Growing headwinds are disrupting business for PVH (NYSE:) Corporation and its competitor VF Corporation (NYSE:). Along with ongoing inflation and supply chain issues, these companies face a growing headwind from the dollar. The has been at the highest level for 20 years and is on course to go even higher. The pace of inflation in the United States is pushing the FOMC to raise rates by 150 basis points by the end of the year, thus strengthening the dollar even more than it already is.
The conclusion is that currency conversion is a growing problem for these companies and for all companies with foreign exposure, but the news is not all bad. PVH Corporation and VF Corporation represent the best investors investors can expect from the apparel/retail world, as they have strong branding, well-established e-commerce channels, growing DTC, sound management and sound return on capital programs.
PVH Corporation lowers its weak outlook
PVH Corporation had a weak quarter which was both heralded by the results of VF Corporation a month ago and also announced weak results from it and other major labels like Ralph Lauren (NYSE:) and Levi Strauss (NYSE:) who both excelled at the start of the second quarter reporting cycle with strong results and a more favorable outlook.
PVH Corporation of $2.13 billion was down 7.8% from a year ago and missed the Marketbeat.com consensus figure by 350 basis points with weakness across all channels. Sales of Tommy Hilfiger fell 5% while Calvin Klein fell just under 1%.
Heritage Brands sales fell 44%, largely due to the sale of the retail business last year. The DTC, wholesale and digital channels also saw declines of 5%, 11% and 7%, respectively. Revenues are also down 9.75% from pre-pandemic levels, and activity is expected to slow further in the second half.
The margin news is the best part of the report, with a gross margin of 57.2%. That’s down 50 basis points from a year ago, but far less than expected. That left operating margin and EPS above target, with adjusted earnings of $2.08, beating consensus of $0.06 despite weak revenue.
Adjusted EPS also includes a $0.35 impact from currency translation, which was $0.10 higher than expected. The bad news is that the orientation has been reduced from the previous version. The company now expects revenue growth to fall from -4% to -3% from the previous expectation of flat 1% growth and EPS to be well below consensus.
The new Adjusted EPS target is $8.00 per share from the previous $9.00 and consensus of $8.67 and there is downside risk to the outlook, particularly if the dollar index continues to increase.
PVH Corporation buys back shares
PVH Corporation and VF Corporation both return capital to shareholders, but in different ways. VF Corporation is a near-dividend king with a yield close to 4.75% and a positive if not robust outlook for dividend growth while PVH Corporation prefers to buy back shares. PVH pays a dividend but it’s a low 0.18%, the buyout was worth 2.95% against recent market cap, however, and the remaining authorization is still worth 25% more.
The technical outlook: PVH Corporation trails VF Corporation
The PVH and VFC shares were downward trend this year, and it looks like this trend may continue, but there is a difference in action. PVH is behind its competitor and has been for some time. In this regard, VF Corporation appears to be the best buy, even with the higher earnings multiple of 13.75X compared to PVH Corporation’s 7.75X multiple. Shares of PVH are down more than 5.0% in premarket action and could easily break support near the $55 level in the coming sessions.