IN THE MONEY: Volatile macro environment unlikely to derail PVH
PVH is investing in its Calvin Klein business this year
Weather issues and a volatile macro environment are unlikely to derail PVH Corp, analysts believe, despite the apparel giant revealing earnings yesterday (5 June) that missed expectations. The company also offered an optimistic outlook for the rest of the year.
Despite first-half pressures exacerbated by heightened promotional activity in North America, PVH CEO Emanuel Chirico told analysts that the company feels well-positioned, with solid underline business fundamentals, for the remainder of the year.
PVH, whose brands include Calvin Klein, Tommy Hilfiger, Van Heusen, Izod, Arrow and Warner's, reported adjusted earnings for the quarter ended 5 April of US$122.1m, or $1.47 per share, down from last year's figures of $155.6m, or $1.91 per share. Earnings were below analyst estimates of $1.49. Gross margin also narrowed in North America.
The results prompted PVH to lower its full-year guidance, which Cowen analyst John Kernan believes reflects "a difficult environment for brands with heavy apparel exposure along with PVH's continued investments in Calvin Klein".
The company is forecasting for non-GAAP EPS guidance in the range of $1.40 to $1.45 for the second quarter, from a previous guidance of $1.39. For the full year, PVH expects EPS of $7.30-$7.40, from a previous guidance of $7.40-$7.50.
"Our second quarter guidance reflects the continuation of a highly promotional environment in North America in most channels of distribution which will negatively impact our gross margin as our customers and competitors move through higher than planned inventories," CFO Mike Shaffer told analyst.
Nonetheless, he said the company is expecting gross margin expansion of around 70 bps for the year. This will be helped by less promotional activity and growth in its international markets.
Referring to the promotional environment in North America in the second half, Chirico added: "We're looking for a less promotional environment than we've seen in the second quarter. I feel there is more opportunity in the third and fourth quarter from a margin point of view to outperform where we were last year than there was in the first half of the year."
Chirico suggested that capitalising on the "significant" growth in its jeans business in North America and Europe will be "critical" for the company going forward.
"That will continue to drive growth. We won't have the burden of cleaning up as we did this year, cleaning up the off-price sales that we had carry over. So as that gets cleaned up, we wouldn't have that in the base and that's worth 200 to 300 basis points by itself.
"Clearly not having that headwind in front of us will get us much closer to a high single digit kind of a growth rate and if we can get some momentum in the European business to along with the momentum we see in Asia and Latin America, I think that's when that we could really start to get closer to that double digit kind of growth again."
Fundamental story unchanged
RBC Capital Markets analyst Howard Tubin noted that while PVH's margin outlook for the second quarter has "grown more conservative", top line trends are "hanging in there".
He added: "Weather issues and a volatile macro environment have challenged business so far in the first half of 2014, though we continue to believe the fundamental story remains unchanged. Regardless of the outside forces pressuring business over the next few months, we believe there is significant opportunity ahead for PVH."
Those opportunities, which he describes as "plentiful", include a number of new initiatives in place in the autumn, which Tubin says could serve to offset a tougher first half of the year.
One of those initiatives will be an investment in its Calvin Klein business. In March, the company outlined a six-pronged plan for the brand that it hopes will improve its performance, which continues to be under pressure in Europe.
This will include a complete makeover and upgrade in the quality and design of the jeans product, improved packaging for the underwear business, and more investment behind the technical designs of women's intimates.
Chirico told analysts: "We believe this is going to really drive the business back and get the Calvin Klein brand repositioned in designer jeans back to where Heritage has been as a brand that started designer jeans around world.
"We're highly confident of our initiatives in North America. Europe is just more of a challenge because of the brand positioning there and what needs to happen and how far we need to move the brand. But we're making all the right moves and all the right investments from a long-term goal to the Calvin Klein business there."
Kernan believes global and category expansion of the Calvin Klein brand, and that of Tommy Hilfiger, will enable each to gain additional global market share in apparel and accessories. This, he concludes, should be reflected in the group's margin.
"We expect improving margins and returns on capital within the Calvin Klein business following the repositioning of the Calvin Klein brand after the acquisition of the jeans and underwear licenses from Warnaco. In addition, cost and revenue synergies from the Warnaco acquisition, and debt paydown creates levers for mid-teen EPS growth over the next five years."
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