The Phillips-Van Heusen Corp., commonly referred to as PVH Corp. (PVH, Financial), reported its fourth quarter and fiscal 2016 results in March. For fiscal year 2016, the Manhattan-based apparel retailer delivered 2.3% sales growth to $8.2 billion and 4.1% drop in profits to $549 million, a 6.7% profit margin compared to 7.1% in 2015.
As observed, other than a steady level of operational expenses, PVH’s tax expense grew by 67% to $125 million, which led to lower profits for the recent fiscal year.
In review, PVH had 18.6% tax rate in 2016 compared to 11.6% in 2015. Further, the company cited that the volatility in its "effective income tax rate in the last three years is due in large part to adjustments to our liabilities for uncertain tax positions."
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“We are very pleased with our fourth-quarter results, which exceeded both our sales and earnings guidance despite the volatile macroeconomic environment and the highly promotional retail market in the U.S. We continued to demonstrate strong momentum in our CALVIN KLEIN and Tommy Hilfiger businesses.
“Our 2016 results demonstrate our strong execution and our continued commitment to invest in our brands and global operating platforms. Succeeding in the current business environment has required us to embrace change and implement new initiatives to ensure that our business model is positioned for future success. We empowered our teams to think creatively, capitalize on new product and business opportunities and find innovative ways to engage consumers, while exercising sustainable business practices. We believe that our brands, led by CALVIN KLEIN and Tommy Hilfiger, continue to resonate with consumers and position us well in the marketplace against our competition.
“We continue to take a prudent approach to planning our 2017 business in light of the macroeconomic and geopolitical volatility around the world, the uncertain global retail landscape, as well as the strengthening U.S. dollar. We believe that our best-in-class teams will continue to manage through the volatility by leveraging our powerful platforms and operations while not losing sight of our long-term vision. Our recent announcement of the agreement to acquire True & Co. illustrates our commitment to driving innovation across our businesses as we look to leverage data and consumer insights to drive our business. We expect that our proven business model and talented associates will continue to drive the execution of our strategic initiatives in an ever-changing environment while delivering stockholder value.” – Emanuel Chirico, chairman and CEO
Outlook
PVH expects its 2017 earnings per share (EPS) to be between $6.20 and $6.30 (full year) and 73 cents to 75 cents (first quarter). At midpoint, the full-year EPS expectation would indicate an 8% decline from 2016’s $6.79 a share.
Valuations
PVH is currently undervalued compared to its peers. According to GuruFocus data, the retailer had a trailing price-earnings (P/E) ratio of 15 times vs. industry median of 18.6 times, a price-book (P/B) value of 1.7 times vs. industry median of 1.7 times and a price-sales (P/S) ratio of 1 vs. industry median of 0.96.
PVH had a trailing dividend yield of 0.15% with a 2% payout ratio.
Using Reuters data, average fiscal 2017 expectations sales and EPS would indicate multiples of 0.97 times and 15 times.
Total returns
PVH has outperformed the broader Standard & Poor's 500 this year with 14.7% total gains compared to 6.07% return for the index, according to Morningstar data. In the past five years, the retailer underperformed with 3.13% return vs. the index’s 13.3%.
PVH
In its filings, PVH is one of the largest apparel companies in the world with a history going back more than 135 years.
PVH’s brand portfolio consists of nationally and internationally recognized brand names, including the global designer lifestyle brands CALVIN KLEIN and Tommy Hilfiger as well as Van Heusen, IZOD, ARROW, Warner’s, Olga and Eagle, which are owned brands, and Speedo, Geoffrey Beene, Kenneth Cole New York, Kenneth Cole Reaction, Sean John, Michael Kors, Michael Kors Collection and Chaps, which are licensed, as well as various other owned, licensed and private label brands.
In 2016, approximately 50% of PVH’s revenue was generated outside the U.S. Further, the company’s global designer lifestyle brands, CALVIN KLEIN and Tommy Hilfiger, together generated over 80% of its revenue during 2016.
PVH aggregated its segments into three main businesses: Calvin Klein, Tommy Hilfiger and Heritage Brands.
The retailer, nonetheless, manages its operations through its operating divisions, which are presented as six reportable segments: Calvin Klein North America, Calvin Klein International, Tommy Hilfiger North America, Tommy Hilfiger International, Heritage Brands Wholesale and Heritage Brands Retail.
