Upgrades And Downgrades Of Apparel Manufacturing Companies

by: David Ristau

Our EquityAnalytics department is always updating price targets and ratings on companies that we have coverage on based on new information. Our price targets and ratings are thoroughly researched and use financial analysis tools to determine stock prices. Today, we are updating the following companies from our coverage - G-III Apparel Group (GIII), Gildan Activewear (GIL), Hanesbrands (HBI), Lululemon Athltica (LULU), PVH (PVH), True Religion Apparel (TRLG), VF (VFC), and Warnaco Group (WRC).

The chart below shows new ratings, price targets, and buy/sell ranges versus old ones:

GIII - Maintain at Hold, Increase PT from $28.50 to $34

G-III continues to be a company that we believe has increasing value. The company's shares, recently, have increased along with our price target, which continues to show a Hold value at this point. The latest quarter from G-III was very positive as we saw it. The company has put a tough 2011 behind it, and as we look to the future, we like what we see. The company is entering China with Calvin Klein in the fall through a joint venture. The company also announced that it was expecting to see gross margins rise this year. We had not anticipated much of a rise in margins and actually had priced in fairly flat margin growth due to higher costs. The company's earnings were slightly under what we expected for the year, but with margins growing and the venture into China, we see growth as higher than before for operating income through 2015.

GIL - Downgrade from Buy to Hold, Decrease PT from $36 to $32

Gildan Activewear gets a slight downgrade as valuation has become less attractive due to price increases as well as a slight slash in our PT for the year. We were on board for the great quarter as we believed the market was overestimating losses on higher cotton costs. Yet, we see shares getting closer to fair value with our new price target. We dropped our PT due to a couple of reasons. For one, we did not increase or decrease our outlook for income levels, but we saw the company increased long-term debt by 50% in the past quarter. That increase is definitely a hit to share valuation in the short term. Additionally, the company's cash decreased. Finally, capital expenditures continue to remain elevated, which does hurt equity value. With the share price increase, we believe that GIL now looks fairly valued but would be adding to our position at $25.

HBI - Maintain at Buy, Decrease PT from $39 to $38

We continue to like Hanesbrands for value. The company has great value at a 10.7 PE and an estimated sub-9 forward PE. The company has dealt well with cotton price increases, and we believe that shares should start to play catch-up in valuation as the year progresses.

LULU - Downgrade from Hold to Sell, Increase PT from $46.50 to $48

We continue to love the Lululemon story, but we are now believing that valuations have once again got too excessive. The company is now pricing a 37 forward PE. Even if the company has a strong growth rate, a 35+ PE is basically pricing in growth for the next two years. One of the issues we see for LULU is that while the company has built a strong brand image that it is going to have rising competition continue to come into the marketplace over the next 24 months that we believe can threaten the company's margin expansion. The latest quarter was great, and we see the growth story. We have priced into our model 115% growth in operating income through 2015. We do not believe that margin expansion will continue much higher, and that valuations are stretched at this time.

PVH - Maintain at Sell, Increase PT from $64.50 to $74

We saw a great quarter from Phillips Van Heusen as the company beat our estimates for operating income and saw fairly strong margin expansion. At the same time, we believe that most analysts continue to overestimate margin expansion through 2012. Many analysts are expecting about a 16% increase in earnings this year but around a 2-4% increase in sales. While margins have been improving, they have never been over 12%, and that was at the peak of the market in 2008. We believe that the company should see around $640M in operating income, which is around a 10.5% - 11.0% operating margin. Right now, we just see that the growth model for margins is less aggressive than other companies as cotton prices continue to remain high as well as Europe remains an issue. Valuations seem a tad expensive to us here as well compared with other competitors.

TRLG -Upgrade from Hold to Sell, Decrease PT from $30 to $26

True Religion has seen an anticipated price snap back as we had the company Sell-rated for 2011. Now, we believe the company is very fairly valued at these levels. The issue is that the company could not keep up with the valuations, and when the company disappointed, it came back to reality (similar to the issue we outlined in LULU). We still believe TRLG is one of the better growth candidates in the industry, but we believe a 12 forward PE is pretty fair valued right now as the company is seeing margins come down. One of the issues for TRLG is that it has no economic moat, and it has a lot of competition in the denim market. At such a significant premium as well, if the company loses its foothold in style, those margins can be crimped further. Margins are dropping quicker than we thought, which is the reason for our price drop.

VFC - Downgrade from Buy to Hold, Decrease PT from $171 to $170

VF Corp. continues to remain one of our favorites in the apparel manufacturing space, but we have seen valuations increase to more fair value levels. Upside seems more limited with a 14 forward PE. The company has maintained most of the same margins and growth levels we had expected. The company seems to be very well diversified in holdings in comparison with some of its competitors and should remain a holding that can add some value and be picked up on weakness.

WRC - Maintain at Buy, Increase from $64 to $72

We continue to strongly like Warnaco. Further, we see WRC as a great Olympics-season play as Speedo swimwear should see heavier demand in 2012 as the Summer Olympics take place. We increased our PT significantly for Warnaco as cash holdings increased year over year, the company outperformed our expectations, and the company continues to see solid expansion in emerging markets. We believe that the company's Speedo line is going to continue to benefit due to warmer weather. We believe the stock is a great value as well at 11.5 forward PE. The company has a much more sustainable growth model than some other companies in the industry and should see valuations increase somewhat. Additionally, we have added on a bit of premium moving into Olympics season.


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