PVH Earnings: Nice Start to 2023 Dimmed by Near-Term Outlook; Shares Very Undervalued

PVH’s PVH sales and earnings eclipsed our expectations in its 2023 first quarter. However, this result was somewhat overshadowed by disappointing second-quarter guidance, sending shares down 10%. Still, as the firm affirmed its full-year outlook for 3%-4% sales growth, a 10% operating margin, and $10 in EPS, and our estimates are close to these marks, we do not expect to make any material change to our $141 per share fair value estimate and view shares as very attractive. Although we see PVH as a no-moat company due to the competitiveness of its industry, we believe its two main brands, Tommy Hilfiger (52% of the quarter’s sales) and Calvin Klein (41% of sales), are among the few brands with global appeal and believe that the PVH+ plan (product enhancements, stronger e-commerce, inventory management, and cost cuts) will lift operating margins to 12% from the current 10% by 2025.

PVH’s 1.7% first-quarter sales growth was 120 basis points above our estimate. Tommy Hilfiger’s 5% increase beat our 2% forecast, while Calvin Klein matched our forecast with flat sales. PVH benefited from China’s reopening, with constant-currency sales up 44%. In North America, Tommy Hilfiger’s sales increased 11%, but Calvin Klein’s sales fell 12% as the wholesale channel was weak. We are not surprised by this result, as many U.S. apparel retailers, such as no-moat Macy’s, have noted soft consumer demand for apparel. We view PVH’s ability to improve the positioning of its two leading brands in its home market as critical to its long-term success.

PVH’s gross and operating margins were 57.9% and 9.2%, respectively, versus our 57.5% and 8.6% estimates. The company benefited from cost cuts and price increases as well as lower shipping rates. Its $2.14 in EPS beat our forecast by $0.21. However, PVH guided to low-single-digit sales growth and $1.70 in EPS in the second quarter, versus our respective estimates of 4% and $2.09, on a soft near-term outlook for the wholesale channel.