Philip Van Heusen - Brand Strength Provides Pricing Power
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Clothing makers need pricing power to compete in a market in which raw material costs can rise suddenly. Philip Van Heusen (NYSE: PVH), which sells dress shirts and other products under its own brands, bought designer brands Calvin Klein in 2003 and Tommy Hilfiger in 2010, giving it the opportunity to sell a wide variety of clothes in department stores. These acquisitions have greatly benefited the company, as both Calvin Klein and Tommy Hilfiger have stylish reputations and customers are willing to pay a premium to wear clothing from these designers.
Philip Van Heusen reports that 75 percent of its profits came from these two designer brands, with the remaining 25 percent coming from Heritage Brands, the company's original brands that include Root, Arrow, and Van Heusen. Heritage Brands provided a third of revenue, but the company has weaker pricing power with these brands. A shopper may recognize an article of Tommy Hilfiger or Calvin Klein clothing from a distance because of its prominent design, and Heritage products often have less striking appearances.
Calvin Klein and Tommy Hilfiger are known for their fragrances, as well as their clothing. The company's perfume and cologne sales give it another source of income that helps reduce its dependence on clothing sales alone. The Tommy Hilfiger product line also includes sunglasses, jewelry, and luggage. Because Philip Van Heusen is experiencing good demand for its non-clothing products, it is not as vulnerable as other clothing manufacturers to an increase in the cost of fabrics.
Philip Van Heusen stock does come at a premium, as the company's shares trade at 21.45 times price to earnings. Although this is lower than competitor Ralph Lauren (NYSE: RL), at 25.48, its smaller competitor Oxford Industries (NYSE: OXM) looks like a bargain in comparison with a ratio of 11.14. Gross margin may explain some of this difference, as Ralph Lauren reports a relatively high 15.43 percent gross margin, although Oxford's 9.92 percent gross margin is not much lower than Philip Van Heusen's at 10.39 percent. Oxford makes Tommy Bahama, Ben Sherman, and Lilly Pulitzer clothing, and the company also appears promising for future growth. The Tommy Bahama and Ben Sherman product lines include non-clothing items that are produced by other manufacturers under royalty arrangements with Oxford.
Ralph Lauren announced that it earned $169 million last quarter, compared to the same quarter in the prior year in which it earned $168 million. Although Ralph Lauren did earn more revenue, it also incurred higher operating costs, explaining that it spent money to open more stores so it could improve its long term income potential. All three of these companies have some protection from increases in the cost of raw materials because of their strong luxury brands.
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