PVH: The Ultimate Consensus Long?
PVH is a consensus long. Period. The interesting thing is that the Tommy deal structurally makes sense, but the narrative behind how, why and when is not pretty by any means. While the world loves PVH, bears might have to wait another 3-quarters until the $300mm cookie jar is empty for some thesis validation.
This is one of those consensus longs that bugs me so many levels, but to fight the tape on a name that has a $300mm cookie jar to fuel earnings over the next year is a tough one. I love how management says that the Tommy Hilfiger deal will be $0.30-$0.35ps (10-12%) accretive, but this excludes $3.21 per share in integration costs. So let me get this straight… they’re going to INCLUDE the revenue and operating profit on the base business – but will EXCLUDE the costs to realize it. The only thing that’s worse is that the Street is taking the bait.
The irony here is that I actually think that the combination makes sense. It gives PVH significantly greater exposure to Europe – where the Tommy brand has always been exceptionally strong (despite its roller coaster ride in the US), and further diversifies PVH away from its legacy dress shirt business – which might be dominant with 46% share in department stores, but it is a price taker in a commodity category. Now the legacy biz is down to 10% of sales and 8% of EBIT vs. 23% and 22%, respectively last year (and over 75% before Calvin).
But as much as I can justify the deal, let’s not forget the fact that PVH NEEDED this. This is not Manny’s first rodeo. He saw what was coming. PVH is capping off a period where CK drove the business and then – like most other companies in retail – relied on extremely tight inventory management pushing peaky gross margins. Tack on a 4% decline in G&A due to corporate workforce cuts (400 positions at about $40mm) and write downs at Geoffrey Beane, and PVH realized 7% EBIT growth last year on a 4% sales decline.
Now, the company begins to go up against extremely tough compares on the gross margin and SG&A lines, and must rely on sales. But without the consumer showing up en masse, the company needs a PVH-specific product driver for the core business – and it would have needed to have been investing in that for the past 2-years. Either that, or it could have simply gone out and bought growth – a la Tommy.
The icing on the cake is a complete reclassification of the reporting segments. In all fairness, this is likely the proper thing to do as GAAP accounting states the company must report in a way that it runs its business – and the business structure has changed. But the reality is that the reclassification clouds the water as it relates to understanding the real trajectory of each of PVH’s units.
This note sounds like sour grapes. That’s not intended. I call the narrative for what it is, and will model it accordingly. Keith will guide with timing and sizing on either side. For now, this is a ‘Do Nothing’ stock -- though I have a fundamental bias to the downside 2-3 quarters out.
FYI: An interesting comment from management on the call about inventories. Good perspective. Sounds like the lynchpin is whether the department stores are correct in modeling 2-4% comp store sales.
I guess I'll speak on inventory levels at retail. I think the retailers -- we went through nine months starting in the third quarter of last year where retailers were chasing inventory consistently from suppliers and because of the availability of production piece goods, in that time frame you were able to react quicker. There was production availability. You were able to get it in. You were able to do what was necessary, fly goods, do whatever. There was transportation available. As demand really started to dramatically improve in the fourth quarter of last year, coming into 2010, clearly production started to fill up. You know all the stories about all the transportation issues. We were very clear with our retail partners. If you want goods, it's going to be very difficult to chase in the second half of 2010. You're going to have to get the orders. So the retailers were forced to really get ahead of the sales trend and they're buying into whatever their planned comps are. We're seeing that in our business and right now I would say to you inventories are in good position. We're in excellent shape at retail. The sales plans with our key customers seem to be running ahead. Clearly inventory's in good shape and they've bought into their 2% or 4% comp store increase depending whatever it is, the retailers have basically bought into that.