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Does PVH Corp (PVH) Have Upside Left Despite Sales Woes?

Zacks Equity Research

PVH Corp. PVH has been navigating through rough waters for a while now, thanks to softness in its Calvin Klein business, stiff competition and adverse currency fluctuations. Driven by these headwinds, shares of this New York-based company declined approximately 29% in the past one year, underperforming the industry’s growth of 7.4%.

Nevertheless, the company is benefiting from its diversified brand portfolio, particularly the Tommy Hilfiger brand. Also, it has been experiencing robust momentum in the international business, mainly backed by solid growth in Europe and Asia. Improved trends in its North American business, especially the wholesale unit, bode well.

 

Let’s look at both sides of the story.

Reasons Behind PVH Corp’s Dismal Run

PVH Corp is grappling with softness in the Calvin Klein business over the past few quarters. This, in turn, has been weighing on the company’s consolidated sales, which dipped nearly 1% in fourth-quarter fiscal 2018. PVH Corp’s Calvin Klein business reported a 2% sales decline in the fourth quarter due to the inclusion of an additional week in fiscal 2017 and soft results in North America.

The segment’s North America unit continues to be negatively impacted by Calvin Klein’s Jeans business owing to fashion miss. Revenues for North America unit declined 7% in the reported quarter due to the aforementioned issue as well as impacts from an extra week in fiscal 2017. Moreover, Calvin Klein North America’s comparable-store sales decreased 1%.

Apart from these, unfavorable foreign currency fluctuation is impacting the company’s performance. In the fourth quarter, its sales were hurt by a calendar shift and an additional 53rd week in fiscal 2017. The company’s earnings per share and operating income included negative impacts of 9 cents and $8 million, respectively, from unfavorable currency. Moreover, unfavorable foreign currency rate is expected to mar earnings per share by nearly 22 cents in fiscal 2019 and 14 cents in the first quarter.

Can Efforts Aid a Turnaround?

PVH Corp’s diversified brand portfolio allows it to stay ahead of its peers, generate above-average industry growth and sustain its position in the current challenging environment. Moreover, the company’s approach to brand management facilitates each of its brands to develop further through effective marketing strategies, financial control and operating leverage. Based on the strength of many of its brands, particularly Tommy Hilfiger, coupled with distribution opportunities, we believe that the company is poised for long-term growth.

Recently, the company agreed to reacquire the Tommy Hilfiger brand’s license in Central and South East Asia from Dickson Concepts (International) Limited. The transaction is in sync with its strategy of having direct control over its brands, which also covers licensed businesses. Through the latest agreement, PVH Corp will be able to leverage growth opportunities in the Central and South East Asian region.

Further, the company expects its Asia Pacific platform to aid expansion of the Tommy Hilfiger brand in Greater China. The enhancement of this brand will be backed by further investments for introducing other product lines and expanding brand presence.

PVH Corp is optimistic about the prospects in fiscal 2019. It expects fiscal 2019 revenues to benefit from the completion of pending acquisitions of 78% interest in Gazal Corporation Limited and the Tommy Hilfiger retail business in Hong Kong, and certain other countries in Central and Southeast Asia from Dickson Concepts (International) Limited during second-quarter fiscal 2019.

These transactions are likely to augment revenues by $150 million in fiscal 2019. As a result, the company expects 4% revenue growth (up 5% in constant currency) in the fiscal year. Further, it envisions adjusted earnings per share of $10.30-$10.40 for fiscal 2019, with GAAP earnings of $8.90-$9.00.

We believe the aforementioned factors to offset the hurdles and help it win back investors’ confidence. Currently, the company carries a Zacks Rank #3 (Hold) and has a VGM Score A, which shows that it has more room to run.

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