PVH Corporation is on track for capital returns

Mounting headwinds are cutting into business for PVH Corporation (NYSE: PVH) and its competitor V.F. Corporation (NYSE: VFC) alike. Along with ongoing inflation and supply chain issues, these companies are facing a growing headwind from the dollar. The dollar index is at the highest level in 20 years and on track to move even higher. The pace of inflation in the U.S. has the FOMC on track to hike rates by 150 bps by the end of the year and that will strengthen the dollar even more than it already is.

The takeaway is that currency conversion is a growing problem for these and every S&P 500 (NYSEARCA: SPY) company with offshore exposure but the news is not all bad. Both PVH Corporation and V.F. Corporation represent the best investors can expect from the apparel/retail world because they have solid branding, well-established eCommerce channels, a growing DTC presence, sound management, and healthy capital return programs.

PVH Corporation moves lower on weak outlook

PVH Corporation had a weak quarter that was at once foreshadowed by V.F. Corporation’s results a month ago and also foreshadow weak results from it and other major labels like Ralph Lauren (NYSE:RL) and Levi Strauss & Co. (NYSE: LEVI) which both set themselves apart early in the Q2 reporting cycle with strong results and more favorable outlooks.

In regard to PVH Corporation, the Q2 revenue of $2.13 billion is down 7.8% from last year and missed the Marketbeat.com consensus figure by 350 basis points with weakness in all channels. Tommy Hilfiger sales fell 5% while Calvin Klein fell a smaller -1%. Heritage Brands' sales fell 44% due in large part to the sale of the retail business last year. The DTC, wholesale, and digital channels also all saw declines falling 5%, 11%, and 7% respectively. Revenue is also down versus the prepandemic level by 9.75% and the business is expected to slow further in the back half of the year.

The margin news is the best part of the report with the gross margin coming in at 57.2%. This is down 50 basis points from last year but far less than expected. This left the operating margin and EPS above target as well with adjusted earnings of $2.08 beating the consensus by $0.06 despite the top-line weakness. The adjusted EPS also includes a $0.35 impact from FX conversion which was $0.10 more than forecast. The bad news is the guidance which was reduced from the previous release. The company is now expecting revenue growth to fall to -4% to -3% versus the prior expectation for flat to 1% growth and for EPS to come in well below consensus. The new adjusted EPS target is $8.00 per share versus the prior $9.00 and the $8.67 consensus and there is downside risk in the outlook, particularly if the dollar index continues to move higher.

PVH Corporation buys back shares

PVH Corporation and V.F. Corporation both return capital to shareholders if in different ways. V.F. Corporation is a near-Dividend King with a yield near 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 buyback, however, was worth 2.95% in respect to the recent market cap and the remaining authorization is worth another 25% more.

The technical outlook: PVH Corporation Lags V.F. Corporation

Both PVH and VFC shares have been trending lower this year and it looks like that trend may continue but there is a difference in the action. PVH is lagging behind its competitor and has been for some time. In this regard, V.F. Corporation looks like the better buy even with the higher 13.75X earnings multiple 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 within the next few sessions.