PVH Grows...In Europe.
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PVH Corporation (NYSE: PVH), formerly known as Phillips-Van Heusen, reported strong results for its second quarter Tuesday. Revenue was roughly flat year-over-year at $1.3 billion, which was also in-line with consensus expectations. Earnings, on the other hand, surged 17% to $1.25 per share, which was notably stronger than the consensus prediction. The retailer raised its full-year earnings guidance range to $6.25 to $6.32, above its previous range of $5.90 to $6.00 and above consensus (which called for $6.22 per share). Shares still have some upside to the high-end of our fair value range, but we’re not huge fans of the stock at current prices.
PVH has focused on slashing unprofitable businesses, including the Izod women’s business and Timberland sportswear wholesale. As a result, apparel gross margins increased by 100 basis points to 51.3%. With SG&A growth roughly in-line with total sales growth, total profitability was boosted by royalty and licensing revenue expansion of nearly 10%.
The firm's Tommy Hilfiger brand continues to perform well, reporting strong 4% year-over-year sales growth, to $722 million. Net of the unfavorable impact of currency, segment revenue grew 10% during the second quarter thanks to surprisingly great results in Europe. Same-store sales in Europe jumped an impressive 15%, while wholesale revenues grew 9%. With nearly every competitor experiencing weakness in the region, Tommy Hilfiger seems to be one of the few that is resonating with the European consumer (and in a difficult economy). Management noted concerns about the credit quality of some of its customers in Southern Europe but feels comfortable with its overall credit exposure.
This isn't the first firm to have shown solid growth in the face of economic headwinds in Europe. VF Corp (NYSE: VFC), owner of Timberland, North Face, 7for All Mankind and Vans, among others, saw revenue increase 16% in Europe during its most recent quarter. VF Corp has strong (somewhat affordable) brand name products that consumers are flocking to in the wake of the US recession, and we think the trend could spread to Europe. The stock isn't cheap, but its valuation is relatively in-line peers.
Calvin Klein, another of PVH’s segments, didn’t fare quite as well, but still grew revenue 5% to $251 million. The Calvin Klein brand is actually sliced between the firm and Warnaco, with PVH receiving revenue from licensing and royalty agreements. Royalty revenue for the segment increased 6% year-over-year.
Meanwhile, PVH’s Heritage Brands segment, which includes Van Heusen, Arrow, Bass and Izod, saw sales slip 10% during the second quarter (or about 6% after excluding the previously-mentioned discontinued business lines). Unlike Calvin Klein and Tommy Hilfiger, which are designer brands, the Heritage brands segment is sold through traditional department stores like J.C. Penney and Kohl’s . With sales falling at both retailers, it comes as no surprise that this segment continues to struggle. Ultimately, we’re not huge fans of this business line long term and wouldn’t be surprised to see the brands either folded or sold down market in the future. We're not hugely optimistic about Kohl's future, as the company continues to miss out on industry trends and bring fashion to market at a slow rate. As for Penneys, Ron Johnson's makeover has either accelerated its decline, or his grand vision is beyond our comprehension.
Even though we really liked PVH’s ability to navigate a tough European retail environment, we believe shares are fairly valued at current levels. We think the Heritage segment could continue to struggle, and shares register just a 4 on our Valuentum Buying Index (our stock-selection methodology). We remain on the sidelines until the firm’s valuation becomes more compelling.
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