The Stage Is Set for Apparel Stocks

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

Phillips-Van Heusen (NYSE: PVH) rocketed up 10% last week, thanks to posting EPS of $1.91, well above $1.33 in the prior-year's quarter. PVH continues to separate itself from the likes of Ralph Lauren (NYSE: RL) and VF Corp (NYSE: VFC) in terms of price performance over the past twelve months. What's more is that with its recent acquisition of Warnaco, PVH will be able to unite the Calvin Klein brand under one roof, helping drive the company's long-term growth and potentially pushing the stock higher. 

PVH is an American apparel company, being the world's largest shirt company, owning brands that include Tommy Hilfiger, Calvin Klein, Van Heusen, and Izod. PVH CEO Emanuel Chirico noted that…

"2013 will be a year of transition for PVH. We are actively implementing our integration plans to build upon the foundation of PVH around the world and pave the way for the continued success of our businesses. We are optimistic that the expansion of our brands globally and the sound execution of our business strategies will continue to drive long-term growth and stockholder value."

PVH saw EBIT up 51% during 1Q year over year thanks to a $48 million increase in its Calvin Klein business, a $15 million increase in the Tommy Hilfiger business, and a $21 million increase in Heritage Brands. PVH is also implementing the Warnaco Calvin Klein jeans wear and underwear businesses, which will allow it to capitalize on long-term growth opportunities. Revenue is expected to reach $8.35 billion in fiscal 2014, which includes $2.15 billion from the Warnaco Group. As well, other tailwinds should include expansion of Tommy Hilfiger into Europe.

The return of the shopper

The big driver for all the apparel companies will be a rise in discretionary spending, which will be spurred on by rising employment and bolstering consumer confidence. The Thomson Reuters and University of Michigan index of consumer sentiment remains near six-year highs, thanks to increased hiring and rising property values. This was helped by the 175,000 jobs added last month. 

Ralph Lauren is another major apparel company. It managed to post fiscal 4Q EPS of $1.37 compared to $0.99 for the same period last year. This comes as the company saw positive revenue growth despite the economic downturn, thanks to its affluent customer base. 

Management has also guided that fiscal 2014 revenue will grow some 4% to 7%, as well as seeing operating margin expansion of 25 basis points to 75 basis points. Ralph Lauren already has an impressive operating margin of 16.5% for fiscal 2013. Going forward, Ralph Lauren should perform well on the back of a debt-free balance sheet and strong cash position of $1.4 billion. This strong balance sheet should help the retailer with its global expansion and enhanced brand offerings. 

The retailer is also looking to open some 30 retail stores in fiscal 2013, namely in international markets. Part of the key opportunities for Ralph Lauren include the Asia market, including increasing its brand positioning in Japan, South Korea, and Greater China.

VF Corp runs key brands such as North Face, Van's, Nautica, and Timberland. However, the second "unreasonably" warm winter has put pressure on its North Face and Timberland brands. Thus, the company is trying to manage inventory of these products cautiously, but VF is also seeing excess inventory of jeans wear in China.

VF has seen outdoor and action sports as its fastest growing segment and it made up 50% of revenue during 1Q 2013. This segment markets outdoor and activity-based products of authentic lifestyle brands. Meanwhile, its other big segment is jeans wear, which includes the Lee, Wrangler, Rustler, and Riders brands. Operating margins for VF are expected to be more robust at 14.7% in 2013 than PVH, driven by the shift toward higher-profit margin outdoor and action brands. 

By the numbers

VF has the most impressive return on equity (ROE). 

What's more is that both VF and PVH have very impressive PEG ratios thanks to the compelling valuation and strong expected growth. VF has a PEG ratio of 0.7 and PVH of 0.35, compared to Ralph Lauren's 2.1, making both stocks growth at a reasonable price opportunities. 

Hedge fund trade

PVH also leads the pack in terms of hedge fund interest. Going into 2Q, there were a total of 39 hedge funds long the stock, which was an 18% increase from the prior quarter. Dough Silverman's Senator Investment Group has the most valuable position, at $117 million (see Senators' top picks).

Behind PVH is Ralph Lauren with 34 hedge funds long the stock, including billionaire Stephen Mandel's Lone Pine Capital with the largest position in the stock at $534 million (check out Lone Pine's top stock picks).

VF Corp had only 14 hedge funds long the stock at the end of 1Q, which was an 18% decrease from the first quarter. Ric Dillon's Diamond Hill Capital has the largest position in the stock at $160 million (check out Diamond Hill's top stocks).

Bottom line

It appears that both VF Corp and PVH are positive long-term bets on the apparel industry, which will be driven by lower unemployment and higher consumer discretionary spending. PVH has the lowest PEG given the company's valuation and growth, but VF offers investors a solid PEG and robust ROE. 

The best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.


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!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure