The Takeover of Warnaco by PVH

Contents

1 Motivation

2 Market & Compaa ny Analysis, Deal Rationale
2.1 Market Analysis - The Apparel Market
2.1.1 General Overview
2.1.2 Five Forees Analysis
2.1.3 Challenges & Opportunities
2.1.4 Company Analysis
2.2 Deal Charaeteristies, Deal Rationale & Chronology of Events
2.2.1 Deal Charaeteristies
2.2.2 Deal Rationale
2.2.3 Chronology of Events

3 Company & Synergy Valuation
3.1 Relative Valuation
3.1.1 Market Multiples
3.2 Warnaeo Stand-Alone Valuation
3.1.2 Transaetion Multiples
3.2.1 Core Assumptions
3.2.2 Results
3.3 Synergies
3.3.1 Core Assumptions
3.3.2 Results
3.4 Conelusion

4 Event Study

5 Conclusion

List of Abbreviations

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List of Figures

1 The Apparel Market-Supply Chain

2 Value Driver Apparel Industry

3 Warnaeo Shareholder Structure

4 Warnaeo Geographic Sales Split

5 PVH Shareholder Structure

6 PVH Geographic Sales Split

7 Peer Group Characteristics

8 Selected Transactions Characteristics

9 Sales development and growth rates for Warnaeo

10 Football held

11 Appendix A - Relative Valuation Results

12 Appendix A - Transaction Multiples All Transactions

13 Appendix A - Transaction Multiples Large Transactions

14 Appendix A - Market Multiples Peer Group

15 Appendix A - Market Multiples Peer Group

16 Appendix A - Market Multiples Mean Peer Group 1&2

17 Appendix A - Market Multiples All Peers

18 Appendix B - Warnaeo Revenue Forecast Model

19 Appendix C - Warnaeo Ratio Analysis

20 Appendix D - DCF Inputs

21 Appendix D - Warnaeo Income Statement

22 Appendix D - Warnaeo Balance Sheet

23 Appendix D - Warnaeo Cash Flow Statement

24 Appendix E - Cost of Capital Calculation

25 Appendix F - Fundamental Valuation

26 Appendix G - Fundamental Valuation Sensitivity Analysis

27 Appendix H - Synergies Warnaeo Scenario

28 Appendix H - Synergies Pro-Forma Seenario

29 Appendix H - Synergies Sensitivity Analysis

30 Appendix I - Implied Sneeess Probability

31 Appendix I - Annonneement CAR

32 Appendix I - Xon Pnblie Events - Event Study Results

33 Appendix I - Xon Pnblie Events - Event Study Results

34 Appendix I - Annonneement/Closing - Event Study Results

35 Appendix I - Annonneement Impaet on Synergies

1 Motivation

The process of completing a merger of several companies or an acquisition of a company is a complex one, involving many different aspects. First, there is the target at hand, and the value of the very same. Second, it is to be determined which positive effect a combination of the businesses may have. Third, the interests of all involving stakeholders such as management, shareholders, investors or the workforce are to be recognized in the process. All of the above is dealt with by the parties involved and may lead to a merger agreement and a price to be paid. The question to be asked by academia is whether or not the price that has been agreed upon, was correct. Of course, this is a question of perspective and, at the same time, of the information available.

To answer this question, this thesis will make use of the transaction between PVH Corp, (PVH) and Warnaeo Group (Warnaeo), two American apparel companies, which on Oc­tober 31st, 2012 announced that their businesses are to be combined by an acquisition of Warnaeo through PVH, The deal was closed in February 2013,

The structure of the thesis is as follows. First, the market both companies operate in is analyzed, involving a market overview, a five forces analysis and a future outlook. Then a detailed description of the two companies follows, including their respective products, structures and histories. The picture will be rounded off by analyzing the deal rationale, deal characteristics and by giving a chronology of events related to the acquisition. The second part deals with the valuation of the companies using relative and fundamental valuation methods. Also incorporated in the fundamental valuation part, is a valuation of potential synergies. The third part then makes use of event study methodology to analyze whether the deal as a whole and price where reasonable according to stock market assessment, A conclusion will then put together the results of all the conducted analysis and answer the question whether or not the transaction price was correct,

2 Market & Company Analysis, Deal Rationale

This section lays out the characteristics of the market in which the involved parties are active in, and analyze its mechanics and competitive forces, A detailed overview of the two companies involved follows. Lastly, an analysis of the rationale for the deal and a chronology of events of the deal are given.

