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  1. Home
  2. / Investing
  3. / Consumer Discretionary

Riches-to-Rags Story for 2 of These 3 Apparel Makers

PVH and Ralph Lauren are feeling retailers' pain, though underwear maker Hanesbrands is holding its own.
By CHRIS LAUDANI Jan 12, 2016 | 10:00 AM EST
Stocks quotes in this article: RL, PVH, HBI

If you think retail stocks have been smashed, take a look at the apparel makers. Oh boy, is it ugly. Leading names such as Ralph Lauren (RL) and PVH (PVH) are down 40% in a year. The only name holding its own is underwear maker Hanesbrands (HBI).

Ralph Lauren is down 40% and the stock inspires little confidence. The company has been hit by weak department store sales, the shift to lower-margin channels such as discount retail, the "athleisure" trend, excess inventory and foreign currency issues. The consensus estimate for the third quarter of fiscal 2016 is for revenue of $2.03 billion, which would be up just 0.23%. For the entire year, Ralph Lauren is expected to report revenue of $7.6 billion and earnings per share of $6.94.

Growth at Ralph Lauren has slowed considerably. In fiscal 2014, the company grew 7%; this year is expected to be down 0.33% and up (hopefully) 3.7% next year. Management is targeting 3% to 5% growth, but it's hard to see how it can get there. Guidance doesn't include a negative 400 basis points of foreign currency translation.

Ralph Lauren bulls think the company can restart growth by adding 40 to 50 new stores. Bulls argue operating margins are hurt by store pre-opening costs and heavy investment in the company's e-commerce infrastructure. Once some of those expenses moderate, the company has plenty of ways to drive growth, the argument goes. Also, a bigger push into children's wear, accessories and home design, better inventory management and some favorable tailwinds from lower cotton prices could help the company produce better results next year. At least that's the theory.

PVH has been hurt by many of the same trends as Ralph Lauren. Fiscal 2016 revenue at Tommy Hilfiger is estimated to be down 7%, Calvin Klein down 1% and PVH's heritage brands are expected to decline around 3%. Total revenue for the year probably will be down about 3% to 3.5%. Next year, analysts think the easy comparisons will help the company report revenue "growth" of about 1% to 2%.

Again, it's hard to see what turns PVH around. The impact of warm weather, weak department store sales, lousy tourist traffic, foreign currency and the lack of exciting new fashion have kept a lid on sales. The last time PVH saw decent growth was fiscal 2014, when it acquired Warnaco. How you get to the $98 consensus target price is a mystery to me.

The only name in apparel that looks like it's holding its own is underwear maker Hanesbrands. Even though the market is down, the stock is up against the S&P 500. Underwear apparently sells no matter the weather. I guess the ebb and flow of tourists into the New York flagship store doesn't make much of a difference, either. According to Hanesbrands, 80% of people know which underwear brand they are wearing.

Bulls think the stock should trade at a premium because the company has managed to navigate the treacherous world of apparel successfully. Hanesbrands has invested heavily in high-tech manufacturing as a method to lower its costs, while chasing growing markets such as athleisure and sportswear.

Hanesbrands' "Innovate to Elevate" platform has been successful in driving margin expansion, but it only accounts for less than 15% of sales. Bulls think margins can continue to rise as the company expands the program to socks and kids' underwear. Active wear and Maidenform have yet to be integrated into the platform, so bulls are expecting more margin improvement in the year ahead, despite just 3% to 4% revenue growth next year.

In the last five years, the company has managed to add a point to operating margin while growing revenue. Operating margin is expected to hit 15%. Add in some stock buybacks and analysts think earnings per share will go from an estimated $1.68 this year to $1.90 next.

Over the weekend, Barron's wrote a positive article on the company and said HBI bulls think the stock can appreciate 30%, or to a range of $37 to $38. I don't know about that. At $29, the stock already is trading at 15x fiscal 2016 estimates. While the company's business is very stable and Hanesbrands is well-managed, I personally don't want to overpay for a company that has low single-digit top-line growth.

Apparel names have taken a beating over the past year. The stocks are down sharply and some are hoping for a turnaround. Perhaps some cold weather can get consumers into the stores and allow the stocks to bounce a little bit. With the exception of a niche player such as Hanesbrands, it's hard to see how Ralph Lauren and PVH turn the corner.

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At the time of publication, Chris Laudani had no positions in the stocks mentioned.

TAGS: Investing | U.S. Equity | Consumer Discretionary |

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