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 (
) 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
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
As a result, 2013 is expected to be mostly a transition year
when the company is repositioning its brands and solidifying its
"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
"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
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
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
of that brand."