2.1 Market Analysis - The Apparel Market

An overview of the apparel market in which both involved parties, PVH and Warnaeo, operate in, is presented. For this thesis, the apparel market as the worldwide market for clothing and accessories for men, women and children,

2.1.1 General Overview

To understand the apparel market and companies active in it, one has to start by char­acterizing the supply chain in this market. Clothing is an everyday good used by almost every human being. But how is this common good produced? First, fiber producers utilize plants such as cotton or flax or animals’ fur such as sheeps’ to produce fibers. These then are sold to textile manufacturers which manufacture fabrics in various steps including combing, spinning and weaving, Next are so-called apparel manufacturers. They require the aforementioned textiles and sew them into clothing. This step in the supply chain is very labor-intensive, as the sewing of most clothing cannot be performed by machinery. Therefore, much of the apparel production takes place in countries where cheap labor is available such as China, Pakistan, Cambodia, Vietnam, Bangladesh and many others. Often, these companies receive their orders from the next link in the supply chain - the wholesaler.

Wholesalers act as intermediary between the producer of the apparel and the retail­ers/end consumer. Generally, they own certain brands and are involved in the design and marketing of these brands. Furthermore, they source the apparel from producers which manufacture the apparel according to the designs and orders received. The distribution to the Point-of-Sale (POS), which may be a store owned by the wholesaler or a store owned by a retail customer, is often carried out by the wholesaler. Retailers are also an important player in the apparel supply chain. They may either buy from wholesalers or directly from the apparel manufacturers. Products directly bought/sourced from apparel manufacturers are usually private label products for which individual - usually not very well-known - brand names are created.

These are generally sold at a lower price-point than branded products. Companies known for this include H&M, Zara and GAP, but also clothing discounters such as German Kik, Whereas the first two are known for relatively low prices, GAP has positioned itself at a higher price-point. The company basically acts as a vertically integrated wholesaler.

Besides the mentioned distribution ehannel via retail, online selling has beeome ever more important. This gives wholesalers as well as eonsumers the opportunity to skip retailers. However, this may not be desirable as retailers plaee by far larger orders. For the end eonsumer the internet allows quiek eomparison of priees and a wide range of parties to buy from. The implieations of the competitive forces for the market will be covered in depth using Michael E, porters Five Forces framework (compare Porter (2004)) in the next section.

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Figure 1: The Apparel Market-Supply Chain

After presenting the supply ehain in the apparel and clothing industry some brief informa­tion as to where in the supply ehain the relevant companies Warnaeo and PVH are to be found is provided. Both companies act as wholesaler, sourcing their apparel from various manufacturers all over the world. Both companies also own some stores and have large retail chains such as Kohl’s, Many’s or Sears as their customers. An in-depth description of the companies follows in section 2,2, Main competitors include companies such as Ralph Lauren, Hugo Boss, Michael Koors, Guess, Oxford Industries (Tommy Bahama, Ben Sherman), Hanesbrands (Champion, Hanes, Plavtex, Wonderbra), Perry Ellis (Perry Ellis, C&C California), and Fifth & Pacific (formerly Liz Clayborne, also owns Mexx), The apparel market is highly fragmented in many dimensions, including geography and target groups, which makes it difficult to come up with worldwide market shares. But this fact is not as relevant as in other markets because the position in each segment is more crucial.

It is important to understand how economic theory drives sales, costs and thus profits of apparel companies. To examine what influences sales in apparel markets, one has to analyze its two determinants, price and quantity.

