EUR 850.00 For Business Accounts Only

Morningstar | PVH's Calvin Klein Sees Near-Term Margin Hit but Intermediate-Term Brand Advantage Intact

Although PVH shares are seeing a negative reaction to Calvin Klein's 80-basis-point operating margin decline in the second quarter, we see the drop as temporary, driven by more aggressive clearance in jeans (inventory now cleared) in front of new performance and sportswear launches. Meanwhile, sales growth of 13% was solid, buoyed by continued strength of both Tommy Hilfiger (44% of sales) and Calvin Klein (37%) across regions and channels, supporting PVH's brand advantage (source of its narrow moat). With 2018 sales guidance (raised to 7% from 6% previously) and operating margin expansion of 30 basis points (unchanged) tracking in line with our forecast (7.3% and 30 basis points of expansion to 10%, respectively), we don't expect a material change to our $149 fair value estimate (which models 4% average annual sales growth over the next five years with operating margins reaching 10.6% in 2022). We see shares as fairly valued.

PVH's brands continue to resonate with consumers, as the company leverages data analytics, global ambassadors (like Formula 1 world champion Lewis Hamilton), supply chain efficacy, and digital efforts (e-commerce grew 20% to 10% of sales, up from 8% in the previous-year period). This was witnessed by the 18% and 15% revenue growth at Calvin Klein and Tommy Hilfiger, respectively, in the quarter. Regional strength was broad, with Calvin Klein seeing international and North American sales growth of 16% and 19%, respectively, while Tommy Hilfiger reported 10% and 9%, respectively. Further, spring/summer 2019 Calvin Klein and Tommy Hilfiger order books are up 20% and 10%, respectively, providing near-term demand visibility. PVH maintained Calvin Klein 2018 sales growth guidance of 8% (versus our expectation for an 8.3% raise) while increasing Tommy Hilfiger revenue lift guidance to 9% from 7% (versus our 8.9% growth forecast).