PVH Earnings: PVH+ Plan Progressing Despite Tough North America Market; Shares Very Undervalued

No-moat PVH PVH reported second-quarter sales and non-GAAP earnings that surpassed our forecast despite a 3% sales decline in wholesale sales (47% of total) as direct-to-consumer sales (53% of total) jumped 11%. While North America wholesale demand is likely to remain soft, the firm held to its guidance for 3%-4% sales growth in 2023. PVH’s results and guidance suggest that it is making progress under key PVH+ plans, including product enhancements, stronger digital sales, inventory management, and cost cuts. We do not expect to make any material change in our $141 per share fair value estimate and view PVH as attractive.

PVH’s 3.5% sales growth in the quarter beat our 2.5% estimate as both of its key brands outperformed. Specifically, Tommy Hilfiger’s sales (52% of total) increased 6% versus our 4% forecast, and Calvin Klein’s sales (43% of total) rose 3% versus our 2% estimate. Led by Asia-Pacific and Europe, both brands achieved stronger sales growth internationally than in North America. Our forecast for long-term sales growth of 3% and 4% for Calvin Klein and Tommy Hilfiger, respectively, is partially based on improving results in North America, where both brands have struggled with dependence on travel retail (which remains low) and department stores.

PVH’s 57.6% gross margin in the quarter matched our estimate, while its 8.3% adjusted EBIT margin beat our forecast by 40 basis points. PVH is benefiting from lower freight costs and its 10% reduction in people costs through layoffs. However, there was also a shift in marketing expenses from the second quarter to the third. In the long run, we think PVH can lift its gross margins to 60% and its EBIT margins to 11%-12%. PVH itself targets 15% operating margins under PVH+, but we judge this goal to be unrealistic given the competitiveness of its categories and the lack of brand strength in its brands. Even so, we think the market is too pessimistic about PVH’s ability to improve its profitability through PVH+.