Is This Apparel Company a Good Buy?

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

PVH Corp (NYSE: PVH) recently jumped by more than 8% in after-hours trading after it reported earnings results that were above expectations. Since the beginning of the year, PVH has appreciated by only about 7%, much lower than the S&P 500’s return of more than 13%. PVH is currently in the portfolios of many investment gurus including Michael Dell, Leon Cooperman, Jim Simons and Joel Greenblatt. Should we buy PVH after its above-expected earnings results? Let’s find out.

Business snapshot

PVH is considered to be one of the biggest apparel companies in the world, with a lot of iconic brands in its portfolio including Calvin Klein, Tommy Hilfiger, Bass, and Van Heusen. PVH has a concentrated customer base. Its five largest customers accounted for around 18.7% of its total revenue, with around 8% of the total revenue coming from Macy’s, its biggest customer. The company operates in seven business segments. Around 33.4% of the total operating income, $220.8 million, was generated from Tommy Hilfiger International. Tommy Hilfiger North America ranked second, with more than $200 million in its operating profit, while Calvin Klein contributed nearly $195 million to its operating income.

Impressive first-quarter earnings results

In the first quarter 2013, PVH posted a 33.8% increase in its total revenue to $1.91 billion, while the net income came in at a loss of $(20) million, or $0.25 per share, much lower than a profit of $1.30 per share in the same period last year. However, the non-GAAP earnings jumped substantially to $1.91, after excluding one-time expenses relating to Warnaco acquisition, Tommy Hilfiger integration and debt modification. Its non-GAAP EPS came in ahead of analysts’ expectations of $1.35 per share. Looking forward, PVH expected to generate around $8.2 billion in revenue, with the non-GAAP EPS of around $7 per share in the full year 2013.

With the recent acquisition of Warnaco, PVH could control two big categories –  underwear and jeans. In the short term, PVH might experience the negative impact of this acquisition on its profit. However, in the long run, it would unlock the potential growth of the Calvin Klein brand, driving the business forward.

PVH is trading at around $111.30 per share, with the total market cap of around $9 billion. The market values PVH at around 12.4 times its EV/EBITDA. EV/EBITDA represents Enterprise Value/Earnings Before Interest, Taxes, Depreciation and Amortization. The ratio takes into account the company’s cash and debt position in conjunction with its market value, and then it compares with the cash generating ability of the company.

How about The Jones Group and Ralph Lauren?

Compared to its peers, including The Jones Group (NYSE: JNY) and Ralph Lauren (NYSE: RL), PVH is the most expensively valued of the three companies.

The Jones Group is trading at around $14.30 per share, with the total market cap of around $1 billion. The market values the company at a bit lower at 10 times EV/EBITDA. It is also considered one of the leader in designing and wholesaling of more than 35 brands, including Nine West, Kurt Geiger, Robbi & Nikki and Energie. In the first quarter 2013, The Jones Group generated most of its revenue from the top four core brands. Nine West brand was the leader with $198 million, or 19.6% of the total revenue. Jones New York brand ranked second with $160 million in sales while the Gloria Vanderbilt and Anne Klein contributed $85 million and $81 million, respectively, in sales.

For the full year 2013, The Jones Group expected to derive around 62% of the total sales from its core brands, while the emerging brands and category labels, each accounted for 19% of the total revenue. The Jones Group estimated its total revenue to stay in the range of $3.8 billion to $3.95 billion, with the two main categories being domestic wholesale jeanswear and domestic wholesale footwear and accessories.

The Jones Group will still eye the international markets for growth, where lies a great opportunity for the company. For the past four years, the number of international stores grew by more than nine times, to 335 stores in 2012. It also intends to open around 34 more stores by the middle of its fiscal 2013 overseas, focusing on the huge Chinese retail market. 

Ralph Lauren also has a lower valuation than PVH. At $174.40 per share, Ralph Lauren is worth around $15.8 billion. The market values Ralph Lauren at around 10.8 times EV/EBITDA. Recently, Ralph Lauren reported an impressive full year fiscal 2013. Revenue was up slightly, from $6.68 billion in 2012 to more than $6.76 billion in 2013.  Net income saw 10.1% year-over-year growth to $750 million, or $8 per share.

Ralph Lauren, the company’s chairman and CEO, felt excited about the full year 2013 results. He said: “We achieved record sales and profit levels in fiscal 2013. Our relentless focus on innovation and our commitment to superior craftsmanship continued to build our global customer base.” He also believed that the company will have quite a few exciting years, when it could grow its total global base store network and e-commerce platform.

Indeed, it already had online platforms in some European markets including Spain, Portugal and Greece. Ralph Lauren has the target to launch its e-commerce in the most populated market in the world, China. Going forward, Ralph Lauren is expected to do well in China by providing consumers the "pyramid of brands" so consumers could start at its  entry level and move up to the more expensive product lines. 

Investors might like The Jones Group most, with its dividend yield at 1.4%. Ralph Lauren ranked second with 0.9% dividend yield while PVH offers investors at only 0.1%.

My Foolish take

PVH, at 12.4 times EV/EBITDA, does not seem to be cheap at its current trading price. Among the three companies, I like Ralph Lauren the most due to its reasonable valuation and decent dividend yield. With its continuing business expansion initiatives in China, Ralph Lauren could be a nice buy for long-term investors.

Anh HOANG has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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