PVH - Zacks Investment Research

Macroeconomic Headwinds May Dampen Performance: Consumer confidence and spendingbehavior may dampen due to macroeconomic factors including an increase in fuel and energy costs,credit availability, high unemployment levels, and high household debt levels, which may negativelyaffect the disposable income of consumers. This, in turn, could affect the company s growth andprofitability.Competitive Pressure: The company operates in a highly fragmented market and competes with anumber of well-established players such as Estee Lauder, Coach, V.F. Corp., Ralph Lauren Corp.,Jones Apparel, Liz Claiborne and Kenneth Cole Productions. The company primarily competes onthe basis of fashion, quality and service. Failure to offer high-quality distinguished products at acompetitive price may hamper PVH Corp. s market share, consequently resulting in reduced top andbottom lines.Risk of Operating in Overseas Market: PVH Corp. s financial performance may suffer due to itsconspicuous presence in the international market, which exposes it to unfavorable foreign currencytranslation risks, economic or political instability and other governmental action on trade andrepatriation of foreign profits.RECENT NEWSPVH Furthers Expansion and Enhances Omnichannel NetworkDec 19, 2014PVH Corp., together with Gazal Corporation Limited, recently declared that they have penned a deal withtheir Australian JV to strengthen the latter s operations, via wholly owned subsidiaries.As part of the expansion of their 50/50 JV, which began operations in Feb 2014, PVH will introduce itsTommy Hilfiger, Van Heusen brands and Nancy Ganz in Australia and New Zealand. Also, thisexpansion will involve the addition of some of Gazal s other shirting, shapewear and tailored businesses.The deal, which is anticipated to close in early Feb 2015, involves the following transactions. The JV willpen a 12-year long license and distribution agreement with PVH s wholly owned subsidiary, TommyHilfiger. It will further buy a few assets of the current retail Tommy Hilfiger operations in Australia andNew Zealand, with the inclusion of 12 stand-alone retail stores of the brand.Further, the JV will purchase Gazal s shirting, tailored and men s accessories business, which operatesunder PVH s Calvin Klein and Van Heusen brands. It will also acquire Gazal s Bracks, Pierre Cardin andParamount brands. Though Gazal already distributes Van Heusen in Australia, under a license fromPVH, the agreement will be transferred to the JV and will be valid up to 2033-end.In spite of its shirting, tailored and men s accessories business being acquired, Gazal will be entitled to50% interest in the expanded JV. Finally, the JV will acquire Gazal s shapewear operations, which willinclude Nancy Ganz, the Spanx brand and Gazal s own HoldmeTight brands.We believe that this agreement is likely to solidify PVH s operations as the extension of its JV to Australiaand New Zealand is most likely to be profitable for its Tommy Hilfiger, Van Heusen and Calvin Kleinbrands, given their popularity and market in those countries.On the same day, PVH made another announcement pertaining to its strategy of achieving growth viaexpansion. The company s Calvin Klein brand announced plans to expand its operations by introducingan international e-commerce strategy for the brand s website, calvinklein.com. The strategy aims to startdirect e-Commerce operations in over 20 countries by 2016-end.Equity ResearchPVH Page 4

