PVH Corp Grapples With Multiple Headwinds: Is Revival Likely?

PVH Corp PVH looks troubled, thanks to softness in its Heritage Brands segment and cautious view for the rest of the fiscal year. The company lowered its earnings view for fiscal 2019 owing to adverse impacts from macroeconomic headwinds and foreign currency translations.

In a year’s time, shares of this Zacks Rank #4 (Sell) company have plunged 35.5%, much wider than the industry’s 9.5% decline.

Let’s Delve Deeper

In second-quarter fiscal 2019, PVH Corp witnessed softness in its Heritage Brands segment, with flat revenues on a year-over-year basis and comparable-store sales (comps) decline of 2%. Moreover, the segment’s EBIT margins contracted nearly 400 basis points (bps) as the wholesale and retail operations witnessed lower gross margin owing to highly promotional retail landscape, particularly in the U.S. department store space.

Unfortunately, this softness is likely to persist throughout fiscal 2019. Evidently, revenues at Heritage Brands are expected to decline 10% in the third quarter and 1% in fiscal 2019.

Although the company delivered earnings and sales beat in the fiscal second quarter, results were hurt by soft traffic trends across North America and China. Management issued a bleak view for the current fiscal year that lagged analysts’ expectations. The updated view reflects the trade tensions between the United States and China, the protests in Hong Kong, anticipations of a volatile macro retail landscape and a highly promotional U.S. retail backdrop. It expects an adverse impact of roughly 20 cents per share from tariffs in the current fiscal year.

For fiscal 2019, the company now projects revenues to increase about 1%, down from 3% growth predicted earlier. At Calvin Klein and Heritage Brands, revenues are expected to decline 2% and 1%, respectively. Adjusted earnings per share (EPS) are now envisioned in the band of $9.30-$9.40 for the fiscal year, down from the earlier guided range of $10.20-$10.30, and $9.60 earned in fiscal 2018. Further, adjusted EPS is envisioned in the band of $2.95-$3.00 for the fiscal third quarter, down from $3.21 earned in the year-ago quarter.

Meanwhile, PVH Corp has been witnessing adverse impacts of foreign currency translations for a while now. In the reported quarter, the company’s EPS and operating income included negative impacts of 15 cents and $5 million, respectively, from unfavorable currency. In the rest of fiscal 2019, management expects foreign currency headwinds to hurt earnings on account of consistent strengthening of the U.S. dollar.

Adverse foreign currency rate is now expected to mar the bottom line by nearly 35 cents per share in fiscal 2019, up from 32 cents estimated earlier. Notably, the adjusted earnings guidance for third-quarter fiscal 2019 includes an anticipated adverse impact of nearly 9 cents from foreign currency.

Are There Any Turnaround Efforts?

We note that PVH Corp was grappling with softness at its Calvin Klein business owing to issues related to the Jeans business on account of fashion miss. However, the company’s efforts to drive growth at its Calvin Klein segment are likely to reap benefits in the near term. Management remains optimistic about the underlying power of this brand. In second-quarter fiscal 2019, PVH Corp transitioned its women’s business for North America to G-III Apparel Group, Ltd. GIII and closed the Calvin Klein Collection business, which together hurt revenues by 300 bps. Backed by robust growth in Europe and gains from the Australia acquisition, the segment delivered a solid international performance.

Looking ahead, the company remains focused on enhancing product and new rollouts at the Calvin Klein brand to sustain growth. Meanwhile, PVH Corp received positive customer response for the core and basic denim styles within Calvin Klein Jeans, which is likely to continue. In third-quarter fiscal 2019, the segment’s revenues are likely to grow nearly 1% (up 3% at cc). Additionally, PVH Corp’s Tommy Hilfiger brand is consistently experiencing momentum and market share gains for the last few quarters.

In a bid to drive the top line, the company has been banking on acquisitions and licensing deals. In the fiscal second quarter, PVH Corp concluded two acquisitions namely, the Australia acquisition and the Tommy Hilfiger retail operation in Central and Southeast Asia from its previous licensee in the region. Also, PVH Corp has agreed to end the global licenses for the Calvin Klein and Tommy Hilfiger North America socks and hosiery operations. This is in sync with the management’s plan to merge its socks and hosiery operations for all brands in North America into a newly-created joint venture. Further, the company expects to bring the Calvin Klein’s international socks and hosiery business in-house. All these transactions are likely to contribute roughly $75 million to revenues in the current fiscal year.

2 Key Picks Stocks to Consider in the Same Space

Crocs, Inc. CROX has an expected long-term earnings growth rate of 15% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Delta Apparel, Inc. DLA, also a Zacks Rank #1 stock, has an expected long-term earnings growth rate of 15%.

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