Calvins Get Between PVH and Profit

 | Mar 28, 2013 | 7:15 AM EDT  | Comments
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pvh

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vfc

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m

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jcp

Darned earnings, they can really screw it up, can't they?

Last night, PVH Corp. (PVH), one of my absolute favorite companies, lowered the boom on 2013. The culprit? A new acquisition, Warnaco, failed to meet the targets that PVH set when the acquisition closed. So a buck-fifty-two goes to a buck-thirty-three for the quarter, and seven-forty-six goes to seven bucks.

Thud.

This was a tough one. I know I was hoping for better because I thought that the Warnaco acquisition that closed in February, bringing in the remaining Calvin Klein brands that were not held by PVH, would go smoothly for the company, the way the Tommy Hilfiger acquisition did several years ago.

That was wrong. As Manny Chirico, the terrific CEO at PVH, told me last night, many of the Calvin Klein business lines just weren't doing that well, particularly jeans in the U.S., Europe and Korea, the latter being especially weak.

Consequently, instead of the synergies, the guide-ups, and the accretions, we got the dreaded word, dilution, 25-cents worth, and a reset. In short, 2013's no longer a growth year for PVH. Now it is an investment year. And if jeans stay weak, an investment year could mean even less growth than Manny's telegraphing now. In other words, we don't know if the 25 cents of dilution captures the entire weakness.

That's the bad news.

The good news is that once you ratchet things down and shake out all those who thought this deal would be accretive from the get-go, you might have a decent second-half investment. I would say that you might have a good trade today -- down 5% to 7% -- but enough analysts will be surprised by the sudden inconsistency of this smoothly running operation that the stock has to lay low and repair for a bit. Fortunately, for Manny and the stock, the analysts at JP Morgan and Wells Fargo nailed the progression here -- or the regression, depending upon how you feel -- and had softened the beach for the miss. Hats off to JP Morgan's Matthew Boss and Wells Fargo's Evren Kopelman for nailing the problems ahead of the quarter. Going into the number, I had thought they were being overly cautious. They were just being right. Very good research.

Unfortunately, for current shareholders, it will be hard to figure out what multiple to put on the new $7 estimate figure. I think there will be those who say, "I can't give apparel a premium multiple because it is too fickle" and they will sell PVH down to the high $90s -- a slight haircut to the multiple of the S&P 500. I think that the quarter will weigh on VF Corp. (VFC), too, because it sells a ton of jeans. Ralph Lauren spillover shouldn't be that one-for-one, but I wouldn't be surprised if it also gets whacked pretty hard today off this number. Heck, even the red-hot Deckers (DECK) could get knocked down a bit by this one. I am not extending it to Lululemon (LULU) because that stock's in a hurting world of its own.

Lost in the shuffle of the Calvin miasma is how well Hilfiger's doing -- just fine, thank you. Makes me feel that without this acquisition, PVH would have blown out the numbers again. But without it, PVH would not be able to take advantage of all of the brand equity of the House of Calvin Klein and would not be able to build out its whole enterprise in Asia and Latin America. Those are musts for the company. They have to be in those markets for Tommy label expansion, and they will fix Calvin. They didn't buy this idly. They knew what they were getting into. I think, though, that times were better when they bought Tommy, and Manny's quite straightforward when he says that Tommy's European operation was always a well-run gem. The biggest mistake Manny may have made was overestimating how much weakness there was in Calvin Klein right now. All of that can be fixed, though, and you want to be in this stock before that fix is complete. No hurry yet, however.

Is there a larger takeaway here for all of retail? Tough call. The holiday season was terrific for PVH, which didn't close on Warnaco until February. That's old news now, though. The new news? The month of March? Not so hot. Not so hot for the weather and, therefore, not so hot for sales. Yep, the temperature's been way too cold for Tommy shorts and the rest of the spring apparel the merchants are hawking. I think that we are going to hear that gripe from a lot of retailers next week, which bodes poorly for a bunch of operators, particularly Macy's (M) until, of course, it gets warm and then all is forgiven again. Always hard to play these weather trends.

Oh, and yes, there's the J.C. Penney (JCP) angle. Manny confirmed that it is awful for regular PVH, the premium brands, but it is terrific for the IZOD store-within-a-store heritage brands, which is performing on plan. Still, Penney, with its down 30% sales, cost PVH $40 million. One can only imagine how much it cost JCP. Penney, of course, is what makes Macy's a tough short off the weather. It still seems zero-sum.

In all, it was a jarring quarter coming on top of what people think was a weak one for Five Below (FIVE), which was just being cautious in its guidance. Total speed bump. But PVH? It's a reset and a reminder that PVH, alas, doesn't sell cereal or bleach, it sells fashion -- and fashion, by its nature, can go out of style.

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