Over the past few years, investors have been wise to avoid retail apparel, which have been whipsawed by fickle fashionistas. But with consumer spending turning higher, shoppers are increasingly dusting off credit cards and heading to malls to freshen wardrobes - begging the question, how best to play the trend? For investor's shy to guess who wins next season's foot traffic war, clothing makers like PVH Corp. (NYSE:PVH) offer a handsome alternative.
Clothing manufacturers took investors on a wild ride in 2011. Last spring, retail inventories exited the holidays leaner than recent years, which boosted demand. However, profits were cropped in the back half of the year as cotton prices, which soared to $2.20 per pound in spring, flowed through fall and winter product lines.
Heading into this spring, the cotton overhang is disappearing as prices have fallen to just under 92 cents a pound. Meanwhile, retail apparel sales, which increased 5.3% year-over-year in January, remain strong. The combination of falling input costs and strengthening demand suggests manufacturer's are entering a growth sweet-spot.
PVH has been similarly rewarded, with shares rising 25% since the end of last June. The lion's share of the company's sales growth comes from Calvin Klein, which PVH acquired back in 2003, and Tommy Hilfiger, which it bought in 2010. Following strong sales last year, investors are betting growth will continue in 2012.
Despite European currency and economic headwinds, the company guided Q4 comparable sales to 15% for Calvin Klein and 12% for Tommy during December's earnings conference call. The company also boosted its Q4 earnings per share guidance by $0.13.
In discussing its November performance, the company noted comparable sales growth in the mid-teens for both brands - substantially above mid-single-digit internal forecasts.
In January, PVH upped Q4 by another nickel, suggesting November's strength continued through December. And, this forecast beating growth has allowed PVH to pay down some $500 million in debt during the year through October.
As lower cotton prices make their way through the channel, strong demand for PVH's iconic brands makes for a compelling argument versus owning apparel retailers. If consumer spending trends continue to improve this year, PVH shareholders will likely see additional market-beating returns.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in PVH over the next 72 hours.