Phillips-Van Heusen (PVH)

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It's hard to visit a department store without seeing at least a few brands with connections to Phillips-Van Heusen (NYSE: PVH). The company owns several popular clothing brands such as Calvin Klein, Van Heusen, and IZOD, and has licensing agreements with many others, including Chaps, Sean John, and DKNY. As the bulk of its brands occupy the mid to lower-mid market range, the company sells its wares largely in major department stores and some 700 Phillips-Van Heusen operated outlet locations.^[1]. Given its heavy dependence on the U.S. market, PVH has recently began to focus on growing its international presence through through licensing agreements and new brand acquisitions.

[edit] Company Overview

[edit] Breakdown of Holdings

Phillips-Van Heusen Net Revenue by Business Segment,2004-2006^[2][3]

Although the company is frequently acquiring new brands and licensing agreements, Phillips-Van Heusen's broad divisions of holdings have been very stable in recent years. Although the company owns or has relationships with dozens of brands at a range of price points, the company's revenue can be broken down into three main sources: retail, wholesale, and licensing.

Wholesale: The company has wholesale contracts with department and specialty stores for several of its strong-selling brands, including IZOD, Calvin Klein, Van Heusen, and Geoffrey Beene. Most of these brands (with a few clear exceptions like the Calvin Klein collection) are mid-range, sold in department stores with moderate price points. Viewed by Phillips-Van Heusen as it's 'core business'^[4], its wholesale revenue is heavily dependent upon a small group of major department stores: from 2004-2006, sales to the company's five biggest customers accounted for over 30% of total revenue.^[5]

Retail: Viewed as a complement to its wholesale business, the company sells a broad range of apparel and accessories at the 700 retail stores in operates in outlet locations across the United States.

Licensing: Accounting for 11.6% of revenue in 2006^[6], Phillips-Van Heusen has over 100 different licensing agreements with a broad range of brands, from Valentino and Michael Kors Collection to Perry Ellis Portfolio and Jones New York. The company generally receives 4-8% of the sales of the licensed goods as payment.^[7] Licensing brands it owns (as it does most noticably with Calvin Klein), or obtaining licenses from other company's gives the business a way to diversify it's holdings with much less effort than starting or acquiring a new label. However, companies can frequently run into trouble with too much licensing of their luxury brands, thereby oversaturating the market and hurting the label's cachet. This is a problem that Phillips-Van Heusen has as of yet avoided successfully with its Calvin Klein label. Although it has several licenses for Calvin Klein fragrances, intimate apparel, and accessories, thus far the company has kept a watchful eye on product development and design so as not to dilute its high-end collection label.

[edit] Recent Earnings

Phillips Van Heusen Net Revenue and Operating Income,2002-2006^[8]

Phillips-Van Heusen has posted strong revenue growth in recent years, its net revenue doubling from $518M in 2002 to $1.03B in 2006. Much of the strong growth has come from the company's acquisition of Calvin Klein for some $430M in cash and stock in February 2003. Since then, Phillips-Van Heusen has very successfully managed the brand, with particularly strong sales in the licensing segment and dress shirt business.

[edit] Trends and Forces

[edit] Dependency on Department Stores

Department stores in the United States have undergone significant changes in recent years. In response to declining margins, stores have implemented tighter inventory controls and have scaled back the quantities of merchandise that they purchase from wholesalers. As a company that describes wholesales as its 'core business', Phillips-Van Heusen appears especially vulnerable to such changes: in 2006, Phillips Van-Heusen posted a $23.2M loss in its wholesale dress furnishings segment, largely a result of Macy's acquisition of the May Department Stores Company in the previous year.^[9] Phillips-Van Heusen also has private label relationships with both Wal-Mart and Macy's, which puts the company in direct competition with some of its biggest clients. Such companies have a strong incentive to prefer their own private labels wherever possible because they can be sold at higher margins than outside brands.^[10]

In addition, a series of mergers and acquisitions in the industry (e.g. Federated Department Stores' 2005 takeover of Marshall Field's) give the businesses that remain potentially greater power to negotiate lower prices with Phillips-Van Heusen, thereby lowering profits.

[edit] Volatility of Fashion Trends

As fashion trends fluctuate in unpredictable ways, apparel companies must be careful to not fall behind from season to season. While Phillips-Van Heusen's high-end Calvin Klein collection has done well in recent years, there is always a risk that the brand will lose popularity, particularly in light of the many licensing agreements that could potentially dilute the label's prestige.

However, Phillips-Van Heusen appears to be better situated that some competitors in that several of the company's large core brands are comprised of basic wardrobe staples (e.g. IZOD polos, Van Heusen dress shirts) that are not particularly vulnerable to the swings in the high-end fashion world. In addition, the company's strong outlet presence allows it to market and sell excess inventory well.

[edit] Competition

Phillips-Van Heusen faces competition from a variety of sources. It's mid-range Van Heusen and IZOD brands compete with labels like Lacoste, Kenneth Cole, and Brooks Brothers. After the company acquired the Calvin Klein brand, it entered the highly competitive designer label market, gaining competitors like Gucci, Prada, and Georgio Armani.

In addition, some of the company's biggest competitors are brands with which it has licensing agreements. For example, while the company has a licensing agreement for Nautica neckties, Nautica polo and dress shirts compete directly with the IZOD brand in mid-range department stores nationwide.

[edit] Market Share

Phillips-Van Heusen is also one of the biggest sellers of dress shirts in the world: In 2001, the company had over a two-thirds market share of all dress shirts sold in the U.S.^[14], and the company's Van Heusen dress shirt brand had a 60% market share of department store sales in 2006^[15].

1. ↑ Yahoo Finance! Phillips-Van Heusen Business Summary
2. ↑ Figures in graph may not add to 100% due to rounding.
3. ↑ Graph data from Phillips Van-Heusen's 2006 10-K (filed April 5, 2007)
4. ↑ Phillips Van-Heusen's 2006 10-K, p. 2(filed April 5, 2007)
5. ↑ Phillips Van-Heusen's 2006 10-K, p. 13(filed April 5, 2007)
6. ↑ Phillips Van-Heusen's 2006 10-K, p. 22(filed April 5, 2007)
7. ↑ Phillips Van-Heusen's 2006 10-K, p. 12(filed April 5, 2007)
8. ↑ Data from Phillips Van-Heusen's 2006 10-K(filed April 5, 2007) and Data from Phillips Van-Heusen's 2005 10-K (filed April 5, 2006)
9. ↑ Phillips-Van Heusen's 2006 10-K, p. 29(filed April 5, 2007)
10. ↑ Phillips-Van Heusen's 2006 10-K, p. 11 and p. 23(filed April 5, 2007)
11. ↑ Unless otherwise noted, the figures in the table below come from Yahoo! Finance and/or Phillips-Van Heusen's 2006 10-K (filed April 5, 2007).
12. ↑ From Polo Ralph Lauren Wikinvest article
13. ↑ From Polo Ralph Lauren Wikinvest article
14. ↑ Wall Street Transcript interview with former CEO Bruce J. Klatsy, published April 23, 2001
15. ↑ Phillips-Van Heusen 2006 Annual Report