PVH Corp. (PVH) is a global apparel company. They own some of the most iconic brands in the business, including Calvin Klein, Tommy Hilfiger, Heritage Brands, Van Heusen, IZOD, ARROW, Warner’s, Olga, and Eagle. It also sells under licensed brands comprising Speedo, Geoffrey Beene, Kenneth Cole, Sean John, MICHAEL, Michael Kors, and Chaps. The company has a diversified product offering as it designs and markets and retails accessories, branded dress shirts, neckwear, sportswear, jeans, intimate apparel, swim products, handbags, footwear, golf apparel, fragrances, cosmetics, eyewear, socks, jewelry, watches, outerwear and small leather goods. The company wholesales its products to department, chain, specialty, mass market, club, off-price, and independent stores. It also sells through company-operated full-price specialty and outlet stores and e-commerce sites as well. PVH Corp. was founded in 1881 and over the last 12 months, the company generated profits of $549 million ($7.15/share) on $8.2 billion in revenue
PVH has something for both the bulls and the bears. First of all, it is an apparel company and this sector is out of favor, giving something for the bears to latch onto. Retailers such as Macy’s are closing stores. Others like American Apparel are filing bankruptcy. Company’s like Target missed analyst’s expectations in their latest financial reports, and the stock got slammed. JC Penny is struggling to find its place and it looks like Sears is on the mat.
The price action of the company stock reflects the troubles in the retail space more broadly and the apparel space more specifically. But hidden within that price action is a bullish story. The share price is trending in a long-term channel. The chart below shows that channel going back to 2008. (The share price has been in a very long-term uptrend since at least 1988.) The share price has one of our favorite long-term setups. The share price looks like it has completed a 2-year bear move within the bullish trend channel. It bounced off the lower bound and is now working its way higher. The recent bullish move was a result of the company reporting a beat of consensus earnings estimates on March 22.
Valuation is supportive of the bullish case. The shares are priced at a PE of 15 based on trailing earnings and 13 based on analyst’s expectations of next year’s earnings. In addition, EV/EBITDA is ok at 10 particularly for a company that is not growing at the moment. The price to sales ratio is just 1.0 which is a bit low even for a no growth company. The company generated $956 million in cash flow from operations, invested $480 million back into the company, used $307 million (3.7% of its market cap) to buy back stock while adding $174 million in cash to the balance sheet.
In our view, PVH is a bullish story on balance. But there is one element that makes us nervous and evidently makes other investors nervous as well. That issue is the border tax. To equalize the tax burden of domestic companies with overseas manufacturers, the administration has proposed a border tax that offsets the VAT rebate from exporting companies. Notice that the share price was hammered after the election. While we do not have firm evidence, we suspect the border tax was the issue. Once people realized it would be a year or two before it is implemented (if at all) and that its effect would be offset in part by a lower tax rate, the share price rebounded. Nonetheless, the issue of a border tax will be a political football and may impact the share price as the final tax bill moves through Congress.
In the final analysis, we think the risk reward looks favorable for PVH. If you own the stock we suggest you keep it. If you believe the share price is on the mend with nominal downside risk, we suggest you add it to your portfolio. If you are cautious bull we suggest you consider selling a put spread. With the stock trading at $103.56, we recommend the following structure.
| Action | Quantity | Exp. Date | Strike | Type | Net |
| Sell | 1 | 5/19/17 | $100.00 | Put | $2.50 |
| Buy | 1 | 5/19/17 | $95.00 | Put | $1.15 |
| Credit | -$1.35 |
To initiate this trade, the investor will collect $135 up front per put-spread, which they get to keep should the share price trade above $100 at expiration. The breakeven level is $98.65, which is 4.7% below the current price, giving us room for error. The efficient market hypothesis suggests there is a 67% chance of success on this trade. The most one can lose on the trade is $365 which would occur if the share price trades below $95 at expiration, which is 8.3% below the current share price.
