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PVH Posts Mixed Results

But we feel a lot better about the 2015 setup, especially if gas prices remain at the current level.
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PVH (PVH) reported 3Q earnings of $2.56 per share against the $2.48 consensus and better than company guidance of $2.56- $2.50 on in-line revenues, stronger gross margins and lower taxes.

Overall, we view the quarter trends as mixed, but are encouraged with the higher y/y gross margins and solid progress in Calvin Klein and Tommy Hilfiger results (offset by continued headwinds at its Heritage segment). In this environment the company executed strongly against fairly low expectations. But with the bulk of the heavy investment spending behind it, solid margin discipline and solid cash flow generation, we feel a lot better about this 2015 setup, especially if gas prices remain at the current level. The call is tomorrow morning.

Total sales were $2.23 billion vs. the $2.26 billion consensus, which we view as close to in line, but the clear highlight was gross margin, which rose 70 bps y/y to 53.2%. That was in line with consensus, but in this competitive market it's a huge victory. The underlying trends were mixed, but generally good enough to support the solid turnaround story, excluding currency.

Calvin Klein North America was the clear positive call out with same-store sales (sss) up 5% and in line with consensus. Not many are posting this kind of growth and shows clear traction in the heavy investment spending that the company has undergone over the last few years to improve the displays, department store positioning and market-share gains. CK international was basically in line, excluding currency, with sss down 2%, although the sluggishness in Asia was a callout. Overall gross margins were up in both CK divisions, showing strong discipline and ability to hold price without much top- line deterioration.

Tommy Hilfiger (TH) North America sss were up 1%, but fell from the 2% seen last quarter. TH Europe sss fell 5%, which was a clear miss against mid-single-digit growth expectations, but management noted that by the end of the quarter there was a pickup to the low-single digits as weather improved. Gross margins expanded in both North America and Europe, again, another sign of the strength to the brand and price discipline.

Heritage was the clear disappointment, mainly due to low-end menswear. It simply hasn't seen the uptick from lower gasoline prices just yet. Same-store sales fell 6% and gross margins declined. The one plus is that this is a much smaller division for the company vs. Calvin and Tommy and we’ll give it a pass for now as lower gas prices should have a bigger impact in 1Q results, with a full quarter of the benefit.

Guidance was lowered, but according to management 100% is attributable to currency impact. New fiscal 2014 earnings is now expected to be $7.25-$7.30 a share from $7.30-$7.40 (Street at $7.36) on slightly lower revenue of $8.3 billion from $8.4 billion. The revenue breakdown now is expected for revenues to be Tommy up 5% from 7%, Calvin Klein up 2% vs prior 3% and Heritage down 8% from down 7%. Again, excluding currency impacts the numbers would have been in line, so this also gets a pass in our view.

The liquidity position remains strong with 3Q ending with cash of $365 million, debt/cap of 44.4% (down from 45.7% last quarter) and inventories at 6.5% growth.

Regards,

Jim Cramer, Stephanie Link, and TheStreet Research Team

DISCLOSURE: At the time of publication, Action Alerts PLUSwas long PVH.