(10-K)
Calvin Klein North America
In 2016, sales in PVH’s Calvin Klein North America segment grew 3.4% to $1.69 billion or 20.6% of total sales and delivered an income before interest and taxes (IBIT) margin of 7.3% compared to 13.8% in 2015.
(10-K)
Calvin Klein International
In 2016, the Calvin Klein International segment grew 12.2% to $1.45 billion or 17.6% of total sales and delivered an IBIT margin of 14.5%, which was same when compared to 2015.
(10-K)
Tommy Hilfiger North America
In 2016, Tommy Hilfiger North America sales in the segment fell 3.7% to $1.56 billion or 19.1% of total sales and delivered an IBIT margin of 8.7% compared to 10.7% in 2015.
According to PVH, the weakness in Tommy Hilfiger North America sales was driven by weak traffic and consumer spending in Tommy Hilfiger’s U.S. stores located in international tourist locations, and the discontinuation of its directly operated women’s wear wholesale business in the U.S. and Canada in connection with the G-III license*.
*PVH entered into a licensing agreement with G-III for the design, production and wholesale distribution of Tommy Hilfiger womenswear in the U.S. and Canada in February 2016.
(10-K)
Tommy Hilfiger International
In 2016, Tommy Hilfiger International segment sales grew 11.5% to $1.95 billion or 23.7% (largest in all segments) and delivered an IBIT margin of 16.9% compared to 12.9% in 2015.
(10-K)
Heritage Brands Wholesale
In 2016, sales in the Heritage Brands Wholesale segment fell 8.1% to $1.3 billion or 15.8% of total sales and delivered an IBIT margin of 7% compared to 6.4% in 2015.
(10-K)
Heritage Brands Retail
In 2016, Heritage Brands Retail sales fell 18% to $261 million and delivered an IBIT margin of 3.4% compared to losses or -1.1% in 2015.
According to filings, the sales reduction experienced in both Heritage Brands Wholesale and Retail was primarily due to the business rationalization initiatives in the brands, including the exit from PVH’s Izod retail business (completed in the third quarter of 2015) and the discontinuation of several licensed product lines in the dress furnishings business.
Total revenue and net income
(10-K Filings)
In the past three years, PVH’s sales grew 0.1%, profits grew 77.4% and profit margin 6.4% on average.
Cash, debt and book value
In January, PVH had $730 million in cash and cash equivalents, and $3.22 billion in debt with a debt-equity ratio of 0.67 times – similar to the year prior period. In addition, 64% of PVH’s $11 billion assets were labeled as goodwill, trade names, and intangibles having had a book value of $4.8 billion vs. $4.55 billion in 2015.
Cash flow
(10-K)
In 2016, PVH grew its cash flow from operations by 6.14% to $954.8 million. Among other cash flow increase, PVH recorded gains from its Mexico business deconsolidation*, inventories, accounts payable and prepaid expenses.
*PVH deconsolidated its wholly owned subsidiary in Mexico and formed PVH Mexico in which the retailer owned 49% economic interest.
Capital expenditures were $246.6 million leaving PVH with $708 million in free cash flow compared to $635.8 million in 2015.
(10-K)
PVH also allocated 47.2% of its free cash flow mostly in share repurchases and dividends. The retailer also took in a $21.9 million in debt and borrowings proceeds net costs and repayments in 2016.
Conclusion
PVH’s extensive history has given it a moat and should be able to overcome the recently struggling broader retail industry.
In 2016, PVH’s Calvin Klein Businesses has more than offset its Tommy Hilfiger’s poor domestic performance although margins have declined in the retailer’s overall North America businesses. Prospective investors also need to keep an eye on the Heritage business as sales keep falling as PVH’s was able to make the segment more and more profitable in recent years.
The retailer also carried a good amount of blue sky figures –Â goodwill, trade name, others –Â in its balance sheet in recent years albeit having an acceptable leveraged balance sheet.
Meanwhile, PVH demonstrated exemplary cash flow allocation in recent years by continuously growing its free cash flow while maintaining conservative shareholder payouts such as dividends and more of share repurchases.
(PVH Stock Price and P/S ratio, GuruFocus)
Fifteen analysts had an average target price of $113.13 per share –Â 18 times PVH’s fiscal 2017 projected earnings.
Asking a 20% margin while applying an overall 2% sales growth would indicate a value of $6.69 billion or 14% decline from a market cap of $7.82 billion at the time of writing.
In summary, PVH is a pass setting a value of $100 per share.
Disclosure: I do not have shares in any of the companies mentioned.
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