Retail Stock with Strong Brand Awareness and Upward Potential
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PVH Corporation (NYSE: PVH) is the third largest apparel company in the world, and the largest dress shirt and neckwear company in the world. In these challenging times for retail companies, the ownership of Calvin Klein and Tommy Hilfiger provides the company support with scale and strength across key distribution channels, especially department stores. PVH reiterated its Q2 EPS guidance of $1.18-1.20 versus consensus of $1.19 and FY12 EPS of $6.15-6.25 versus consensus of $6.23. Historically, PVH has consistently delivered on its guidance and we are impressed with the strength in Tommy's business in Europe despite weak macro trends, with Q2 SSS up high single digits so far. We also see opportunities for international growth at Tommy, particularly in Eastern Europe and Asia. Thus, if current trends continue, we back the company to beat the guidance. The following chart presents a break-up of the company’s FY11 revenue and operating profit.
Source: Company reports
The Heritage business poses some concerns with its low operating margins. However, we are confident about the company’s growth prospects going forward as the Calvin and Tommy brands are well positioned and we expect a recovery in the heritage business as well.
Ample growth drivers for Calvin and Tommy
We believe the company has enough growth drivers for Calvin and Tommy brands that represent 70% of revenue and 82% of profits to deliver 8%-10% topline growth, 50-75bps of annual operating margin expansion and high-teen EPS growth over the next five years. Both brands have significant geographic white space opportunities in BRIC (Brazil, Russia, India and China) countries as well as category expansion opportunities (tailored clothing at Tommy and European apparel at Calvin). Tommy, with $80 million revenues in China and just $70 million in India, can grow exponentially in this region over the next several years. CK launched ck one color cosmetics in 150 U.S. retail doors in spring of this year (expanding to 400 doors for fall), which we think could be an additional growth driver for the brand.
Heritage Business likely to recover with JC Penney’s shop-in-shops
PVH's heritage business which represents 17% of earnings has been a weak link over the past few quarters (revenues are expected to be down 8-9% in Q2 2012). But a recovery is likely in 2H12 both in terms of revenues as well as margins driven by tailwind from lower product costs and IZOD's shop-in-shops launch in 600 JC Penney (NYSE: JCP) doors beginning in September. Going forward, PVH’s $10M investment, on top of JCP’s significant investment behind the shop-in-shops, is expected to bring good results for the company.
Impressive acquisition track record
When it comes to integrating acquisitions, getting the synergies out of acquisitions and delivering against the projected results, PVH has an impressive track record. The company acquired Calvin Klein in 2003 and helped the brand achieve a compounded annual growth rate of 13%. As a result, Calvin Klein today is a global brand with 96% consumer awareness and $7.6 billion in global retail as compared to $2.8 billion in 2003. The management’s top priority to utilize cash flow remains in acquisitions and we believe investors will react positively to any acquisition announcements.
We believe that the long term growth opportunities for Calvin Klein and Tommy Hilfiger, two strong global lifestyle brands, combined with margin expansion potential makes PVH one of the more attractive stocks in the apparel manufacturing space. We believe the company has a strong management team with a good track record with acquisitions, and thus we recommend it as a good investment.
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