The Better Buy in Fashion

By Chad Henage - June 6, 2012 | Tickers: PVH, RL | 0 Comments

• Email
• Print

I'm sure there are some who would argue the point, but in the men's fashion industry there are just a few standout names, Ralph Lauren (NYSE: RL), Calvin Klein, and Tommy Hilfiger come to mind. The last two brands are owned by a company called PVH Corp. (NYSE: PVH). PVH also licenses a ton of recognizable brands like Van Heusen, Bass, Kenneth Cole and others. Ralph Lauren doesn't have quite the stable of brands, but when customers see a little stitching of a polo player they immediately know the brand. Using Peter Lynch's idea of buy what you know, there are millions that could have bought either company as soon as they picked up their most recent Polo shirt or Calvin Klein boxers. The question is which company is the better investment?

You can see that strictly on a PEG basis, PVH could be the better value. With both companies showing similar expected growth rates, PVH sells for a lower multiple. There could be a good reason for that, but for now we'll give this category to PVH. (PVH – 2, Ralph Lauren – 1)

In today's market, you have to be wary of companies that miss earnings estimates. I've seen several instances where an earnings miss of just a few percent, causes the stock to drop like a stone. Investors in either PVH or Ralph Lauren haven't had to worry about an earnings miss, as both companies actually beat earnings estimates in 4 of the last 4 quarters. While that's impressive, Ralph Lauren did a better job as their average beat was by over 16%, versus PVH's average was just under 7%. (PVH – 1, Ralph Lauren – 2)

When most investors compare two companies, if they are relatively similar, the company with the highest yield wins. Sometimes that simplistic of an approach fails, but not in this case. PVH pays a yield of just 0.20% versus Ralph Lauren's yield of 1.13%. Even more important, is the difference in dividend growth between the two. While PVH has not increased the dividend in the last five years, Ralph Lauren shows a growth rate of over 30%. Dividend coverage is not an issue, with free cash flow payout ratios of 3.39% for PVH and 12.12% for Ralph Lauren. A better yield and huge dividend growth makes Ralph Lauren our winner again. (PVH – 1, Ralph Lauren – 2)

While earnings and dividends are important, many investors look at free cash flow as a measure of how a company is really doing. Using a ratio of free cash flow per $1 of assets, we see that PVH generated $0.05 per $1 of assets in the last year. Ralph Lauren is absolutely more efficient using their assets to produce cash as they generated $0.11 of free cash flow per $1 of assets. In the retail industry, a more efficient operator many times wins, so this category goes to Ralph Lauren as well. (PVH – 1, Ralph Lauren – 2)

Last but not least, we need to look at the two companies balance sheets. Using the debt-to-equity ratio, we find that PVH is far more leveraged with a 0.67 ratio. By contrast, Ralph Lauren has a debt-to-equity ratio of just 0.075. Less leverage means more flexibility to make acquisitions, pay dividends, and buy back shares. In addition, less debt means less chance of financial problems if times get tough. (PVH – 1, Ralph Lauren - 2)

In summary PVH scored a 6 and Ralph Lauren scored a 9. I think you could even make the argument, that given Ralph Lauren's superior performance in all of the other categories, that it deserves the premium the stock sells for. This comparison is a good example of, sometimes a company is better served to stick to its original brand rather than trying to be everything to everyone. While PVH's brand stable is much larger, the company is doing significantly less for investors on nearly every measure we looked at. Ralph Lauren's numbers are so impressive that this win was really not a contest after all.

• Email
• Print
• Feedback