The consumer discretionary sector was among 2023's big winners, though gains were concentrated among a few leaders, including Amazon.com Inc. (AMZN, Financial) and Tesla Inc. (TSLA, Financial), as well as a handful of travel stocks and homebuilders. While there are questions about how consumers will fare in 2024, one growing apparel company with strong profitability trends appears poised for more gains.
PVH Corp. (PVH, Financial) sports a low valuation and high earnings growth over the coming quarters. While its technical situation is mixed, I see more upside ahead.
Apparel stocks underperformed discretionary in 2023
Company description
According to Bank of America Global Research, PVH has an international presence in the apparel industry through two primary segments: Calvin Klein and Tommy Hilfiger. It operates through three distribution channels: wholesale, retail and licensing operations. It designs and markets apparel in more than 40 countries, primarily through e-commerce outlets and physical stores.
Key data
Sporting a $7 billion market cap, the New York-based apparel, accessories and luxury goods company within the consumer discretionary sector trades at a low 11.2 forward 12-month non-GAAP price-earnings ratio, and the company pays a low 0.1% dividend yield. With earnings not due out until March, the stock carries a moderately high 30% implied volatility percentage with a material short interest of 4.30% as of Jan. 10.
Color on the quarter
Back in November, PVH reported a significant bottom-line beat. Fourth-quarter non-GAAP earnings per share verified at $2.90, easily topping the Wall Street consensus estimate of $2.74. Top-line growth of 3.5% from year-ago levels led to $2.36 billion in net sales, slightly missing analysts' expectations. The company's 15% operating margin goal by 2025 remains intact following the solid quarter, even with a more modest sales outlook given the weakening consumer environment. The next few quarters will be critical to watch given the rise in the stock, with particular attention being paid to how its European geographic segment performs – with significant revenue from that region, and any weakness there is a risk. But with improved inflation trends in Europe, there's reason for optimism. Big picture, the company reduced selling, general and administrative costs while its North America segment produced robust margin numbers in both Calvin Klein and Tommy Hilfiger as it grows its direct-to-consumer channel.
If the company can hit its 15% operating margin target, then this year's earnings forecast should easily be hit. Execution is key in 2024 amid several macro crosscurrents, and the latest advance in the share price sets the bar a bit higher than what was seen during the middle of last year. Still, PVH's strong international presence, top-line momentum and improved balance sheet are tailwinds for the coming years.
PVH sales mix
Competitor analysis
Compared to its peers, PVH is relatively undervalued given its earnings multiple and modest enterprise value/Ebitda ratio under 9. For shareholders, the stock lacks a decent yield, and you can find retailers more focused on distributions, but I assert that PVH's improved margin story and international growth opportunities are worthy of being invested in right now. Also consider that PVH has among the best growth prospects in its industry while share price momentum trends have been robust in recent months. Finally, amid weak apparel company earnings per share revisions lately, PVH stands out with a slew of earnings upgrades over the past 90 days.
Risks
Key risks for the company include a softer macroeconomic environment, particularly if consumer spending trends weaken. Being a company with a mix of U.S. and international sales, adverse currency movements are always a risk. Rising input costs and labor challenges could also derail the margin expansion story. A particular concern heading into 2024 is what could unfold in Europe. About half of PVH's sales stem from Europe, with an even larger share of its profits from that region. If we see continued soft economic data, including retail sales, then PVH could be a laggard. I will also be keeping a watchful eye on PVH's promotional activity.
Valuation
On valuation, analysts at Bank of America see earnings jumping 17% this year after a dip in 2023. Per-share profit growth is expected to accelerate in 2025 with continued ample earnings growth in 2026. The current consensus outlook calls for mid-teens earnings per share increases, with perhaps easing growth by 2026, however. The improved profitability trend will likely be driven by margin expansion given that forecasters see PVH's top line rising by just 1% this year and near 0% next year.
Dividends, meanwhile, are projected to hold at a very low rate as the company focuses on reinvesting capital into high-growth initiatives. With a low teens operating earnings multiple, the company appears as a solid value play with significant growth opportunities. If we apply a low to mid-teens price-earnings ratio, between PVH's long-term average (10.7) and the sector median (15.6), and assume $10.80 of non-GAAP earnings per share over the next 12 months, then the share price should be near $142, making the stock significantly undervalued today.
PVH: Earnings, valuation and free cash flow forecasts
Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed fourth-quarter 2023 earnings date of Monday, March 25. No other volatility catalysts are seen on the calendar.
Corporate Event Risk Calendar
The technical take
PVH has been a major winner from the stock market bottom in October of 2022. Notice in the chart below that shares nearly tripled from a low near $43 to the December 2023 peak above $123. A pullback is currently underway, which is not surprising given the stock rallied right up to its 2021 range highs between $121 and $125. I would expect further consolidation, potentially forming a bullish cup with handle pattern. The thinking is investors who bought the stock in 2021 may look to sell in order to get back to breakeven, creating some pressure on the stock. Once that supply is out of the way then I see technical opportunities for PVH to continue its rally, potentially up to its 2018 high near $169.
I also spot a high amount of volume by price from the low $80s up to $110 – that makes for a natural support area on pullbacks. Also consider that PVH's long-term 200-day moving average is now upwardsloping, suggesting the bulls are in control, though shares are working off technical overbought conditions, as seen in the relative strength indicator momentum oscillator at the bottom of the graph.
Overall, the technical situation is healthy long term, though a pullback is in the works and a major area of support is seen at the 2023 range highs in the mid-$90s.
PVH: A pause in the advance, strong recent momentum, $169 in play, mid-$90s support
The bottom line
I see shares of PVH as undervalued, though a pause in the uptrend appears to be taking place. With support in the mid-$90s and fundamental upside to the low to mid-$140s, this apparel company looks strong as 2024 progresses.
