This Stock Will Continue to Outperform

By Sandeep Gupta - September 19, 2012 | Tickers: OXM, PVH, RL | 0 Comments

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PVH (NYSE: PVH) is one of the world's leading apparel companies. The company currently controls a diverse portfolio of owned (Calvin Klein, Van Heusen, ARROW, and IZOD) and licensed brands (Tommy Hilfiger, Geoffrey Beene, Chaps, Sean John, and Donald J. Trump). Through a mix of wholesale, retail, and licensed businesses, the company generated $5.4 billion in revenue and $5.37 in operating EPS in 2011.

The company has been performing well despite a challenging global economic environment and beat the consensus estimates for EPS for the 10^th consecutive quarter. The following chart summarizes PVH’s EPS surprise history.

PVH's strong Q2 results and 2012 EPS guidance raise ($0.02 more than the Q2 beat, at the high end) continues to be driven by strength in Tommy Hilfiger which posted 15% same store sales growth in Europe (an acceleration from the 5% increase in Q1) and 9% wholesale growth. It is clear the brand is gaining significant market share in a tough macro environment. Moreover, management has done a good job at maintaining inventory levels and the company’s Q3 outlook also looks impressive.

Robust 3Q Trends

The company has got off to a good start in the third quarter. Following flattish trends in 2Q, Heritage Brands business is tracking low-single digits quarter to date. Importantly, Calvin Klein continued its strength with same store sales up 8%-9% quarter to-date, implying acceleration from 2Q. Tommy also continues to exhibit strength with quarter to-date same store sales also up 8%-9%, roughly consistent with the two year trend from 2Q12. Thus, the company’s all three brands are going strong and I believe that the company’s analyst day on 2^nd October in Dusseldorf will act as a positive catalyst for the stock.

Inventory In-Check

PVH exited the quarter with clean inventories at wholesale accounts as the company inventory levels were flat year over year and below the sales growth of 0.2%. I am especially encouraged by PVH’s active inventory management and allocation at retail accounts, both in US department stores and with accounts in Europe. Going forward, this control of in-store inventories will help limit discounts (and markdown checks) in the later half.

PVH’s liquidity position remains strong ending 2Q with $262 million of cash on hand. With expected annual free cash flow generation of $400-$500 million next year and $262 million of cash on hand today; PVH maintains a substantial amount of flexibility for future opportunistic acquisition activity, share buybacks and dividends.

Moreover, management reassured that a 15% CAGR in EPS is achievable and realistic over the next 3-4 years. I think this growth will be driven by continued strength in Tommy Hilfiger and Calvin Klein, an improvement in the Heritage business, and the possibility of acquisitions at some point in the future. From a valuation standpoint, PVH looks highly undervalued with respect to its peer group of Oxford Industries (NYSE: OXM) and Ralph Lauren (NYSE: RL). Despite growth in excess of this in 2010, 2011, and 2012E, the shares are trading at 13x forward earnings. The following chart summarizes the forward P/E and EV/EBITDA multiples of PVH and its peers.

PVH’s 15% CAGR growth profile is in-line with that of Oxford Industries and Ralph Lauren, yet it is trading at a significant discount to both of them. I think the market is under appreciating the company’s growth prospects and a strong hold of its Tommy Hilfiger and Calvin Klein brands in the global market. Going forward, as management continues to execute, the market will eventually reflect the company's consistency and outperformance in the multiple and share price appreciation will continue.

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