Philips-Van Heusen Falls on Dingy Outlook

On Monday evening, clothing maker Philips-Van Heusen (PVH) reported fiscal first quarter results that topped analysts’ expectations when excluding costs associated with their acquisition of Tommy Hilfiger.  For the quarter the company earned 83 cents per share, ahead of the 79 cents per share analysts had anticipated.  Sales were strong as well rising 11% to $619 million boosted by 13% growth in the Calvin Klein brand.  Shares slipped as much as 5% in early morning trading but losses have subsided somewhat to only about 3% as of the time of writing.

For the quarter ahead, PVH management expects 50 to 52 cents per share (again excluding nonrecurring costs), and they said weaker seasonal business trends and higher base share count is expected to impact earnings by 12 cents per share.  Most analysts were not expecting the Tommy acquisition to close until the end of the second quarter, but as it turns out that the share dilution will be accounted for over the course of the entire quarter.  Analyst estimates were calling for 70 cents per share, so the outlook for the next quarter is weaker than expected even after adjusting for the 12 cents impact.  Furthermore, sales forecasts are for $1.08B to $1.10B including $520 million from Tommy Hilfiger.  Analysts’ revenue estimates for the second quarter (most of which exclude Tommy) called for $714 million, so the new outlook is again disappointing.

It is not exactly clear how comparable guidance is to analysts’ estimates for the coming quarter because of the quicker than expected closing of the Tommy Hilfiger acquisition.  However, full year estimates and guidance should match up reasonably well.  Updated guidance for the year is $3.55 to $3.65 in earnings per share on sales of $4.35 billion to $4.40 billion.  Interestingly, this guidance came in stronger than expected for sales, but earnings per share are a little light in light of Wall Street’s expectations.

As of our most recent report, we held that PVH was Overvalued at a price of about $53 per share (as of the report dated 5/22/2010).  Based on the historically normal ranges of price-to-cash earnings and price-to-sales, we have a rationally expected price range of $41 to $56 per share.  Obviously, fundamentals are growing following the acquisition of Tommy but so is the number of shares outstanding.  With Philips-Van Heusen estimating there will be 71.5 million shares outstanding, the deal represents a nearly 38% increase in share count.  We may have a more favorable view of PVH once all of those shares are absorbed, but as of right now we think there are much more appealing value stocks available.

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