PVH: Levers & Drivers

 

There is nothing that materially changes our view on PVH post call – we still like it here and beyond 2012. The earnings beat was largely in-line with our view headed into the event. In addition, with persistent uncertainty in Europe we’re also not surprised in management taking a more conservative view of Q1; However, with sales trends at both CK and Tommy running well ahead of plan quarter-to-date, we think PVH is going to pull a RL and end up coming in above the Street’s original $1.32 despite guiding to $1.20-$1.25.

 

With Tommy and CK continuing to drive the company’s results as it works through a turnaround in its Heritage business, it is increasingly evident that PVH’s earnings growth is more stable than most other branded retailers given the number of drivers and levers at its disposal. This doesn’t suggest that there isn’t risk in the model, but simply that PVH has cushion if needed that many others don’t. We think the upside in 2012 numbers will come from stronger (than guided) sales rather than a reduction in spending and are shaking out at $1.36 for Q1 and $6.45 for 2012. With earnings power of $8 in 2013, we think the stock is headed higher.

 

Here are few callouts re 2012 from the call:

  • QTD CK comps up over 10% and Tommy in the teens vs. guidance of +4%-5% growth for each so revs continue to track above plan. Wholesale is also tracking ahead of plan suggesting upside to guidance.
  • Already seeing turn in Heritage margins here in Q1 (most effected by macro factors), which is notable given our view that Heritage is not a very defendable business.
  • The Spring/Summer order book is up 13% yy in Europe quarter-to-date (~70% of sales).
  • 2012 guidance was raised by $0.10-$0.30 to $6.10-$6.20 – mostly due to tax rate coming down from ~29% to ~24-25% as more profits realized overseas from Tommy as well as more aggressive debt reduction, $300mm in 2012.
    • This is not a 1x, but permanent shift. While we’d typically point to a lower quality earnings that is not the case here, but a new reality for the company given where profits are generated i.e. Tommy.
  • At CK, royalty revenues will decelerate to MSD growth this year driven by 1) take back of CK bridge line from WRC, 2) more conservative ordering by European retailers, and 3) a planned reduction in sales to the off-price channel.
  • SG&A spending growth will be up MSD driven by higher pension expense, multiple new launches (e.g. CK Bold underwear and new fragrances), as well as continued support for Tommy’s “Meet the Hilfigers” campaign.

All in, while it is not in our list of top three, we still like the stock here. We’re shaking out at $6.45 for 2012 on 5% total revenue growth driven by 9% growth at CK, 7% at Tommy and Heritage down slightly and 50bps in margin expansion.

 

While PVH works to stabilize its cash flow business (Heritage), it’s doing what the best brands do that license out their brands in order to grow into international markets – it’s starting to take back control of its own content. Driving brand sales directly at higher margin was key to RL’s success through much of the last decade as the company bought in its licenses. We don’t expect PVH to be any different. With earnings power of $8 in 2013, we think the stock is headed higher.

 

Casey Flavin

Director

PVH: Levers & Drivers - PVH S

 

 

 

 


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