Morningstar | PVH Updated Star Rating from 28 Mar 2019
Narrow-moat PVH reported solid results for the fourth quarter of 2018 that sent shares sharply higher. PVH’s reported revenue and adjusted EPS of $2.48 billion and $1.84, respectively, for the fourth quarter beat our estimates of $2.41 billion and $1.74. Both Calvin Klein and Tommy Hilfiger beat sales expectations, while the heritage brands segment reported soft sales and an unexpected loss of $8 million. Tommy Hilfiger’s operating margin of 14.7% in the fourth quarter beat our forecast by 170 basis points. Less favorably, we believe the first quarter of 2019 has been difficult for apparel retail in North America on cold weather and heavy discounting of post-holiday inventory. PVH released adjusted EPS guidance for the first quarter of 2019 of $2.40 to $2.45, slightly below our expectation of $2.50. We, nonetheless, expect to increase our fair value estimate on PVH by a low-single-digit percentage from the current $137 on the fourth-quarter outperformance and strong booking trends for the second half of 2019. We think PVH can overcome some softness in North America with international sales. We continue to view PVH as undervalued, albeit less so after the post-earnings move.We maintain our view that PVH has a narrow moat based on its two power brands, Calvin Klein and Tommy Hilfiger. PVH announced some moves for the brands that we view as favorable. It is taking control of its joint venture in Australia and terminating its licensing deal for Tommy Hilfiger in southeast Asia. We believe PVH has a good opportunity to improve sales by taking control of its key brands in immature markets. PVH also announced no-moat Macy’s will no longer have exclusive access to Tommy Hilfiger sportswear in U.S. department stores. We believe PVH will introduce this popular apparel in high-end department stores, including narrow-moat Nordstrom. We think Tommy Hilfiger sportswear is a good fit for Nordstrom, which has proven success with athletic apparel from wide-moat Nike and others.
PVH is a branded apparel company. The company designs and markets branded dress shirts, neckwear, sportswear, jeanswear, performance apparel, intimate apparel, underwear, swimwear, swim products, handbags, accessories, footwear and other related products. The company also licenses the use of its trademarks to third parties and joint ventures. The company's businesses include: Tommy Hilfiger, which consists of the Tommy Hilfiger North America and Tommy Hilfiger International segments; Calvin Klein, which consists of the Calvin Klein North America and Calvin Klein International segments; and Heritage Brands, which consists of the Heritage Brands Wholesale and Heritage Brands Retail segments.
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