PVH (NYSE:PVH) is an apparel brand aggregator that focuses on classically "preppy" clothes. The company's leading brands are Calvin Klein and Tommy Hilfiger, but it also owns some smaller outlet-mall-style brands. Over 2012, the stock rose over 60%, and the company now has a market capitalization over $8 billion. In its last full fiscal year, the company increased revenue by 28% to $5.4 billion.
More recently, revenue fell in the last quarter, but the company managed to decrease costs, and ended up increasing earnings per share by 45%. The company now predicts an 18% increase in EPS for the full fiscal year. So why is the company, which had been chugging along like any other until a few years ago, now doing so well?
The case for PVH
It all starts at the top. PVH's CEO, Manny Chirico, has been with the company since the early 1990s, when he joined as a VP. But his strongest points may come from his time spent as CFO. PVH is a company that prides itself on its ability to manage costs and find new synergies among its brands. Employees also seem to like his view of the world, and Chirico has a 93% approval rating on Glassdoor.com, where 70% of employees say they'd recommend the company.
PVH has mastered the network effect of distribution and production -- such as moving production from country to country as regional costs change -- all under the guidance of Chirico. That focus has helped increase operating margins, and allowed the company to grow faster than competitors. Last quarter, operating margin increased 1.5 percentage points, which the company drove through an increase in gross margin.
As with many successful companies, PVH has used its power to implement a number of social and philanthropic efforts. The company ranked fifth in Fortune magazine's 2012 Most Admired Apparel Companies list, and has been recognized by Norges Bank for its commitment to children's rights. The company has focused on safety in its overseas plants, while also increasing the environmental sustainability of its U.S. operations.
Customers have responded to both the company's branding and its undertakings, as evidenced by its revenue and income growth. The company's Calvin Klein brand came in 10th last year in Millward Brown's ranking of brand value for apparel.
While happy customers don't always make happy shareholders, that certainly seems to be the case with PVH. Revenue has grown at a five-year average rate of 21%. As I mentioned above, that growth has slowed recently, with PVH posting a 1% decline in its last quarter, and forecasting high-single-digit growth for its fourth quarter. The danger for investors is that the slowdown could drag on, if its Warnaco integration -- more on that in a second -- doesn't go as smoothly as predicted.
Areas for improvement
PVH is a growing company, but it still lags behind some of its closest rivals in both size and brand power. VF has been building its own catalog of brands, which currently contains a variety well beyond that of PVH's portfolio. That reach put VF ahead of PVH on Fortune's list as the third most admired apparel company in 2012. Both companies have made a push for more Asian sales, but PVH has had trouble with its Tommy Hilfiger brand and expects those troubles to continue into this year.
But that market currently represents a very small portion of the business. Much of the weakness that Tommy has seen overseas has been offset by strength in the Calvin Klein brand. Revenue from Asia was up 13% in the last quarter, with North American sales up by the same amount. That brand strength faces a new challenge in 2013, though, with PVH's acquisition of Warnaco.
PVH acquired Warnaco in order to consolidate all of the Calvin Klein branding. Up until this point, Warnaco had provided underwear and jeans under the Calvin Klein label, both of which have been experiencing weakness recently. The acquisition also gives PVH some new brands, like Speedo and Chaps, which should help the company compete in new markets.
The challenges facing PVH have helped increase the short interest in the company, as investors worry that the best times are behind them. But PVH has a history of integrating new businesses successfully, with Tommy having been added to the roster just two years ago. PVH is ready to take on its newest challenge and go the distance. Having said that, 2013 will be a trying year, and I'm expecting growth to slow noticeably as that business is reworked.