PVH’s first-quarter results were low but met expectations, and the stock offers upside opportunity

PVH Company (New York Stock Exchange: BVH) is a fashion group. The company owns the Calvin Klein and Tommy Hilfiger brands.

This article discusses the company’s Q1 2024 results and earnings call. The results showed a decline in revenues 10%, especially in wholesale, Europe and Tommy Hilfiger. This was expected based on the company’s previous guidance, and PVH beat consensus on revenue and EPS. On a more positive note, margins rose and EBIT increased compared to the same quarter last year despite lower sales. The company raised its EPS guidance for the year to $11 to $11.25.

This is also my first article about PVH. I believe the company has several quality characteristics: high brand value, good focus on intangible assets, diversified global revenue base, and a good strategy for this difficult macroeconomic period. On the other hand, it has little financial leverage High, it seems that the company has exhausted its avenues for growth.

In terms of valuation, I think PVH is attractively priced. The company is trading at a P/E of 11x on the low range of FY24 guidance. This is generally an attractive multiple for a company with PVH characteristics. Moreover, the company’s earnings have room to improve if macroeconomic conditions improve, especially in Europe.

Q1 2024 results were challenged, in line with expectations

PVH’s Q1 2024 results were not good, with revenues down 10%.

About 3% of this decline resulted from the sale of a group of smaller brands (Warner’s, Olga, True&Co) in late 2023.

The remaining decline was concentrated in Tommy Hilfiger International (down 14% year-on-year), especially in Europe. The macro economy in Europe is facing challenges, and PVH is trying not to over-promote, which is impacting its sales but helping to maintain margins. The company calls this strategy of maintaining “quality sales.” Although results in Europe may be macro-driven, the company also announced the dismissal of global CEO Tommy Hilfiger and head of PVH Europe, suggesting some issues may be arising internally.

Calvin Klein, on the other hand, saw flat revenues, with growth in North America (4%) offset by declining international sales (down 2%).

The wholesale channel was the most affected, with revenues down 17%, again impacted by brand selling (6%) and Europe. In the case of Europe, PVH has decided that it will reduce the availability of its products in digital markets (call Q4 2023).

In terms of profitability, things looked much better. Gross margins were 350 basis points higher, which is understandable given the decline in the wholesale channel. Inventories fell by 22%, indicating a healthy outlook for future quarters. SG&A was $50 million lower than last year, meaning that despite lower sales, EBITDA was higher this quarter ($205 million) than last year ($198 million). Margin improvement was particularly strong at Calvin Klein, which, despite flat revenue, increased EBIT by 30%. This was offset by a 25% decline in Tommy Hilfiger’s profits.

Looking to the future, the company still expects challenges in Europe and wholesale. Management weighed in on the call about a fall 2024 order book decline, blaming overall caution. The company expects an improvement by the spring 2025 collection, which would impact revenues in late 2024 and early 2025.

A leading company in the field of clothing

In this section, I review some of the aspects I like and don’t like about PVH.

Leading brands: Calvin Klein and Tommy Hilfiger are two of the leading global clothing brands. Proof of this is that the brands have nearly 45 million followers on Instagram. This is a similar number to Ralph Lauren, with nearly 60 million followers across brands and platforms.

Universal foot mark: 65% of PVH’s revenues (according to FY 2010-10) were generated outside the United States. This shows that the brands have global appeal. The company does not disclose how much of its international revenue is generated in Europe versus Asia, but given the challenges in the first quarter of 2024, it appears that Asia remains less developed.

Significant investments in the brand: A fashion company has to invest in branding, otherwise it will lose its cultural relevance. I think PVH is investing in the right intangible assets. You can see some of the celebrities they have hired to promote their groups on their investor relations website. For example, last year Calvin Klein ran an advertising campaign with Jeremy Allen White before he received the Best Actor award at several film festivals for his participation in the film The Bear. This year, Tommy Hilfiger went to the Met Gala, an important fashion event, accompanied by the K-Pop band Stray Kids, who have 30 million followers on Instagram. Other recent collaborations include Jennie Kim, Jung Kook, Kendall Jenner, and Zendaya. The company recently appointed a new creative director for Calvin Klein Collection, and announced that the brand will return to hosting fashion shows next year.

