Time to Buy This Top Apparel Company

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After beating earnings last quarter, PVH Corp's (NYSE: PVH) stock still managed to take a sizable hit. The stock is down as much as 5% since last week. Last quarterly results showed a 35% increase in earnings year over year, and posted EPS of $1.60 per share, beating consensus of $1.50, so what's the big deal? 

The recent slide came as the company now believes there will be a 20% lower EBIT contribution from the Warnaco acquisition. Cost savings guidance for 2013 was lowered to $25 million from $50 million on this decreased profitability. Analysts now expect the acquisition to be dilutive to 2013 EPS by $0.25, compared to prior estimates of a $0.25 to $0.30 accretion. However, despite the setback, I think the pullback could be a buying opportunity. 

PVH will unite Calvin Klein underwear, jeans and sportswear lines with the Warnaco deal. The acquisition also brings PVH the Speedo and Chaps brands. This will still be a long-term positive despite the fact that it will take longer than expected to recognize the synergies, now expected to take up to four year versus the previous three, before synergies are fully recognized. PVH is also one of billionaire Michael Dell's top five stock picks. 

PVH managed to beat fourth quarter estimates thanks to solid revenue performance in Tommy Hilfiger, up 9% year over year, and Calvin Klein, up 14%. Analysts expect the company to grow at an annualized 13% pace over the next five years, and when coupled with its "cheap" valuation the stock is a solid growth at a reasonable price opportunity with a PEG of 1.1; this is likely why hedge funds love the stock.

The Apparel Industry 

One of the great ways to play the higher-end retail apparel industry is Ralph Lauren (NYSE: RL), which has various opportunities to expand in the global luxury apparel markets. Ralph's international expansion is a huge opportunity for the company, which includes its long-term goal of increasing its exposure to Europe and Asia to make up two-thirds of its total business, compared to the 38% the two made up in 2012.
Even more, its e-commerce business is expected to be a big growth driver going forward. The company has grown nicely over the last five years, managing to grow earnings by 10% annualized, and analysts expect the company to grow at an annualized 14% over the next five.
One of PVH's biggest competitors is VF Corp (NYSE: VFC), which has seen some pressure due to the warmer winter. This is in part due to its two key brands being heavily-exposed to the cold weather market, The North Face and Timberland. What's more is that VF has not managed to pursue any strategic acquisitions, while PVH has been busy. VF's major past acquisitions include North Face (2000) and Vans (2004).
Growth is also slowing. Analysts expect VF's revenue growth to slow to 6% in 2013, after having grown 15% year over year in 2012, and the company also recently cut its 2013 EPS estimate to $10.80 from $11.16 on revised sales expectations.
The Jones Group (NYSE: JNY) is one of the industry's many turnaround stories. The company sells apparel via its top brands Jones New York, Nine West and Anne Klein. Meanwhile, the company is looking to focus 2013 toward expanding its international footprint. Analysts expect revenues to be up 4.6% in 2013 on the back of a turnaround in jeanswear and momentum in footwear and accessories. As well, the company managed to post fourth quarter EPS of $0.14, compared to $0.10 for the same period last year, and well above consensus estimates of $0.05. 

Don't Be Fooled

PVH has made strides to become one of the top apparel stocks, and it appears to be trading rather cheaply. PVH trades at the bottom of the industry on a price to operating cash flow basis at 13x. Ralph Lauren is at 16x, VF Corp 14x and The Jones Group at 30x. Although news of late has been unexciting, given downward revisions on the immediate impacts of its Warnaco acquisition the long-term benefits for the company are still intact. This pullback could be a great opportunity to jump into the stock. 

Marshall Hargrave 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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