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Stock Analyst Update

PVH's Story a Good One, but Shares Fairly Priced

The narrow-moat apparel maker capitalized on strong consumer demand during the latest quarter.

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Narrow-moat  PVH (PVH) demonstrated its continued brand strength, finishing fiscal 2017 with 7% constant currency revenue growth and 19% constant currency earnings per share growth in excess of our 17% constant currency earnings per share growth estimate. The company appears to be firing on all cylinders with high growth channels performing well (digital revenue increased over 20% for the year and is roughly 10% of retail sales, while international sales growth also topped 20% and represents over 50% of revenue and 60% of operating income). However, even the traditionally more challenging North America business saw improvement with Calvin Klein revenue up 1% (on top of 3% growth last year), Tommy Hilfiger flat (versus a 4% decline last year), and Heritage Brands flat (versus a 10% decline last year). Furthermore, we were impressed with profitability maintenance (likely due to pricing power, mix shifts, and leverage offsetting tech, creative, sourcing, and marketing investments) as adjusted operating margin remained roughly 9.7%.

We expect to increase our $135 fair value estimate in the mid-single-digit range as we now see the company poised to reach a 12% adjusted operating margin in the long term given mix shifts to higher margin international revenue streams and scale (versus our current 11% estimate). We still see top-line constant currency revenue growth in the 3% to 4% range over the next five years (versus 2018 guidance for 4% constant currency growth) as we believe digital and international opportunities will propel levels north of our low-single-digit U.S. apparel sales growth estimate. That said, we think the market has correctly assessed this opportunity and view shares as fairly valued.

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Bridget Weishaar does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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