Calvin Klein Is Stronger Than The Street Thinks, UBS Says In Upgrade Of Parent Company PVH

The Calvin Klein brand is stronger for PVH Corp PVH than the market thinks, according to UBS.

The Analyst

UBS analyst Jay Sole upgraded PVH from Neutral to Buy and raised the price target from $145 to $170.

The Thesis

The market views Calvin Klein’s 325-basis point year-over-year EBIT margin drop in the third quarter as a sign the brand is weakening, Sole said in a Monday note — but he disagrees.

The brand has faced near-term sales and margin headwinds from fashion misses with its CK Jeans and 205W39NYC lines. The brand can recover, the analyst said.

“Our view is Calvin Klein’s 2018 missteps are fixable and spring/summer 2019 wholesale order growth will accelerate quarter-over-quarter."

The analyst is modeling 11-percent five-year EPS CAGR and said PVH is worth 14x FY19E EPS versus today’s 9x P/E.

A wholesale buyer survey reveals that Calvin Klein's order growth is not only strong on an absolute basis, but higher than peers such as Ralph Lauren Corp RL, Sole said. Data indicates the company is clearing inventory, and Tommy Hilfiger’s resurgence also bodes well for PVH moving into 2019, he said.

“We see a solid opportunity to buy stock in two leading global brands at an attractive valuation."

The market is concerned with the potential effect of tariffs and FX headwinds on the apparel company, but PVH sources less than 20 percent of its American inventory from China, the analyst said.

“Our analysis suggests only an 80-basis point gross margin headwind if the U.S. establishes 25-percent tariffs on all softgoods imported from China.”