In summary, we have dropped our price target on Polo Ralph Lauren from $147 to $140 and maintained our Hold rating. On Shanda Interactive, we have dropped our price target from $55.50 to $48 and maintained our Hold rating. For Quiksilver, we have upped our price target from $2.50 to $3.00 and maintained our Sell rating. On Phillips-Van Huesen, we have upped our price target from $62 to $63 and maintain our Hold rating.
Deeper analysis below ...
Polo Ralph Lauren - A disappointing quarter for RL as the company was hit with higher than expected costs and did not do as well as we had expected with margins given rising inputs. The company dropped its operating margin more than we expected for the past quarter. When we originally released our spring edition of Apparel Manufacturing EquityAnalytics, we commented that RL above all other apparel manufacturers had the best chance of passing on costs to its consumers. It has not done this as well as we had expected. The company, further, forecast a 100-150 basis point drop in operating margin in line with rising costs.
We see operating income still coming in close to $1B for the year, but the hits to our targets come from our dropping our expectations for FY2013 and FY 2014 as the company may not pass on rising costs as well as we had expected. Further, the company forecast a larger uptick in capital expenditures than was expected for FY2012 to over $300M.
Our 12-month target is now $140 for RL. We believe it is a value buy at $110 and below, and a sell at $155. We maintain our current Hold rating.
Shanda Interactive - Shanda is taking a big drop in price due to a drastic miss in expectations that made us reconfigure our estimates. We were expecting the company to near on $30 - $35M income from operations in the company's first quarter for 2011, but it missed those expectations drastically with a 9% operating margin. This was a large drop YoY, but it was a quarterly improvement. The company, additionally, is losing some equity value due to an increase in debt.
Shanda needs to show drastically improved margins to regain a higher price target. The drop in share price, though, does allow this stock to still remain a Hold.
Our 12-month target is now $48 for SNDA. We believe it is a buy at $38 and below, and a sell at $53. We maintain our current Hold rating.
Quiksilver - Quiksilver took a major hit from its Asia/Pacific division in Q2, but at the same time, the company drastically reduced debt. On the negative side, the company saw a $75M operating loss from the Asia division, which was heavily hit by the Japanese crisis. At the same time, the company, which had over $700M of long-term debt moving into this quarter, reported a drastic drop in this debt to just under $600M. Still, the company's debt to market cap ratio is 3:4. It has come down from a 9:10 relationship, but it is still a significant debt load. Without any debt, ZQK is a $7 stock. With the debt, it is a $3 stock. If the company can continue to unload this debt without taking major hits to cash flow, we can see upside in this stock.
The company still faces a severe uphill battle, and it desperately needs it Asia/Pacific sector to recover. We looked at this as a one-time loss that would not incur into 2012 and beyond. Quiksilver is still far from a holding we want to have, but the signs are positive.
Our 12-month target is now $3 for ZQK. We believe it is a buy at $2.50 and below, and a sell at $4. We maintain our current Sell rating.
Phillips-Van Huesen - The company's Calvin Klein acquisition seems to be working, but the company still has not proved how it will deal with all the debt. The company saw a drastic drop in cash and cash equivalents along with a maintaining of over $2B in debt. This is not the path we like to see PVH on for unloading this debt. At the same time, the company is seeing some great numbers come through in growth that exceeded our forecasts. We upped all forecasts for the next five years. The drop in cash though took away from this rise. If the company can unload even half of its debt, this stock immediately becomes worth $80 per share.
For now, it is still in need of a major shift in debt.
Our 12-month target is now $63 for PVH. We believe it is a buy at $50 and below, and a sell at $70. We maintain our current Hold rating.