What a brutal six months it’s been for PVH. The stock has dropped 20.4% and now trades at $68.41, rattling many shareholders. This may have investors wondering how to approach the situation.
Is now the time to buy PVH, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think PVH Will Underperform?
Even though the stock has become cheaper, we're swiping left on PVH for now. Here are three reasons there are better opportunities than PVH and a stock we'd rather own.
1. Declining Constant Currency Revenue, Demand Takes a Hit
We can better understand Consumer Discretionary - Apparel and Accessories companies by analyzing their constant currency revenue. This metric excludes currency movements, which are outside of PVH’s control and are not indicative of underlying demand.
Over the last two years, PVH’s constant currency revenue averaged 2.6% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests PVH might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
PVH has shown poor cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 6.6%, lousy for a consumer discretionary business.
3. New Investments Fail to Bear Fruit as ROIC Declines
We like to invest in businesses with high returns, but the trend in a company’s ROIC can also be an early indicator of future business quality.
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, PVH’s ROIC averaged 1.2 percentage point decreases each year over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
We see the value of companies helping consumers, but in the case of PVH, we’re out. After the recent drawdown, the stock trades at 6× forward P/E (or $68.41 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now. Let us point you toward the most dominant software business in the world.
Stocks We Like More Than PVH
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