To The Moon

Summary

• PVH Corp.'s stock price has been overshadowed in recent months by its poor revenue performance and outlook. This can continue into Q2, 2024.
• But the stock isn't without its redeeming factors. Earnings have seen a robust rise recently, and the earnings outlook has been upgraded as well.
• With recent price weakness, a strong earnings outlook, as expected in Q2 2024, results in attractive market multiples.

olaser

Soon after my last article on the Tommy Hilfiger and Calvin Klein brands' owner PVH Corp. (NYSE:PVH), its stock price fell off a cliff following its final quarter (Q4 2023) and full-year 2023 (year ending January 2024) results (see chart below).

The results themselves weren't bad compared with expectations. But there was a very good reason for the price decline. The outlook. Specifically, the revenue outlook, as the company expected the number to contract by 6-7% in 2024 in both reported and constant currency terms.

With a 10% year-on-year (YoY) revenue decline in Q1 2024 in reported terms and 9% YoY in constant currency, the share price barely budged. This was despite an upgrade in the profits outlook, following better than expected earnings during the quarter. It follows then that sales could continue to be the driving force for PVH even after its Q2 2024 results.

Price Chart (Source: Seeking Alpha)

The big revenue disappointment

The revenue forecast is of course a big disappointment in its own right. But it's even more so when seen in context, which explains investors' reaction to the stock. The context itself is two-fold, as below.

It's not going according to the PVH+ Plan

Fresh from its robust performance in 2021, which saw revenues grow by 28% and operating margin rise to ~11%, after a loss the year before, PVH released a new strategic roadmap, the PVH+ Plan. In financial terms, the plan had two targets. One, to reach a revenue of ~USD $12.5 billion in 2025 and two, expand operating margin to 15% by that period (see graphic below for more details on the plan).

From the company's then standpoint, the target looked achievable as it pencilled in a compounded annual growth rate [CAGR] for revenues of 8.1% YoY, which is much lower than its growth rate in 2021.

However, the actuals haven't quite played out anything as expected. The revenues actually contracted by 1.4% in 2022 and grew by just a small 2.1% in 2023. Further, going by the projections for the present year, the company’s revenues will have contracted at a CAGR of 2% since 2021. For PVH to now achieve its revenue target by next year, it will have to grow by 45% in FY25, which looks most unlikely.

Source: PVH

Softening in Tommy Hilfiger and Calvin Klein sales

Even worse is the fact that its big brands Tommy Hilfiger and Calvin Klein have slowed down recently after performing somewhat better in 2023. For the last full year, they saw 3.6% and 3.5% revenue growth respectively. Total revenue growth, however, was smaller due to the sale of the company's Heritage Brands women's intimates business. If the impact of Heritage Brands is removed from both 2023 and the base year's revenues, the overall revenue growth improves to 3.5%, compared to the actual number of 2%.

Even without the sale, though, the growth isn’t anywhere near the targets as per the PVH+ plan. But the contraction in Q1 2024 makes it even worse, as revenues show a decline of 5.6% YoY even after removing the impact of Heritage Brands.

This is essentially due to a 9.9% YoY decline in Tommy Hilfiger's sales, which contributed to the biggest chunk of 52% of the revenues in the quarter. It didn't help that Calvin Klein's sales were essentially flat. too. The company attributes this to weak sales in Europe as it carries out a "planned strategic reduction to drive overall higher quality of sales in the region".

What to expect from Q2 2024

With the reason behind the stock's weak performance explained with revenues as the driving force, it appears clear that if the price were to rise following the upcoming Q2 2024 results, it would only be a surprise. Here's why.

Further revenue contraction expected

For Q2 2024, the company pencils in a revenue decline of 6-7% YoY in reported terms and 5-6% in constant currency. While this is certainly an improvement over the 10% YoY decline seen in Q1 2024, it's still in line with the full-year forecast.

Double-digit rise in EPS forecast

This revenue trend can continue to negate the positive impact the expected profits picture might have had on the stock. It expects the earnings per share [EPS] number to come in at USD 2.25, which is a notable 50% YoY jump from GAAP earnings in Q2 2024 and a 13.4% YoY increase from the non-GAAP earnings.

This would follow the already robust EPS performance in Q1 2024 due to contracting operating expenses as well as lower interest expenses and tax payouts. The GAAP earnings per share [EPS] during the quarter came in at USD 2.59, 21% higher than expectations and the non-GAAP EPS was at USD 2.45, a 14% increase above projections.

The overlooked, but buoyant profits

There's exactly one disappointment regarding profits. And that's the operating profit margin. At an expected 10.1% in 2024, the number remains below the 15% envisaged in the PVH+ Plan so far. However, compared to the past 10-years average of 8.5%, it still looks fine.

With the figure at 9.85% in Q1 2024, there’s no real cause for concern either for 2024 either and indicates that the company could still be well on its way to achieve the full-year margin target.

Next, with better than expected EPS performance in Q1 2024, the company actually raised its EPS guidance. The GAAP EPS is now expected to come in the range of USD 11.15-11.4 for the full year 2024 and the non-GAAP EPS is expected at USD 11-11.25. These represent a 3.7% and 2.3% increase from the previous guidance, respectively.

Attractive market multiples

At the midpoint of the EPS projections, the forward GAAP price-to-earnings (P/E) comes in at 9.4x and the forward non-GAAP P/E comes to 9.5x. These are attractive figures compared with even the consumer discretionary sector, with corresponding ratios of 17.3x and 15.9x respectively.

Also, compared to its own five-year average of 10.8x, PVH’s forward non-GAAP P/E looks good. Essentially, even at its lowest, there's at least 15% upside to the stock right now, and likely far more.

Further, there are also share buybacks to consider. PVH has already bought back USD 200 million worth of shares in Q1 2024 and expects to buy back another USD 200 million through the rest of the year. The total amount is at 6.8% of the company’s present market capitalisation, which could play a role in lifting the stock up a bit.

What next?

However, the uplift in price might not come in when the company releases its Q2 2024 results. With revenues as the focal point around which the PVH stock story has evolved in recent months, an expected revenue contraction offers little hope.

That this is due to strategic decisions, related to both its Europe market and the offloading of some assets. I'm not entirely convinced of the explanation, though, considering that the North American sales for the company's key brands grew by just 3% YoY as well in the past quarter.

Still, going by the earnings numbers and forecasts, its profits can continue to grow at a healthy clip not just in the quarter but for the full year 2024 as well. This lends itself to rather attractive market multiples compared to both the consumer discretionary sector and its own past averages.

While it appears unlikely that PVH will achieve the targets for its strategic plan, at least it continues to make progress on earnings and, following from there, the forward P/E. The big wait and watch to see is on the revenue front. On the whole, though, the stock still looks more good than not. I'm retaining a Buy rating with the medium term investing horizon in mind.