Low growth potential: I believe that clothing brands can saturate their markets at some point, and this seems to be the case for PVH already. The company’s growth slowed in mid-2010. The avenues for growth are limited. Expanding into DTC can generally increase revenue, but may not translate into operating profits. According to PVH’s FY23 10-K, about 50% of its sales already come from DTC. International markets also appear to have been tapped, with 65% of revenue coming from there. Finally, the company is taking back some licenses (such as outerwear from G-III Apparel), but just like DTC, this move can increase revenue but not necessarily operating profits.

A little leveraged: As of Q1 2024, PVH had $2.15 billion in long-term debt on just $346 million in cash. This level of leverage is high for an apparel company because apparel is largely non-discretionary and suffers from operating leverage. The company mentioned the refinancing in its first-quarter 2024 call, but without mentioning the terms. The refinancing bonds are 2029 unsecured green bonds issued in April, with a coupon of 4.125%. The proceeds were likely used to redeem the 3.625% 2024 notes. These are good refinancing terms, although we’ll need to wait for the first quarter 2024 10-Q to find the actual yield (including par value discounts). The company still has to repay or refinance $500 million, due in 2025, with a coupon of less than 5%.

evaluation

In its Q1 2024 release, PVH management reiterated its guidance of a 10% revenue decline for the year (to $8.3 billion), with an operating margin of 10.5%. EPS guidance was raised to between $11 and $11.25 per share.

I think the company’s guidance is conservative, considering that revenues are expected to decline and the guided margin is higher than TTM’s operating margins but lower than Q1 2024 margins (already at 11%).

Today, PVH has a market cap of $6.25 billion, which added to about $1.8 billion of net debt, results in an EV of $8.05 billion. Compared to management’s operating income guidance of $870 million, or NOPAT of $696 million (using a targeted effective tax rate of 20%), this results in an EV/NOPAT of approximately 11.5x. A similar multiple arises from comparing a stock price of $123 with guidance EPS of $11 per share, or a P/E ratio of 11.2x.

I think these complications represent an opportunity. The reason is that PVH has quality characteristics that are mainly related to its brand equity, the right strategy for investing in intangible assets, and the right pricing strategy (preferring to lose bulk sales rather than promote its products excessively). These characteristics provide a positive opportunity if the macro environment improves, especially in Europe. The multiple also compensates for the stock’s risk, i.e. its exposure to a non-discretionary sector such as apparel and leverage.

I generally believe that a company with low long-term growth prospects, capable management, manageable leverage, and stable earnings deserves a 10x earnings multiple. In this case, PVH has most of the above characteristics, except for stable earnings. Its multiple is a little higher than 10x as well. However, I think this is offset by the fact that the multiple is based on earnings generated during a challenging scenario and the company has good brand equity.

Conclusion

PVH’s results in the first quarter of 2024 showed significant challenges in the European and Tommy Hilfiger businesses. Part of the challenges can be explained by macro and part by company mistakes. PVH replaced its CEO in Europe and Tommy Hilfiger addressed these mistakes. On the margin side, the company’s disciplined pricing strategy has allowed it to protect operating income despite declining sales. I believe this strategy allows the company to regain sales with accretive margins if the economy improves in Europe.

Today, PVH Corp. With P/E and EV/NOPAT ratios of about 11.5 times, based on the company’s conservative guidance for FY24. I believe these multiples are opportunistic, considering the quality characteristics of the company (i.e. high brand equity, good intangible investments, and the right pricing strategy). This low multiple provides upside opportunity if the overall economy improves, as well as downside protection if the situation worsens further.

For this reason, I think PVH Corp. shares… Represents an opportunity and buy at these prices.