Calvin Klein Fitting Neatly Into PVH's Portfolio


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Ownership brings with it responsibility. It's exactly what global branded apparel firm PVH wanted when it bought out its largest Calvin Klein licensee partner, the Warnaco Group, earlier this year. It is now unifying the House Of Calvin Klein and it plans to reap the rewards of this in the coming years.

New York-basedPVH ( PVH ) markets men's, women's and children's clothing, footwear and accessories under the Calvin Klein, Tommy Hilfiger, Van Heusen, Izod, Arrow, Bass, Speedo, Olga and Warner's brands. It distributes its products via wholesale, retail and licensing operations throughout North America, Europe, Asia and Latin America.

Calvin Klein and Tommy Hilfiger brands represent more than 75% of PVH's profits. Now that the company has consolidated the Calvin Klein brand in-house, analysts expect that growth primarily will be coming from these two areas.

"This is a global company with two very strong, premium flagship brands," said Erinn Murphy, research analyst at Piper Jaffray & Co. "What they are doing with Calvin Klein, as evidenced by their acquisition of licensee Warnaco, is taking more control of a brand by bringing product categories back in-house."

Transition Year

As a result, 2013 is expected to be mostly a transition year when the company is repositioning its brands and solidifying its platform.

"Throughout this year, they have been building back infrastructure that was lacking from the core Warnaco business. They're adding people, investing in the product, upgrading systems and they're integrating their sourcing platform onto their own," added Murphy. "They're really doing a lot of heavy lifting this year, but setting the stage for what we believe can be very strong earnings-per-share growth for the next several years, in the 15% to 20%-plus range."

PVH is not new to acquisitions and integrations. In 2003, the company bought Calvin Klein. And in 2010, it added Tommy Hilfiger. In both cases, the company demonstrated a disciplined approach to paying down debt following the acquisitions.

"Tommy Hilfiger was the poster child of how to integrate an acquisition. And now they're starting to do the same thing with Calvin Klein," said Murphy.

PVH's earnings growth accelerated in the past five quarters, jumping 44% in the most recent one to $1.91 per share. Profit margin is 8.1% after taxes. Sales jumped 34% to $1.9 billion, the highest increase in eight quarters. While business was solid across the board, Warnaco's portion contributed strongly to the results. Nevertheless, the company remained cautious, not raising its guidance for 2013 as it is still early in the integration process.

"During the first quarter, we began to make the necessary investments to rebuild Warnaco's Calvin Klein jeanswear and underwear businesses, which will allow us to capitalize on their long-term growth opportunities," noted PVH's CEO Emanuel Chirico in the earnings release.

"We are committed to successfully executing on our previously announced initiatives, which include our focus on upgrading the quality and product design of Calvin Klein jeanswear, investing in marketing and merchandising, reducing excess inventory levels, and restructuring the sales distribution mix for these businesses in Europe and North America."

North America represents nearly 60% of PVH's revenue, while 27% comes from Europe, 11% from Asia and 5% from Latin America.

PVH has big plans for its international businesses. First off, it is closing 30 stores in Europe and reducing its wholesale points of distribution. It also plans to reposition and expand its Calvin Klein brand there. Management believes that over time, Calvin Klein Europe could reach $1 billion in sales.

It also sees increased opportunities for the Tommy Hilfiger brand, especially in some of Europe's underdeveloped markets such as the U.K., France and Eastern Europe.

"The business for them in Europe has been trending better than their peer group," said Murphy. "That's brought about the strength of Tommy Hilfiger's business model and brand perception in Europe. They understand distribution very well; they've been managing that opportunity there."

In China and Brazil, the Calvin Klein brand has been scoring better results. This also opens up the opportunity to expand their Tommy Hilfiger brand in those areas, noted Murphy.

Any time a company is merging two businesses, there is a risk that the time frame could take longer or that it would cost more. Another risk is if the European recovery takes longer than expected or if the company experiences increased volatility in some of its emerging markets. Finally, there is a fashion and markdown risk if the new designs are not successful in specific regions.

Paying Down Debt

Management is viewed as very solid and has a proven track record of integrating businesses. Currently, it is looking to fill its positions of president of Calvin Klein Europe and president of Calvin Klein Asia.

Financially, as PVH generates more cash, it plans to pay down debt with the goal of reducing substantially by 2015. The company does not pay dividends or buy back its stock.

"If you're running the brand (Calvin Klein) as an owner, it's a very different conversation -- it's a very different strategy -- than if you're running it as a licensee, as a renter. As a licensee, you have less incentive to actually focus on investing in the business, investing in marketing, investing in stores, investing in people and investing in systems," said Murphy. "But with PVH as the owner, they will make those investments because they want longer-term sustainability of that brand."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Investing Ideas

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