2023-08-07 22:46:09 ET
Summary
- Back-to-school shopping season is important for retailers, with record-breaking sales expected in 2023.
- PVH Corporation is a global branded apparel vendor with strong growth in direct-to-consumer and international areas.
- PVH's fundamentals are solid, with a focus on improving gross margins and driving growth in its direct-to-consumer business.
- Ahead of Q2 earnings later this month, I outline key price levels to monitor.
The back-to-school shopping season is in full swing. According to the National Retail Federation , this period of the year is the most important for many retailers; total consumer spending for the fall semester outpaces all other holidays, including the winter holidays.
And 2023’s back-to-school edition is forecast to be a record. Both Back-to-School and Back-to-College categories should top records. Expectations are high, and we will hear from a slew of consumer companies throughout the remainder of August in terms of Q2 earnings reports.
I reiterate my buy rating on PVH Corp. (PVH). Strong earnings growth and a modest valuation, along with ample free cash flow, make the stock appealing.
Back-to-School Boom
According to Bank of America Global Research, PVH is a global branded apparel vendor with two main business groups: Calvin Klein and Tommy Hilfiger. It distributes its branded apparel through three main channels: wholesale, retail, and licensing operations. Recent growth in its direct-to-consumer and international areas has been strong.
The $5.4 billion Apparel, Accessories, and Luxury Goods industry company within the Consumer Discretionary sector trades has negative trailing 12-month GAAP earnings and pays a small 0.2% dividend yield, according to Seeking Alpha. Ahead of earnings later this month, the stock carries a moderately high 43% implied volatility percentage with a modest short interest of 3.5%. The options market has priced in a 7.4% earnings-related stock price swing post-reporting.
Back in May, PVH reported a strong first quarter. Earnings per share came to $2.14 on a GAAP basis, beating estimates of $1.95. Revenue came in decent at $2.16 billion, up 2% year-on-year, near expectations. What was troubling, though, was that its gross margin dipped to 57.9% from 58.4% in the same quarter a year ago. While inventories fell sequentially, they were still up 24% from Q1 of 2022.
The management team reiterated its FY 2023 top-line forecast and sees EPS of $10, very close to what the sell-side sees with a 10% operating margin. Perhaps taking shares lower was the soft Q2 guide, making this month’s earnings release all the more important. Digging into the quarter, while sales for Calvin Klein North America declined by 12%, Tommy Hilfiger North America experienced an 11% increase.
I still view PVH’s fundamentals as solid despite an ebbing consumer environment. I would like to see better gross margins - it was good to see that the sequential GM percentage was better from Q4, but more signs of profitability improvement would support the growth thesis. PVH expects up to 100 basis points of GM improvement due to channel mix changes and lower freight costs. How the US dollar moves is also impactful on earnings.
What is particularly encouraging to me is that its direct-to-consumer ((DTC)) business is performing well, with Q1 sales +12% compared to Q1 2022, outpacing wholesale growth. The company is focusing on marketing efforts to drive improvements in this channel. The management team also noted international strength - keep your eye on that trend in the upcoming Q2 report.
Key risks include a weaker macro US economy, adverse foreign exchange rate fluctuations, and increased promotional activity (spending, costs). Upside potential comes from a quicker rebound in international travel, positive FX trends, and improving global macroeconomic conditions.
On valuation , analysts at BofA see earnings rising at a solid low- to mid-double digit pace over the next few years. Per-share operating earnings are expected to top $13 by 2026. The Bloomberg consensus forecast is about on par with what BofA projects. Dividends, meanwhile, are seen as hovering at just $0.15 per share over the coming quarters, but there is the potential for shareholder accretive activities given the company’s robust free cash flow in the out years.
While its current free cash flow per share on a trailing basis is negative, PVH stock trades at just 9x forward FCF estimates (2024). With a strong growth rate and solid momentum , its profitability picture looks better using forecast figures.
PVH: Earnings, Valuation, Free Cash Flow Forecasts
If we assume $9.50 of the next-12-month non-GAAP EPS and apply the stock’s 5-year average earnings multiple of 11.2, then the stock is worth about $106 today. I assert that there is upside risk to that valuation given that the sector median P/E is much higher, near 17. If we were to use a PEG ratio analysis with a 9% long-term EPS growth rate assumption, then the stock would be valued near $125 to $130 based on a normalized current forecast P/E of 9.1 and the sector median PEG of 1.5. Finally, we could be talking about a $130 stock in two years if $13 remains the expectation in 2026.
PVH: Compelling Valuation Metrics, High Growth Ahead
Seeking Alpha
Compared to its competitors , PVH has stronger quant rankings and generally better earnings growth along with solid technical momentum.
Peer Comparison
Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed Q2 2023 earnings date of Tuesday, August 29 AMC. The calendar is light on volatility catalysts aside from the reporting date.
Corporate Event Risk Calendar
The Technical Take
Since I last reviewed PVH, the stock chart has undergone some important shifts. Notice in the graph below that shares feature an ascending triangle pattern with continued key resistance at the range lows from 2021. The $91 to $94 zone has continued to bring about selling pressure, but with a new uptrend support line that comes into play in the low $80s, we have some upside potential here.
Moreover, the 200-day moving average has been trending higher all year, suggesting that the bulls are in charge. If we see a bullish upside breakout above $95, then a measured move price objective to the $115 to $120 zone would be in play based on the height of the triangle. A move of that magnitude would take PVH back into its range from two years ago. Long here with a stop under $75 appears to be a favorable risk/reward play.
PVH: Key Resistance in the Mid-$90s
The Bottom Line
I reiterate my buy rating on PVH Corp. Its modest valuation, robust growth trajectory, and potentially bullish chart are favorable features. Still, it is susceptible to any downturns in consumer spending.
For further details see:
PVH: Undervalued As Kids Head Back To School, Eyeing Margins And The Global Consumer