EUR 850.00 For Business Accounts Only

Morningstar | Tommy Hilfiger a Strong Performer for PVH in 3Q, but Pricey Calvin Klein Jeans Disappoint

We continue to view narrow-moat PVH as attractive (trading below our existing $153 valuation) after solid third-quarter results. Revenue growth of 7.1% matched our estimate for the quarter, and it raised guidance after a solid start to the holiday season. Tommy Hilfiger was the standout performer in the quarter, especially in Europe and Asia. Its international segment reported revenue and same-store sales growth of 16.4% and 13%, respectively. Heritage Brands also performed well with 8.4% revenue growth, beating our forecast of 4.3%. Meanwhile, Calvin Klein disappointed as 2.2% sales growth missed our forecast of 5.6% and the reported EBIT margin of 12.6% missed our 14.0% expectation, as PVH cut prices on some high-end Calvin Klein jeans due to slow sales (an issue we view as temporary).

The continuing strength of the Tommy Hilfiger and Calvin Klein brands supports our view that PVH has a narrow moat. The Tommy Hilfiger segment experienced 11.1% revenue growth in the quarter, its fourth consecutive quarter of double-digit growth. Moreover, the segment consistently reports EBIT margins in the low-teens, and we expect it will continue to do so. It was strong in all product categories. As for Calvin Klein, we believe the issue with its jeans (15% of the brand’s global sales) to be temporary, and we do not see any issue with the brand itself. Calvin Klein reported solid sales in key categories like men’s underwear, women’s intimates, sportswear, and women’s apparel (through licensee G-III) in the quarter.

We remain constructive on PVH. While it is still early, we expect a good holiday season after a strong November/Black Friday weekend, despite concerns about the drag from Calvin Klein, currency issues (strong USD), and tariffs. We may slightly reduce our fair value estimate to reflect these issues, but the share price will remain well above the current levels.

We believe PVH has a strategy to fix the problems at Calvin Klein. PVH’s gross margin of 54.1% in the third quarter missed our forecast of 55.6% and fell 150 basis points from the previous quarter. Part of the shortfall was attributed to price cuts on high-end Calvin Klein 205W39NYC jeans. These jeans can retail for $1,000 or more. PVH has reduced prices on these jeans and shifted marketing dollars to other categories. The company has a history of successfully cutting prices to reduce slow-moving inventory and we believe the issue with the Calvin Klein jeans is temporary. We view the shift in marketing as positive as PVH has invested too heavily in this one category.

We believe PVH can adjust to any increases in tariffs on goods from China. PVH, like many U.S. apparel companies, uses contract manufacturers in China and imports clothing to the U.S. It has, however, reduced its exposure to Chinese producers. Over the past three years, it has reduced the percentage of its imports from China to the U.S. from over 40% to less than 20%. PVH employs factories in more than 50 countries and can shift production away from China if necessary. Still, PVH would be forced to increase prices on some clothing if the proposed 25% tariff is implemented. Also, there is some risk that a trade war could hurt the Chinese economy and sales of PVH’s apparel. PVH has reported some slowdown in foot traffic at branded stores in China. Growth in China is a key part of our constructive view on PVH.