UBS says PVH can rally more than 35% as Tommy Hilfiger parent transforms its business

Published Thu, Dec 8 20229:23 AM EST

The fashion company behind brands such as Calvin Klein and Tommy Hilfiger should be in vogue for investors heading into 2023, UBS said Thursday. Analyst Jay Sole named PVH a top pick, saying that out of the 40 stocks covered by the firm in the space, it's one of the most likely to deliver better-than-expected earnings next year. He reiterated the stock as a buy with a price target of $100, which presents an upside of 37.3% over where it closed Wednesday. He said the market is too focused on macro and foreign exchange challenges to understand how PVH can drive relative outperformance compared to competitors. The main driver of its performance will be the "PVH+ Plan," which has the goal of making its brands premium, direct-to-consumer and global that move out of wholesale. "What many in the market seem to overlook is that PVH's plan isn't novel," Sole said, pointing to Ralph Lauren and Levi Strauss as examples of fashion companies that have undergone business transformations. "PVH's new management team is simply modernizing a company that has fallen behind peers in some areas." Sole also said he believes the company can execute the plan, following on its track record of making operational improvements in recent years through focusing on tracking performance indicators. As an example, he noted the company was able to get on-time delivers from factory partners to wholesale customers up to a range of between 70% and 90% from 30% to 40% just a few quarters ago. He said PVH coming in ahead of expectations for third-quarter earnings per share is another sign that management can see the plan through. But the company has been plagued by concerns that it would take five or more years for business issues to be resolved, he said. While Sole said it would take a "long time" to fix the company's North American business, Europe and Asia, where the most profits are made, have stronger foundations and could see benefits from the plan sooner. On a more technical level, Sole said the company is also a top pick because of its "very attractive valuation." But he said fundamentals would improve along with the stock value, as the PVH+ Plan would help bring the operating margin up to 15% in 2025 from 8.5% in the 2022 fiscal year. That operating margin growth will come from more full-price selling, fewer markdowns and better inventory control as the company improves its marketing, supply chain and product assortment, he said. Sole said a shift to direct-to-consumer and international markets, paired with easing shipping, freight and material costs, could also help performance. The stock has lost 31.7% of its value this year. That reflects a broader struggle for retail stocks as companies navigated oversupply and changing consumer spending habits. — CNBC's Michael Bloom contributed to this report.