When we examine the lack of earnings oomph from so many of our companies, we need to start being realistic about how they are really doing vs. how they appear to be doing.
We need to do so because the dollar is freakishly distorting the earnings of our companies and it, frankly, isn't sustainable. It's gotten to the point where you can't even use the stated numbers to make a judgment about how a company's doing. They are simply not giving you an accurate depiction of what's really going on.
Take PVH Corp. (PVH). Here's a company, run by CEO Manny Chirico, which had long been -- along with Trifecta portfolio holding V.F. Corporation (VFC) and Ralph Lauren (RL) -- among the idols of the industry.
Manny took PVH from an also-ran with a couple of dying brands like Izod and Philips Van Heusen and some assorted Calvin Klein labels and turned it into an international powerhouse when he bought Tommy Hilfiger for $3 billion in 2010. At the time, it looked like still one more colossal overpay, as so many deals do, only for it quickly to become a much more powerful, upscale brand, particularly overseas. It took a terrific vision to see that Tommy could be re-ignited, and Manny had that vision.
Then, however, in a bid to reunite many of the Calvin Klein brands under one roof, in 2012 PVH bought Warnaco, which controlled the Calvin Klein underwear and jeans business, for $2.9 billion in cash and stock.
The deal looked tremendous at the time, son of Tommy, and it drove the stock from the $90s to the high $130s within the year. However, the market -- and Manny -- soon learned that Warnaco had severely underinvested in its brands and, unlike Tommy, there was a ton more work to do to fix up the Warnaco properties.
Over the last two years PVH had begun a sickening slide back to where it was before the acquisition. In the last few quarters, Chirico began to get more optimistic about the acquisition, which boosted the company's overseas business both in Europe and Asia taking the U.S. down to 53% of its business from 67% just before the deal.
Then last night we got the first definitive upside surprise from the company, with earnings before income taxes, depreciation and amortization up a fantastic 25% with the once-hobbled Calvin Klein showing an astounding 10% increase in international comparable stores.
It was the long-awaited breakout.
But try finding it in the headline numbers, which, other than the actual net, looked like a stunning miss. In fact, earnings increased by only $0.03 year over year and revenues decreased 4%. Who wants a growth company with declining revenues?
Yet if you back out the exchange rate, it was a gain of 20%. Not only that, if you look through the U.S., which was sluggish, you will see both Tommy and Calvin Klein suffered from selling goods in many of the classic tourism destinations like Vegas, San Francisco, Florida and New York. The weakness? The freakish dollar slowed tourism, and the tourists who came here buy a ton of Calvin and Tommy.
Put it all together and you see a company that had taken out a ton of costs from Warnaco -- at last --and is raisings prices both for jeans and for underwear, what it bought Warnaco for in the first place.
How much better are things? Over and over, I had been begging Manny to buy back stock but he's conservative and didn't want to do anything to hurt the balance sheet after two big acquisitions.
Last night, he announced a $500 million buyback.
Plus, there are still many smaller Calvin Klein licenses that are owned by other companies. He intends to purchase those and plug them into the distribution network that is now running smoothly around the globe.
The problem is that none of this is visible to the naked eye. The vision Manny traced out when he bought Warnaco three years ago is finally upon us, and unless you are a real student of the company you have no idea that is so.
But it is.
PVH is, in short, a buy if you look through the dollar because the earnings power is at last here. It's a sale if you don't.
Which is right? If you know the business, then you understand that it's a buy and you would hold your nose and pay up a gap price. If you didn't, you'd short it.
That's just plain stupid. It does show that the whole exercise of value is distorted by this currency issue. And, more important, it is obscuring real value that will, one day -- perhaps when we lap this crazy dollar -- show its true colors many points above where the stock currently resides.