Shares of PVH Corp (NYSE:PVH) touched a new 52-week high of $138.68 on Friday. The retailer could record significant EPS upside in the long-term after reinvestment in the first half of 2014.
New York-based PVH, or Philips Van Heusen, is one of the world's largest apparel companies with more than 75 percent of revenues coming from its two global designer lifestyle brands – Calvin Klein and Tommy Hilfiger. As such, PVH is most focused on the moderate- to high-price point apparel, handbags, and accessories market.
Investors seem over-focused on near-term risks of stepped-up investment, ongoing inventory reduction, and distribution right-sizing for the Calvin Klein (CK) jeans/underwear business (acquired from Warnaco in 2013).
UBS analyst Michael Binetti views that PVH has the most visible algorithm for EPS growth over the next three years at the high end of the large-cap apparel peer group. He expects EPS to grow at a rate of more than 18 percent CAGR in the next three years.
By the second half of 2014, PVH should transition to a significant CK margin improvement story, with the Warnaco CK business currently under earning its long-term EBIT margin potential by 500 basis points (80 cents in EPS).
Starting in 2015, Binetti believes that PVH can re-accelerate revenue growth with better pricing power, new categories and new geographic opportunities for the Calvin brand as well as an ongoing Europe white space opportunity, and accelerating owned-retail business in the US for Tommy Hilfiger brand.
Calvin Klein margin improvement story is PVH's most powerful near-term opportunity. PVH can improve margins for the legacy Warnaco CK business (Jeanswear/Underwear) by about 500 basis points by 2016.
The market assumes only 6 percent revenue growth for CK in 2014 (below PVH's long-term outlook for 8-10 percent annual growth). But, the company is already well underway in reducing CK inventories, right sizing distribution that over-skewed to low-end channels, and improving product quality to re-establish pricing power and re-accelerate revenues to the 8-10 percent long-term range.
Binetti estimate that the legacy Warnaco business is currently generating 7.5 percent operating margins (with the $1 billion revenue Jeanswear business currently at low single digit operating margins), but should improve to 12.5 percent by 2016.
Every 100 basis points of improvement in legacy Warnaco CK margins is 15 cents of EPS to PVH. On a pro forma basis, Calvin Klein EBIT margins can improve by 400 bp (to 19 percent by 2016 from 15 percent in 2013).
A key near-term concern for investors has been PVH's comments that Tommy Europe orders will be only up about 1 percent after several years of solid growth. However, Tommy orders should not remain sluggish. Even in the third quarter call, the company commented that it expects better growth by fall.
For Tommy, there is significant opportunity to extend the brand into new geographies—especially leveraging legacy Warnaco assets in Latin America and Asia.
Meanwhile, Binetti said an analysis of past PVH and Warnaco company presentations points to up $1.4 billion in revenues from additional licenses for Tommy Hilfiger and Calvin Klein that PVH could consolidate in the coming years—which could add an incremental $1 in EPS.
The 2014 will largely be a year of completing the repositioning of the Warnaco CK businesses. In 2015 and beyond, PVH will begin to roll-up these licenses. If PVH acquires about 50 percent of these outstanding licenses over the next three years, it could add 50 cents in EPS by 2016.
As the Warnaco business starts showing signs of stability, PVH will transition into one of the best three-year EPS stories in large-cap apparel. Investors could own the stock ahead of the turn in the fundamentals.
PVH shares currently trade at a forward P/E of 16.8 times, a discount to peer group average of 17.6 times. They gained 20 percent in the last one year and traded between $102.72 and $138.68.
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