Robert Way
PVH Corp. (NYSE:PVH) 2Q24 results were in line with expectations and did not generate any meaningful reaction in the market. The company’s revenues post negative figures, but most of the decrease stems from the sale of legacy brands affecting wholesale. The company did a little better sequentially in NA and continues to be challenged in Europe with some additional sequential improvement. The company reconfirmed guidance for FY24, with some improvement in EPS from a tax accrual.
On the valuation side, the stock is 20% below where I first recommended it in June. In my opinion, fundamentals have not deteriorated and have improved comparatively, implying the stock trades at a more attractive valuation. Looking at this year, the company trades at 9.5x earnings. I believe this is an attractive valuation, considering the company is looking at an LSD decrease this year.
2Q24 results
Mixed topline: PVH’s top line was down 6% in 2Q24 and is expected to be down 6/7% for FY24, but at least half of that decrease comes from the sale of discontinued businesses (called Heritage Brands). On a comparable basis, the company’s revenues were down 3% (2% constant currency).
This figure is negative, which is in line with what the company expects to see for the year, but it shows some sequential improvements. The most important one is Europe, where the company was down 2% compared to double digits last quarter. The improvement came mainly from Tommy Hilfiger. North America was flat at positive 1% versus growth of 3% in Q1. Asia was down 4% versus up 3% last quarter.
Management commented that the results would have been better if competitors had not engaged in heavy discounting during July, which they decided not to match because they have less product in clearance.
2H24 Spring 25 season confirmed: The company already commented on where wholesale revenues are going in 2H24 when the wholesale orders for Spring 25 are delivered. Its order book is down LSD, in line with yearly guidance. Again, the situation shows some improvement in Europe from the HSD decrease in the Fall 24 collection. The fact that the order book is complete and guidance has been unchanged provides certainty regarding 2H24 guidance, given that wholesale orders are firmer.
Unfortunately, the expectation of a recovery in the Spring 25 collection will not materialize, leading to expectations for the Fall 25 collection to be offered in late 2H24 and materialized in sales in 1H25.
Margins are increasingly challenged: PVH posted operating margins that are improving YoY, particularly in some areas (like 400bps in the US). The lever was gross margins increasing 250 bps, half of it coming from higher DTC mix, and half from lower product costs (from the higher cost inventory of late 2022 affecting early 2023). On the SG&A side, the situation was not as good, with deleverage of 160bps. Out of that, 160bps came from higher DTC (therefore cancelling the improvement in gross margins), and a remaining 150bps came from delivering of sales, offset with 150bps of cost cuts. The costs cuts are helping weather the natural deleverage of sales decreasing. The problem is that going forward, the boost in gross margins will lose steam (as comparables become more challenging) while the cost cuts cannot easily match the deleveraging of lower sales. PVH guided for flat operating margins in 3Q24 compared to 2Q24, but already down from 3Q23. Indeed, the company decreased operating margin guidance by 30bps (from 10.1% to 9.8%)
Maintaining its marketing roster: The company already launched its Fall 24 campaign (already sold for wholesale, but starting in retail), starring the figures that it had used for the Spring 24 campaign, namely Jeremy Allen White, Kendall Jenner, and MingYu for CK, and Stray Kids and Lewis Hamilton for TH. The company added Greta Lee to CK’s roster.
Valuation remains attractive
PVH’s situation is not ideal, with sales decreasing. The 2Q24 figures point to some sequential recovery in Europe, albeit pointed to a deterioration in Asia. The company reaffirmed guidance (updated EPS upwards of $0.55 from a tax adjustment), which, I believe, is now firmer thanks to Spring 2025 wholesale orders closed. Spring 2025 is also performing better than Fall 2024.
The company will generate $840 million in operating profits this year, with sales down 6/7% (3% on a comparable basis). Interest expenses are $80 million per year, and taxes are 25%, representing a net income guidance of about $570 million. Trading at a market cap of $9.5 billion, PVH offers a multiple of 9.5x or a yield of 10.4%.
I believe the above is a fair current yield for a company that is undergoing challenges but showing some improvement and applying the right elevation strategies. The company owns two very valuable brands and has been increasing its value via curtailing discounting and aggressive channels (like online sales in Europe). The current yield is not extremely high, but in a scenario of even moderate growth, the company could drive margin expansion, earning additional growth yield plus a potential recovery in multiples.
On the risk side, we could have a negative holiday season in Q4, albeit this is difficult to predict for any company. Going forward, 2H24 should also provide some color on the Fall 2025 order book. Maintaining sales will be important for FY25 margins and guidance.
For the above, I believe PVH still represents an opportunity and maintain my Buy rating.
