Apparel and accessories maker PVH (NYSE: PVH), home to the Calvin Klein and Tommy Hilfiger brands, has been a big winner for investors over the past five years, evidenced by a cumulative stock price gain of more than 200%. The company has anecdotally benefited over that time period from a continued expansion of its brands into international markets, which has resulted in consistently higher annual sales tallies, a strategy that has also worked well for other branded apparel competitors, like Ralph Lauren (NYSE: RL).
However, 2014 has been more of a struggle for PVH, with its stock price down by double-digits, mostly due to negative market reaction to a slight profit shortfall in its latest fiscal quarter, as well as to management's decision to slightly lower its financial outlook for the year. On the upside, though, the company's largest unit, Tommy Hilfiger, continued to perform well during the period, reporting positive comparable store sales growth globally, including a 6% gain in international markets. So, at its discounted price, is PVH a good bet for investors?
What's the value?
PVH is one of the world's largest apparel manufacturers with a top market share position in the dress shirt and neckwear product categories. The company has benefited from its success at turning its Calvin Klein and Tommy Hilfiger units into lifestyle brands, which has allowed it to extend the brands into higher-margin, non-apparel areas through the licensing channel. The net result for PVH has been an upward trajectory for its overall sales over the past five years, as well as solid cash flow generation that has helped to fund acquisitions, like its 2013 purchase of Warnaco, one of the largest licensees of the Calvin Klein brand.
In its latest fiscal year, it was more of the same for PVH, evidenced by a 35.5% increase in revenues that was a function of positive comparable store sales gains for its Calvin Klein and Tommy Hilfiger brands, as well as from the positive effect of its aforementioned merger with Warnaco. While the merger led to a 230 basis point decrease in PVH's gross margin during the period, due to Warnaco's focus on lower priced product lines, it gave PVH greater control over Calvin Klein's product mix and added key distribution relationships in international growth markets, like Brazil and China. More importantly, the deal should theoretically improve PVH's corporate overhead efficiency, through the elimination of duplicative purchasing and administrative functions, paving the way for potential gains in operating profitability in the future.
A tough start to the year
Unfortunately, those hope-for efficiency gains did not show up in PVH's latest fiscal quarter, evidenced by a roughly 220 basis point decline in its adjusted operating margin that culminated in a 15.8% drop in operating income. While PVH's adjusted gross margin actually improved by 30 basis points versus the prior-year period, its operating profitability was hurt by the greater promotions needed to move merchandise in the company's non-core product area, its so-called Heritage segment, which suffered a sales drop of 11.2%.
Of course, PVH is not the only company dealing with profitability challenges, as Ralph Lauren seems to have its own challenges in that department. The iconic apparel manufacturer, with brands including Polo and Chaps, turned in a mixed performance in its latest fiscal quarter. While its top-line rose 3.3%, thanks to a solid sales performance for its retail segment, the company was hurt by sales declines in its wholesale segment, as well as the higher overhead support costs associated with the continued expansion of its retail store base. The net result for Ralph Lauren was a 4.6% decrease in its adjusted operating income, a performance that has not surprisingly led to strong headwinds for its stock price in 2014.
A better way to go
Given PVH's near-term profitability challenges, investors may want to look for a better way to play the popularity of the Calvin Klein brand name, like with G-III Apparel Group (NASDAQ: GIII). The company is one of the major licensees of the Calvin Klein brand, but it also has a growing portfolio of owned brands, which now account for roughly one-third of its total sales. Generating a greater percentage of sales from its own brands has allowed G-III Apparel Group to lower its business risk, by reducing its reliance on the Calvin Klein brand, while providing a positive impact to the company's gross margin, which rose 180 basis points in its latest fiscal year, hitting a five-year high. More importantly, the company's strategy produced solid growth in operating profit and cash flow during the period, enabling it to pursue value-added acquisitions that should allow it to continue on a growth trajectory, highlighted by its late 2013 purchase of the G.H. Bass apparel brand from PVH.
The bottom line
PVH has certainly been a good investment choice over the past five years, but future appreciation is looking like it might be a tougher slog, due in part to the company's much larger size relative to its size five years ago. While management still expects adjusted EPS growth of 10% for the current fiscal year, PVH's weak performance in the fiscal first quarter indicates that meeting that forecast isn't a foregone conclusion, the failure of which could put additional pressure on the company's stock price. As such, investors might want to wait for another quarterly report prior to placing a bet on this branded apparel giant.
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