Higher taxes will hurt this apparel company known for brands like Calvin Klein and Tommy Hilfiger, Morgan Stanley says. Analyst Kimberly Greenberger downgraded PVH Corp. 's stock to equal-weight, saying higher tax rates could hit its future cash flow hard and trim its earnings. "The new, higher tax rate impairs cash flow generation, and we see limited catalysts for multiple re-rating over the next 12 months," Greenberger wrote in a note published Thursday. It comes as the company shared 2022 adjusted earnings per share guidance that fell 9% below Wall Street's estimates and said it expects a 29% to 30% tax rate, well above 19% consensus estimates for 2022. The cause for the hike stems from the end of a favorable tax agreement in the Netherlands and the expiration of tax benefits from its 2003 acquisition of Calvin Klein, PVH said. Shares of the retail stock have already plummeted more than 22% this year and 15% this month as it faces rising interest rates and ongoing supply chain issues. Along with the downgrade, Morgan Stanley lowered its price target on the stock to $89 from $122, representing a near 8% potential return from Wednesday's close price. The bank also cuts its free cash flow forecast and EPS estimates for 2022 through 2025 by 17% and 14%, respectively. While higher tax rates threaten to hurt PVH in the long term, Greenberger anticipates that the company will likely return to pre-Covid revenue in 2023. Greenberger also sees the company's upcoming investor day as a potential catalyst for the stock. She is watching whether "the L-T margin guidance implies margins could grow beyond the ~10% threshold," but expects management to outline growth in 2023 and onward. "For this reason, we think the stock could remain range-bound for now, or until we start seeing benefits from PVH's renewed long-term strategies hit the P & L, most likely in 2023," she wrote.
Pedestrians walk past a Calvin Klein jeans store in Beijing.
Keith Bedford | Bloomberg | Getty Images
Higher taxes will hurt this apparel company known for brands like Calvin Klein and Tommy Hilfiger, Morgan Stanley says.