This Apparel Stock Has a Long Way To Go

Gaurav is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Major apparel companies PVH (NYSE: PVH), V.F. Corporation (NYSE: VFC), and Ralph Lauren (NYSE: RL) have outperformed the S&P500 by a good margin. The following chart summarizes the stock price movement of these companies this year.

<img src="/media/images/user_14531/pvh-bmp_large.jpg" />

We can see that PVH has clearly been the winner as the stock has gained more than 55% this year. However, one needs to be aware if the gain has been primarily a result of multiple expansion or earnings growth. Let’s study the valuation metrics (forward PE and PEG) of these companies to have a better idea of their true worth.

<table> <tbody> <tr> <td> <p>Company</p> </td> <td> <p>Forward PE</p> </td> <td> <p>PEG Ratio</p> </td> </tr> <tr> <td> <p>PVH</p> </td> <td> <p>14.83</p> </td> <td> <p>1.33</p> </td> </tr> <tr> <td> <p>VFC</p> </td> <td> <p>14.19</p> </td> <td> <p>1.55</p> </td> </tr> <tr> <td> <p>Ralph Lauren</p> </td> <td> <p>17.56</p> </td> <td> <p>1.49</p> </td> </tr> </tbody> </table>

Despite the appreciation, I don't think PVH is overpriced. The company is trading in-line with VFC and at a discount to Ralph Lauren. Moreover, PVH has the lowest PEG ratio among these three companies and looks like a good buy. PVH has been a consistent performer and the strength of the company’s business could be seen in its recently announced numbers. The company beat the consensus estimates and the upper end of its EPS guidance by $0.04; making 3Q12 as the 11th consecutive quarter where it beat the consensus estimates. Moreover, the company has also updated its guidance for the full year. 

The company has been active on inventory management and ended Q3 with clean inventories. The company’s inventory increased 2% year over year and was lower than revenue growth, excluding the impact of exited businesses. Such a discipline over inventory management reduces the odds of old products staying on the shelves and thus, limits discounting in the future.

It is encouraging to see that despite the macroeconomic headwinds, the company has been able to expand its market share penetration and global reach; owing to a worldwide consumer appeal for its Calvin Klein and Tommy Hilfiger brands. Calvin Klein’s outlet retail business showed a remarkable 9% increase in comparable store sales and the acquisition of Warnaco Group (NYSE: WRC) will further cement PVH’s control of the Calvin Klein clothing brand.  Apart from Calvin Klein jeans and underwear, Warnaco will also add major brands like Chaps and Speedo to PVH’s diversified brand portfolio. The acquisition of Warnaco will help PVH accomplish more than $8 million in annual revenue and the deal is expected to boost the earnings per share by $0.35 in the first year itself and by as much as $1.00 by the third year. The company is currently projecting all of the European jeans and apparel businesses that Warnaco operates at contractual guaranteed minimums of fiscal 2012 and thus, there is a possibility of an upside to these estimates. 

The management has indicated that the Q4 has got off to a good start with both Calvin Klein and the Tommy Hilfiger businesses continuing to perform ahead of estimates. Going forward, I see a huge white space opportunity for Tommy Hilfiger to grow in countries like India and China as these regions still represent a very small portion of the total revenues (Tommy generates just $150 million of revenues in Asia and China combined). 

In short, I find PVH stock attractive despite the run up. PVH has been one of the most consistent companies in the apparel industry and with a ongoing turnaround in the heritage business and a strong hold of its Tommy and Calvin Klein brands, I see a huge runway for growth. The company has an impressive track record for acquisitions and any further acquisition (though unlikely in the recent future) would act as a positive catalyst for stock appreciation. I rate it as a buy. 

gauravguru has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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