The strategy involves individual websites, customized on the basis of market, despite having the sameinterface. The strategy, which was implemented with the re-launch of the company s digital flagship in theU.S. and extended across Europe, North America and South America, will also extend to Asia.These sites feature a wide array of products including men and women s jeans and underwear, area-wiseofferings of Calvin Klein s perfumes, apparel and accessories, home and children s products, dependingon availability. The sites will launch on web, mobile and also foray into the world of social media.PVH has been focusing on expansion and its higher-margin businesses for a long time now. We believethe company is likely to boost results by undertaking these growth measures.PVH Corp. (PVH) Beats on Q3 Earnings, Cuts 2014 OutlookDec 3, 2014PVH Corp. s third-quarter adjusted earnings of 2.56 per share not only came ahead of its own guidancerange of 2.45 2.50 but also beat the Zacks Consensus Estimate of 2.48 per share. Moreover, thecompany s adjusted earnings were nearly 11% higher than the year-ago comparable period figure of 2.30 per share.Despite a difficult global retail environment and intense promotional scenario, the company s bottom-lineresults improved year over year on strong performance at its Tommy Hilfiger and Calvin Klein brands.Including one-time items, PVH Corp. reported earnings per share of 2.71, surging 14% from 2.37earned in the comparable year-ago period.Though the company posted better-than-expected bottom-line results in the third quarter, its sales resultsfailed to meet expectations. Moreover, the company provided a cautious guidance for the fourth quarterand at the same time lowered its forecast for 2014 as it expects continued impact from foreign currencytranslation in the year ahead. Consequently, the shares of this premium specialty apparel retailer fell1.9% during yesterdays after-hours trading session.Quarter in DetailPVH Corp. s total revenue fell 1.2% to 2,233.1 million from 2,259.1 million in the prior-year quarter.The prior-year figure includes revenues of 67 million from the divestment of its Bass business on thefirst day of fourth-quarter 2013. Excluding the same, the company s total revenue registered year-overyear growth of nearly 2%.The year-over-year increase in revenues was attributed to decent sales contributions from all threebusiness segments. However, quarterly revenue fell short of the Zacks Consensus Estimate of 2,260million.Total adjusted gross profit improved year over year by a marginal 0.2% to 1,170.4 million while as apercentage of sales it expanded 70 basis points (bps) to 52.4%.PVH Corp. s adjusted operating profit rose 1.1% to 309 million from 305.5 million in the year-agocomparable quarter. Moreover, the company s operating margin expanded 30 bps to 13.8% from theyear-ago period. The improvement in operating margin is primarily due to the ongoing strength in itsTommy Hilfiger business, partially offset by investment in the recently acquired Warnaco businesses andgross margin erosion in the Heritage Brands business.Equity ResearchPVH Page 5

Segment AnalysisPVH Corp. reports its financial results under three business segments: a) Calvin Klein, b) Tommy Hilfigerand c) Heritage Brands.Calvin Klein s revenue jumped 2% to 816 million in the quarter from 800 million in the year-agoquarter, including a 1% negative impact from foreign currency translation. The growth was driven by a5% increase in the North American business and a 2% increase in total Calvin Klein royalty revenue,offset by a 1% decline in the brand s international business.The North American operation improved due to a 5% rise in retail comparable-store sales (comps) andsquare footage growth, coupled with a moderate growth in the North America wholesale business.Further, the brand s international performance was impacted by a 2% decline in comps stemming fromweakness in Asia along with negative effects of 2% from foreign currency translation. Royalty revenueprimarily gained from ongoing strength in womenswear.The segment s adjusted operating profit fell 1.4% to 142 million from 144 million, mainly because ofincreased expenses related to strategic investments in the newly acquired businesses and advertisingexpenditures.Revenue at the company s Tommy Hilfiger segment increased 1% to 930 million from 921 million inthe year-ago period, backed by sales growth of 3% in the North American business, partly offset by a 1%decline in the international business. Growth at the segment s North American business was driven by1% retail comps growth along with square footage expansion. Meanwhile, the international revenue waspulled down by a 5% fall in retail comps in Europe due to significant traffic decline in the region in themiddle of the quarter as well as lesser promotional activity. Moreover, the segment s international wingsuffered a 3% negative currency translation impact due to a weaker euro.The segment s adjusted operating profit increased 9% to 155 million from 143 million in the thirdquarter of fiscal 2013. The increase in operating profit was due to higher revenue coupled with grossmargin improvement in both North America and Europe due to relatively lesser promotional activitycompared to last year.The Heritage Brands segment s revenues rose 3% year over year to 487 million, excluding 67 millionrevenue related to the Bass business in the prior-year quarter. Including the same, this segment srevenue fell nearly 10% year over year. Revenue growth during the quarter is attributed to a 6% rise inwholesale revenues, partly offset by a 6% decline in retail comps.The segment s adjusted operating profit plunged 14.3% year over year to 36 million, due to lowerdecline in gross margin that stemmed from an increase in promotional activities to drive sales and traffic.Balance SheetThe company ended the quarter with cash and cash equivalents of 365.1 million, long-term debt,excluding current maturities of 3,618.7 million and shareholders equity of 4,583.8 million.GuidanceSignificant strengthening of the U.S. dollar against several currencies in the last three months, especiallythe euro, has forced PVH s management to become cautious in planning its forecast for the fourthquarter.Equity ResearchPVH Page 6

