In this article, we discuss at length why we think PVH Corp. (PVH) is a buy and Tiffany (TIF) is not. Tiffany has experienced a drop in sales in its primary market, the U.S., as well as important Asian and European markets. Things are unlikely to improve in the near future given the present global economic situation. PVH, on the other hand, has managed to fare well. It has raised the current year's outlook and has even posted significant same store sales gains in Europe, an area that has hurt other retailers.
Tiffany & Co.:
Tiffany & Co. is primarily a jewelry manufacturer and retailer with 251 retail stores as of April 30, 2012. It operates in the U.S., Canada, Japan, Asia Pacific and Europe, with 46% of 2011 revenues coming from the U.S., followed by Asia and Japan (17%). The company has significant European exposure (almost 12% of 2011 sales). Apart from retail, it also has internet, catalog and wholesale businesses. 91% of 2011 revenues came from jewelry, and the rest from the sale of silver goods (not jewelry), crystal and fragrances etc.
The company reported 2Q2012 sales of $887 million. Net sales worldwide were up by 1.6% in the second quarter as compared to last year, primarily driven by Japan, though same store sales fell 1%, excluding the currency effect and 3% including the translation effect. In the first three quarters of 2011, the company had recorded double digit net sales growth in each quarter, which first reduced to 7.6% in Q12012, and now to 1.6%. However, the company had been anticipating these results, as mentioned in their Q1 results. Share price had declined more than 15% following Q1 results, which means that the negative outlook for this quarter had already been priced in.
Gross margins were 2.7 percentage points less owing to product acquisition costs (i.e. gold and diamond cost), and EPS in Q22012 were 2% higher ($0.72/ diluted share) than last year's $0.69/diluted share.
The company's stock has a high beta of 1.8. Tiffany, too, is affected by the weak economy and currency fluctuations. This is reflected in its lower U.S. and European sales. The company attributed the lower U.S. sales entirely to lower consumer spending, as people become more discrete in spending.
Yesterday, its shares were up 7% during intraday trading, despite the company cutting its fiscal year sales and profit guidance. Sales are expected to grow 1% less, which means a range of 6%-7%. The new profit guidance is $3.55- $3.7/share, down from a range of $3.7-$3.8/share. This is the second time this year that the company has cut its guidance for profits. The company expects earnings to decline in the third quarter, followed by a return to growth in Q42012 because of holiday sales. Another specialty jewelry retailer, Signet (SIG), has also given a low current year outlook.
The forward P/E of Tiffany is 15x as compared to Signet's 10x, and other high end brands, like Coach (COH)'s 12.6x and Ralph Lauren (RL)'s 17.5x. Ralph Lauren has considerable (21% of revenues) exposure to Europe.
We give Tiffany an "avoid" rating due to lower sales in the U.S. and other markets like Europe and China. China is one of the fastest growing markets for luxury brands. The European economy shows no sign of improving, at least in the current year. We will be bullish on Tiffany, an established name in the high-end jewelry market, once the economy recovers in markets that TIF operates in, especially the U.S., and when expansion plans in the Asia-Pacific, America and UAE start bearing fruit.
PVH, an apparel/accessories company, has wholesale, retail and licensing operations in the U.S., Canada, Europe and Asia. Its portfolio consists of established brands like Calvin Klein, Hertitage Brands (Van Heusen, ARROW etc), Tommy Hilfiger and licensed brands like Michael Kors and DKNY. Calvin Klein and Tommy Hilfiger bring more than 75% of the company's profits. In 2011, Tommy Hilfiger brought in 46% of the companies operating profits ($758 million) while Calvin Klein brought in 37%.
The stock is up 5.7% in following its earnings release. The company posted non-GAAP EPS of $1.25/share, which is more than analyst estimates and the company's guidance of $1.2/share. The EPS is also 17% more than last year's EPS. Revenues were almost the same as what analysts had expected i.e. $1.34 billion. Last year, the revenue figure was $1.33 billion. European comparable store sales improved (15% retail and 9% wholesale business), which is great news because many other retailers have cut their outlook due to troubles in Europe.
The EPS rise is attributable to the Tommy Hilfiger brand's performance despite the tough economic scenario in Europe. Non-GAAP EBIT from Tommy Hilfiger increased 28% over the last year. For Calvin Klein, there was a decrease of 9% in non-GAAP EBIT due to $10 million planned shifting of advertising expense into Q2. The revenues from Calvin Klein rose by 5%, more than the 4% rise in Tommy Hilfiger revenues. The economy took its toll on heritage brands with a revenue drop of 6%, excluding the impact of exited businesses.
For the full year, the company guided a revenue growth of 1%-2% driven by growth in the same two brands. This means revenues of $5.95-$6.01 billion. Analysts expect $6.01 billion for the current year.
The company increased its EPS guidance to $6.25-$6.32/share. This means an increase of 16%-17% over last year's $5.38. This new guidance is the second time that the company has raised its profit guidance in the current year. The street expects $6.22/share.
We recommend buying PVH based on the strength of its brands, and its financial performance withstanding economic headwinds. The company has a future long term earning growth rate of 15%, the same as the 15% growth experienced over the last 5 years.