PVH Corp. Seems To Be Undervalued, But I Am Not Buying Yet (NYSE:PVH)

PVH Corp. (NYSE:PVH) is about to release their Q2 2024 earnings on August 28. Shareholders will be paying close attention to any updates on their FY2024 guidance.

In this article, I considered reviewing their recent performance, focusing on the headwinds and pressures that the company has been experiencing since the start of the year.

Despite great valuation ratios, and raising EPS guidance in Q1 2024, I believe there is a certain level of pessimism among shareholders, which could lead to a 30% (unjustified) panic selloff if management lowers FY2024 guidance, or they miss earnings by a significant amount.

Therefore, I keep a Hold rating, which I discuss more in the outlook section. For now, I will start with a brief company overview, for those readers new to this stock.

Company Overview

PVH Corp. is a global apparel company that operates mainly through two major brands: Tommy Hilfiger and Calvin Klein.

Their revenue comes through three channels:

1. Wholesale sales to department stores and other retailers.
2. Direct retail through company operated stores, and online platforms.
3. Licensing agreements where third parties produce and sell products under the Tommy Hilfiger and Calvin Klein brands.

I considered including below a table with their different business segments, to better illustrate the relative weight of each segment to the total annual revenue.

Click to enlarge

Author’s compilation from the latest 10-K.

In regard to the beneficial ownership of the company, I have to admit that I feel disappointed by the 1% stake in the company among all directors and executive officers. My investment style favors skin in the game in the form of ownership, and cluster insider buying activity in the open market (especially following a selloff).

I considered including below a snippet from their latest 14A.

Recent Performance

Their Q1 2024 results were positive, with an EPS of $0.27 above analysts’ expectations, and a total revenue of $15.78 million above expectations.

Nevertheless, since the Q1 release, their share price dropped by over 20%. Let’s try to understand some of the factors that could have driven this decline.

The first strong headwind that concerns me is the tough macroeconomic environment in Europe, particularly in the UK and Germany, characterized by weak consumer sentiment and cautious spending. The uncertainty about the economic outlook in Europe led to pressures in discretionary sectors, like apparel.

Therefore, wholesalers in this region had to adjust their inventories, leading to a 12% decrease in revenue from the European region.

Despite this decline, I favor management’s decision to focus on higher-margin sales rather than volume. Indeed, this had an impact on the total revenue in the European region of 6%, which represents half of the 12% decline YoY.

My investment style favors companies with higher margins, especially during economic downturns, as these margins provide them with a certain level of flexibility.

Another challenge is the departure of Martijn Hagman, the CEO of Tommy Hilfiger Global and PVH Europe. Hagman had been with the company for 16 years, building PVH’s European operations into a profitable segment.

While the company is searching for a new CEO for this segment, David Savman, PVH’s Chief Supply Chain Officer, will take on the role of Interim CEO for PVH Europe.

I am sweating about this departure, considering the recent decline in revenue in the European market. In my view, this could also put some pressure on the new Tommy Hilfiger global president, Lea Rytz Goldman, to quickly establish her leadership and maintain the momentum of their global strategy.

In regard to their supply chain, I favor the decision to reduce inventories by 22%. I like companies with an optimized inventory level to meet the current demand, especially in the apparel industry, where you don’t want to be stuck with a product that doesn’t sell and takes up valuable space on the shelf.

Outlook

Let’s start by having a look at the share price in a weekly chart.

Since April 2024, the share price dropped by 30%, mainly due to the weak FY 2024 guidance, presented in their Q4 2024 earnings report. Essentially, they projected a flat operating margin and a decrease of 6% – 7% YoY in their annual revenue.

In my view, part of this selloff is justified, but not all of it, especially the 20% decline since the release of the Q1 2024 results.

The main reason is that management raised the GAAP EPS guidance to a range of $11.15 to $11.40, compared to the previous guidance of $10.75 to $11.00. Additionally, they reaffirmed (and not lowered) their revenue and operating margin expectations. In my view, a 10% operating margin for the apparel industry is a healthy figure.

Additionally, you might have noticed a support line in the weekly chart above. In my view, this is a validated support level, between the $60 – $70 price mark.

Do I think the share price will touch this support line if they keep the same guidance? No, especially if they beat earnings in Q2 2024. However, if later on during this year they lower their guidance, or miss the analysts’ estimate, I believe there is a nonzero chance for another selloff, down to the $60-$70 price range.

In my view, the results of the second quarter will have a strong influence on the share price, especially if they lower guidance. For this reason, I believe there is a high risk of initiating a long position right now, as this is a bet on their future guidance, and considering the uncertainty in the European market, I believe it is too speculative for my investment style.

Other than that, I believe the company is undervalued when compared to the median of the consumer discretionary sector, and their own 5-year average.

From a valuation point of view, I believe it makes sense to initiate a long position, although you are running the risk of the share price going down (by another 30%) before it comes back up. As a side note, I never underestimate the irrationality of shareholders during economic downturns, as I have seen many unjustified selloffs in other companies with healthy valuation ratios.

In regard to insider buying activity, I am disappointed by the lack of buying transactions in the open market during this year. If I see a selloff, accompanied by a major cluster of insider buying activity, before the share price reaches the $60-$70 price level, I would most probably initiate a long position myself. But until then, I remain cautious, with a Hold rating for this stock

Conclusion

Wrapping up, I believe the challenges in the European market will persist during the rest of the year due to the lack of any strong macroeconomic indication to suggest otherwise.

Despite beating earnings in Q1 2024, the share price dropped by 20%, which I see as an indicator of pessimism among shareholders, following the guidance provided in Q4 2023.

Valuation ratios look really decent, in my view, but my investment style is overly focused on optimizing my entry point due to a relatively short timeframe of 3-24 months. Therefore, I believe that initiating a long position right now might be a risky decision due to the overall pessimistic feeling among shareholders, which could lead to a panic selloff.

I believe that missing earnings or lowering guidance later on during this year could drive the share price down to the $60-$70 price mark. If this is the case, I would probably initiate a long position, but until then, I keep a Hold rating.