectacular quarter. I continue to believe that PVH is a well-run apparel company, and that its acquisition of Warnaco (NYSE:WRC) is a strong move with benefits in both the short and long term, but it's hard to see today's price as any sort of holiday special.

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Another Solid Quarter
PVH Corp management continued its record of a consistently solid performance in the third quarter.

Revenue declined almost 1% as reported, but certain product exits (Izod women's and Timberland sportswear) and adverse currency moves depressed reported performance. Strip those out and underlying revenue rose 4%, and basically matched expectations.

Tommy Hilfiger saw a 6% constant currency revenue growth, with 4% international growth (again, currency-adjusted) and almost 8% growth in North America. Retail comps were strong in both Europe and North America, up 14 and 9% respectively. Calvin Klein revenue rose 6%, with North America up 3%, while the Heritage group saw a 7% revenue decline on a 10% headwind from Izod and Timberland.

PVH's margin performance was a little choppy, but not significantly so. Gross margin improved 260 basis points, and that was better than expected. The company also spent a bit more than expected on SG&A, though, so operating income growth of 10% and operating margin improvement to over 15% were basically as expected.

Switching to Two Barrels
Without wanting to completely restate my case from the time of the PVH-Warnaco merger announcement, I believe direct control over most of the Calvin Klein estate will pay real benefits in terms of better revenue capture and better margins. I also think Warnaco's Calvin Klein business will, frankly, be in better hands and I think PVH will do a better job of growing the business.

But there are also some additional synergies to consider. Tommy Hilfiger is a strong brand for PVH - revenue rose 6% this quarter, while adjusted operating income rose 16%. A lot of that strength is coming despite a pretty feeble European economy that has driven some tough results for many European apparel/retail names. With Warnaco, though, PVH's ability to grow the Tommy Hilfiger brand in Latin America and Asia should be even stronger.

Consistent Execution, or Go for the Glory?
Although there's still what seems like a daily drumbeat of news about how bad the economy still is, it's not showing up in the retailers, or at least not uniformly. Not only is PVH at a new high as of this writing, but American Eagle (NYSE:AEO) is within about 15% or so, and non-U.S. companies like ASOS (OTC:ASOMY) and Fast Retailing (OTC:FRCOY) are also faring rather well. What's more, the initial takes on Black Friday shopping have been relatively positive - odds are virtually 100% that results won't match the survey numbers that the media loves to hype going into the weekend, but the initial results look positive all the same.

My primary point in bringing this up is that valuations are starting to move up, and investors should likely take that as a sign to exercise a little more caution and discernment. To that end, companies like PVH (and Fast Retailing) have established themselves as pretty reliable performers, and while I would not overpay for PVH, there's at least the kicker of Warnaco-related accretion on the way.

The Bottom Line
Although PVH doesn't look so expensive compared to companies like Ralph Lauren (NYSE:RL) or Nike (NYSE:NKE), the stock is more than 60% ahead of its long-term EV/EBITDA average. What's more, even fairly healthy estimates of the value added by the Warnaco deal don't really push the stock into "buy" territory today. If I owned shares, I'd be in no hurry to sell as there's clearly a momentum trade going in retail (or at least parts of it), but I'd wait for a better price before establishing a new position unless I was just looking for a trade.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.

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