PVH’s Strong Q4 Results and 2023 Outlook Provide Confidence in PVH+ Plan; Shares Very Attractive

Shaking off macroeconomic and industry concerns, PVH’s PVH sales and earnings in 2022′s fourth quarter exceeded our forecast. Moreover, its 2023 guidance for 3%-4% sales growth, a 10% operating margin, and about $10 in EPS compares favorably with our prior estimates of 2%, 9%, and $8.90, respectively. PVH’s shares soared roughly 20% on the report, but we still view them as very undervalued relative to our $136 fair value estimate, which we expect to lift by a mid-single-digit percentage. Although we classify it as a no-moat firm, we also believe that its key brands have international appeal and that its PVH+ plan (focused on product enhancements, stronger e-commerce, inventory management, and cost cuts) is sound.

In the fourth quarter, Calvin Klein and Tommy Hilfiger recorded sales growth of 8% and 10%, respectively, on a constant-currency basis and roughly 3% (for both) on a reported basis. We had projected sales declines of about 4% for both as the apparel industry suffered excess inventories and discounting in the period. PVH attributed its outperformance to an improved supply chain (on-time rate now approaching 100%), well-received new products, and its efficiency efforts.

PVH’s 55.9% fourth-quarter gross margin represented a 240-basis-point decline and fell short of our estimate by 60 basis points, but this is understandable given the widespread promotions and inflation. More positively, its 8.6% adjusted EBIT margin was 150 basis points better than our estimate due to expense leverage and cost containment. We still believe PVH can improve its gross and operating margins to 60% and 13%, respectively, in about three years as it implements PVH+. PVH itself targets a 15% operating margin, but we prefer to be more cautious given the competitiveness of the global apparel market. Indeed, indicative of this pressure and in accordance with our quantitative model, we intend to adjust our Morningstar Uncertainty Rating on the company to Very High from High.