As a result, the company has lowered its 2014 adjusted earnings per share guidance range to 7.25 7.30 from 7.30 7.40 projected earlier. The new guidance represents 3% 4% growth compared with 7.03 earned in 2013Revenues for fiscal 2014 are now expected to come in at 8.3 billion, up 3% from the year-ago period,excluding revenues of the Bass business and reflecting the negative currency translation impact,compared with last year as well as the previous revenue forecast of 8.4 billion. Including the Bassbusiness s revenue, the company s total revenue for 2014 is expected to increase nearly 1%.On a segment basis, the company anticipates revenues from its Calvin Klein and Tommy Hilfigerbusinesses to increase 2% and 5%, respectively, while revenue for Heritage Brands is expected toremain relatively flat with the prior-year quarter, excluding the Bass revenue. However, including theBass revenue, Heritage Brands revenue is expected to decline 8%.For fiscal 2014, net interest expense is projected to be 140 million, reflecting a decline from fiscal 2013,due to projected debt repayments of 400 million for the year, coupled with the refinancing of its creditfacility and the related redemption of its 7 3/8% senior notes in the first quarter of 2014. Effective tax rateis expected to be in the range of 23.5% on a non-GAAP basis.For fourth-quarter fiscal 2014, the company expects total revenue of 2.1 billion, representing a 3% risefrom the prior-year quarter figure. Revenue projections for the quarter include a 3% negative impact fromforeign currency translations, primarily due to a weak euro. Further, the company anticipates revenuegrowth of 2% at the Calvin Klein business, 5% at Tommy Hilfiger and 1% at Heritage Brands.Adjusted earnings per share for the fourth quarter are expected to be in the range of 1.71 1.76,reflecting 20% 23% growth from 1.43 per share earned in the prior-year quarter.Net interest expense for the fourth quarter is expected to be 33 million, while tax rate is projected to beapproximately 19.5%.Equity ResearchPVH Page 7

VALUATIONPVH Corp. s current trailing 12-month earnings multiple is 18.4x compared with the 25.3x industryaverage and 19.2x S&P 500. Over the last 5 years, PVH Corp. s shares have traded in the range of 12.2xto 20.3x, trailing 12-month earnings. The stock is also trading at a discount to the industry average,based on forward earnings estimates. Our target price of 135.00, 16.1x 2015 EPS, reflects this view.Key IndicatorsP/EF1P/EF2Est. 5-YrEPS )PVH Corp. (PVH)17.615.314.011.518.420.312.2Industry AverageS&P 14.112.0V. F. Corp. (VFC)24.321.412.722.425.625.7Teijin Ltd. (TINLY)N/A17.0N/A4.316.494.8Ralph Lauren Corp. (RL)21.618.812.515.922.325.2TTM is trailing 12 months; F1 is 2014 and F2 is 2015, CF is operating cash flow9.68.113.9P/BLastQtr.P/B5-Yr HighP/B5-Yr LowROE(TTM)D/ELast Qtr.Div YieldLast Qtr.EV/EBITDA(TTM)PVH Corp. (PVH)2.32.71.512.60.80.116.4Industry AverageS&P ty ResearchPVH Page 8

Earnings Surprise and Estimate Revision HistoryEquity ResearchPVH Page 9

DISCLOSURES & DEFINITIONSThe analysts contributing to this report do not hold any shares of PVH. The EPS and revenue forecasts are the Zacks Consensusestimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personalviews as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly,related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in thisreport is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as toaccuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meetthe particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as anoffer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have aposition long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for thesecurities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six totwelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelvemonths. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. Thecurrent distribution of Zacks Ratings is as follows on the 1117 companies covered: Outperform - 16.3%, Neutral - 77.3%, Underperform 5.8%.Data is as of midnight on the business day immediately prior to this publication.Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends inearnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The modelassigns each stock a rank from 1 through 5. Zacks Rank 1 Strong Buy. Zacks Rank 2 Buy. Zacks Rank 3 Hold. Zacks Rank 4 Sell. ZacksRank 5 Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of acompany s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms ofinvestment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. Indetermining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on eachthstock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 group has the highestvalues and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to thesecond, third, and fourth groups of stocks, respectively.Equity ResearchPVH Page 10

Dec 30, 2014 · Collection, Calvin Klein platinum label, Calvin Klein white label, Calvin Klein Jeans and Calvin Klein Underwear. It is the companys topmost premium brand which is marketed at a higher price and at higher-end distrib