PVH (PVH) Up 14.2% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for PVH (PVH). Shares have added about 14.2% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is PVH due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

PVH Corp Beats on Q2 Earnings, Trims FY19 View

PVH Corp delivered better-than-expected second-quarter fiscal 2019 results, wherein both the top and bottom line surpassed the Zacks Consensus Estimate. With this, the company delivered 21st straight quarter of earnings beat.

However, quarterly results were hurt by soft traffic trends across North America and China. Further, the ongoing protests in Hong Kong resulted in a higher promotional environment. Consequently, management trimmed its revenue and earnings per share (EPS) view for fiscal 2019. Also, the current trends, anticipations of a volatile macro and retail landscape, and ongoing trade tensions led PVH Corp to revise guidance for the fiscal year.

Nevertheless, the company remains optimistic about its diversified business model and brand strength.

Q2 Highlights

PVH Corp’s adjusted EPS came in at $2.10, which included adverse currency impacts of 15 cents. The bottom line fell nearly 3.7% year over year but surpassed the Zacks Consensus Estimate of $1.89. The metric also outshined the company’s guided range of $1.85-$1.90.

On a GAAP basis, the company delivered earnings of $2.58 per share, up 21.7% from $2.12 registered in the year-ago quarter. However, the reported figure was short of the management’s guidance of $2.75-$2.80. Bottom line included an adverse impact of 6 cents from foreign currency translations.

In the fiscal second quarter, revenues inched up 1% to $2,364.2 million primarily driven by growth at its Tommy Hilfiger, somewhat offset by revenues decline at Calvin Klein and flat revenues at the Heritage Brands segment. On a constant-currency (cc) basis, revenues improved 3%. The top line outpaced the Zacks Consensus Estimate of $2,334 million.

The company’s total gross profit inched down 0.7% to $1,288.4 million and gross margin contracted 380 basis points (bps) to 54.5%. Moreover, adjusted EBIT decreased 2.5% to $232.5 million including adverse currency impacts of nearly $5 million. Adjusted EBIT was hurt by a decline in earnings at the Calvin Klein and Heritage Brands’ businesses and higher corporate expenses, somewhat compensated with growth at the Tommy Hilfiger business.

Segment Analysis

PVH Corp reports its financial results under three segments — Calvin Klein, Tommy Hilfiger and Heritage Brands.

Revenues at Calvin Klein declined 6% year over year to $873 million (down 4% at cc). This also includes a total net reduction of nearly 2% from the winding down of PVH Corp’s women’s jeanswear wholesale business in the United States and Canada; closing of the CALVIN KLEIN 205 W39 NYC brand; and revenue contribution from the Australia acquisition.

However, the segment’s International revenues edged up 1% to $465 million (up 5% at cc). Robust growth in Europe and gains from the Australia acquisition was somewhat offset by lower sales due to the closure of the CALVIN KLEIN 205 W39 NYC brand and weakness in China. International comparable-store sales (comps) were flat. Furthermore, the segment’s North America revenues declined 13% to $409 million (down 12% at cc). In North America, comps dipped 3% due to lower traffic and weak consumer spending trends.

Revenues at the Tommy Hilfiger segment improved 8% to $1.1 billion (up 10% at cc). International revenues at the segment increased 18% to $697 million (up 22% at cc). The improvement was mainly backed by a stellar performance in Europe and gains from the Australia acquisition as well as comps growth of 9%. However, the segment’s North America business witnessed a 5% revenue decline to $413 million (down 5% at cc) on account of an 8% comps decline.

The Heritage Brands segment’s revenues remained flat year over year at $381 million. However, comps at the segment dipped 2%.

Share Repurchases

In the first six months of fiscal 2019, PVH Corp bought back roughly 1.2 million shares for $127 million, under its $2-billion buyback authorization extending up to Jun 3, 2023. Since its inception, the company has repurchased nearly 10.2 million shares for $1.1 billion as part of its commitment under the aforementioned plan.

In fiscal 2019, the company expects to repurchase shares for nearly $300 million, up from the prior projection of $200 million.

Other Developments

During the reported quarter, PVH Corp concluded two acquisitions, which include roughly 78% stake in Gazal Corporation Limited, also known as the “Australia acquisition”, and the Tommy Hilfiger retail operation in Central and Southeast Asia.

Additionally, PVH Corp has agreed to end the licenses for the global Calvin Klein and Tommy Hilfiger North America socks and hosiery operations. This is in sync with management’s plan to merge this business for all brands in North America in a newly-created joint venture. The venture is likely to operate this December. Further, the company will bring the Calvin Klein’s international socks and hosiery business in-house.

FY19 Guidance

Notably, management updated view for the remainder of fiscal 2019 to reflect trade tensions between the United States and China, the ongoing protests in Hong Kong and a highly promotional U.S. retail backdrop. Management expects an adverse impact of roughly 20 cents per share from tariffs in the current fiscal year.

Further, the revised view reflects the Australia acquisition and the buyout of the Tommy Hilfiger retail operation in Central and Southeast Asia. Also, it includes the impact of aforesaid measures at Calvin Klein business. All these transactions are likely to contribute roughly $75 million to revenues in fiscal 2019.

For fiscal 2019, the company now projects revenues to increase about 1% (up 3% at cc) compared with 3% growth predicted earlier. Brand-wise, revenues are anticipated to increase roughly 5% at Tommy Hilfiger. Further, revenues are expected to decline 2% and 1% at Calvin Klein and Heritage Brands, respectively. At cc, revenues are likely to grow 8% at Tommy Hilfiger and remain flat at Calvin Klein.

Net interest expenses are expected to decline to nearly $110 million, down from $116 million incurred in fiscal 2018. Further, adjusted effective tax rate is projected in the band of 14-15%.

On a GAAP basis, EPS is now projected to be $7.95-$8.05 compared with $9.05-$9.15 projected earlier. Last year, PVH Corp reported GAAP EPS of $9.65.

Further, adjusted EPS are now envisioned in the band of $9.30-$9.40 for the fiscal year, down from the earlier guided range of $10.20-$10.30 and $9.60 earned in fiscal 2018. Both GAAP and non-GAAP earnings projections include negative impacts of roughly 35 cents per share from adverse currency.

Q3 Guidance

For third-quarter fiscal 2019, the company expects total revenues to grow nearly 1% (up 3% at cc). Brand-wise, revenues are expected to increase 5% (up 8% at cc) at Tommy Hilfiger and remain flat (up 2% at cc) at Calvin Klein. However, the metric is likely to decline 10% at Heritage Brands.

Net interest expenses are anticipated to decline to roughly $27 million in the fiscal third quarter. The adjusted effective tax rate for the quarter is anticipated in the range of 6.5-7.5%.

On a GAAP basis, the company envisions EPS in the range of $2.70-2.75 compared with $3.15 in the prior-year quarter. Further, adjusted EPS is envisioned in the band of $2.95-$3.00, down from $3.21 earned in the year-ago quarter.

Notably, GAAP and adjusted earnings guidance for the third quarter include an anticipated adverse impact of nearly 9 cents from foreign currency.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted -14.89% due to these changes.

VGM Scores

At this time, PVH has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise PVH has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.

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