PVH Corp.: Q2 Results Give More Confidence to FY24 Guidance, Reiterate Buy (PVH)

PVH Corp. (NYSE:PVH) 2Q24 results were in line with expectations and did not generate any significant market reaction. The company’s revenue is in the red, but most of the decline comes from the sale of legacy brands which affects the wholesale trade. The company did slightly better sequentially in NA and continues to be challenged in Europe with some further sequential improvements. The company reaffirmed FY24 guidance with some EPS improvement from a tax accrual.

In terms of valuation, the stock is 20% below where we first recommended it in June. In my view, the 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 9.5 times earnings. I think this is an attractive valuation given that the company is targeting a decline in LSD this year.

2Q24 results

Mixed top line: PVH’s top line fell 6% in 2Q24 and is expected to fall 6/7% for FY24, but at least half of that decline comes from the sale of discontinued businesses (called Heritage Brands). On a comparable basis, the company’s revenue was down 3% (2% constant currency).

That figure is negative, which is in line with what the company expects to see for the year, but shows some sequential improvement. Most important 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 a positive 1%, versus 3% growth in Q1. Asia fell 4% compared to a 3% increase last quarter.

Management commented that the results would have been better if competitors had not engaged in deep markdowns during July, which they decided not to match because they have less product on clearance.

2H24 Spring season 25 confirmed: The company has already commented on where wholesale revenue is headed in 2H24 when wholesale orders for spring 25 are delivered. Its order book is down LSD, in line with annual guidance. Again, the situation shows some improvement in Europe since the fall in HSD in the Fall 24 collection. The fact that the order book is full and guidance is unchanged provides certainty on 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 that the autumn 25 collection will be offered at the end of 2H24 and materialized in sales in 1H25.

margins are increasingly challenged: PVH recorded operating margins that are improvement over last year, especially in some areas (such as 400 bps in the US). The lever was gross margins up 250 bps, half of that coming from higher DTC mix and half from lower product costs (from higher cost inventory from late 2022 impacting early 2023). On the SG&A side, the situation was not as good, with a leverage of 160 bp. Of this, 160 bps came from higher DTC (thereby offsetting the improvement in gross margins) and the remaining 150 bps came from sales delivery, offset by 150 bps of cost reductions. Cost reductions help overcome the natural decline in sales. The problem is that going forward, gross margin growth will lose steam (as comparables become more difficult), while cost reductions don’t easily match the reduction in lower sales. PVH guided for flat operating margins in 3Q24 compared to 2Q24, but already down from 3Q23. Indeed, the company lowered its operating margin guidance by 30 bps (from 10.1% to 9.8%)

Maintaining its marketing list: The company has already launched its Fall 24 campaign (already sold wholesale, but starting with retail), starring the figures it 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.

The valuation remains attractive

PVH’s situation is not ideal, with sales declining. 2Q24 figures indicate a sequential recovery in Europe, although they indicate a deterioration in Asia. The company reaffirmed guidance (updated EPS of over $0.55 from a tax adjustment), which I believe is now firmer due to closed Spring 2025 wholesale orders. Also, Spring 2025 performs better than Fall 2024.

The company will generate operating profits of $840 million this year, with sales down 6/7% (3% on a comparable basis). Interest expense is $80 million per year and taxes are 25%, representing estimated net income of approximately $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 think the above represents a fair current return for a company that is going through challenges, but is showing some improvement and applying the right upside strategies. The company owns two very valuable brands and has increased its value by reducing discounting and aggressive channels (such as online sales in Europe). The current yield is not extremely high, but in an even moderate growth scenario, 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, although this is hard to predict for any company. Going forward, 2H24 should also provide some color in the fall 2025 order book. Sustaining sales will be important for margins and FY25 guidance.

For the above, I think PVH is still an opportunity and maintain my Buy rating.