Factors that influence the willingness to pay of end consumers and thus the price compa­nies can charge, are characterized first. As for most products, price-determining factors include resources needed in the production. In this ease, this may be proxied by the size of the piece of clothing, e.g, a t-shirt is cheaper than a long-sleeve shirt, and the quality. The latter could be the pure quality of the textile or fiber, but also the additional materials used, such as buttons and patches. Also, the usability plays a crucial role in determin­ing willingness to pay in the apparel market. There are many specialized products such as clothing for different occasions like sports or business, clothing for different weather conditions and clothing for different age groups and gender, especially children’s wear, men’s wear and women’s wear. Among these segments there are differences in usability perceived by consumers, however, they are highly subjective in most eases. Therefore, advertising and the information of the consumer about the usability of one’s products is very important and influences the prices companies will be able to charge. This in turn will influence the price retail customers are willing to pay to wholesaler. For branded products, usability may also include a feeling about status, and thus give some apparel products the status of luxury products, whereby higher prices yield a higher utility to the consumer. In order to position a brand in this category, good design that incorporates current fashion trends as well as efficient advertising and communication, possibly through flagship stores which also communicate a lifestyle of luxury, are needed. Overall, the size of the different segments is influenced by the income available to consumers. Consumers with a higher income are more likely to buy clothing of higher quality at a higher price, because status usually becomes more important to them.

After analyzing which factors influence the price of apparel, a characterization of quanti­ties in the apparel market follows. Clothes are goods of consumption. They need to be replaced on a regular basis. Thus, the basic quantities demanded will be relatively stable. However, as income increases, the number of apparel items a given person wants/needs to own will increase. This is because more attention is paid to appearance, e.g, at work, and occasions for which different clothes are needed increase. Also, as population grows, so does the quantity of apparel.

As shown above, both willingness to pay and quantity of clothing are likely to increase with rising income. This implies a positive link between economic growth and growth in the apparel market. However, it is unclear how the exact relation between the two variables is characterized. Examining different segments, it is likely that cheap private label clothing consumption may decrease if a certain level of income is reached. For higher price levels, consumption may not even be greater than zero until a certain threshold level is reached.

Having analyzed the factors driving sales in the apparel market, this paper looks at what drives costs in the apparel market. Costs are usually categorized by fixed and variable costs, the latter only occurring per piece whereas the first arise regardless of the quantity produced.

Variable costs in the apparel market firstly include production costs. As most apparel companies do not produce themselves, these are the costs paid to their suppliers, typically apparel manufacturers, which are paid per piece. These costs are primarily driven by hu­man labor costs, thus suppliers have in recent years moved from China - where wages have increased steeply - to countries such as Bangladesh or Vietnam, Supplier location and relationships are two factors that have gained importance in recent years and yield a big opportunity for apparel companies. This will be discussed more deeply in subsection 2,1,3 Challenges & Opportunities, Also, costs per piece may decrease as order size increases due to higher buyer power by the apparel company. The next great cost factors which are partly variable and partly fixed are logistics and distribution. This involves shipping costs from production plants to the desired market as well as distribution and warehousing in the final consumption market. Whereas shipping is entirely variable, the maintenance of warehouses is independent of the number of clothes produced. However, the number and size of a warehouse does depend on the common quantity of clothing to be stored there. Opportunities for improvement in this area are discussed in 2.1.3. As mentioned above, costs for design and advertising, which are fixed costs, are of major importance in the apparel market, especially for companies that own highly valuable brands. These have to be nurtured and catered in order to preserve the brand value and its implications for prices discussed above.

It can be seen that the apparel industry from the vantage point of a wholesaler is char­acterized by high fixed costs. Companies have to invest into design and advertising independent of sales. This implies, as variable costs may decrease with the quantity sold, that companies able to sell a lot of apparel will be highly profitable. Also costs per item decrease, since fixed costs are distributed among higher quantities. It also implies that firms already owning a known brand face less uncertainty regarding the success of their fixed investments and potentially high profits.

A summary of the value drivers discussed above can be found in Figure 2.

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Figure 2: Value Driver Apparel Industry

Overall, it can be said that the apparel industry is a truly global one, with a multitude of factors playing an important role. For apparel wholesalers, however, global economic development as well as the perception of their brands drive sales. Costs are characterized by a high fixed portion stemming from advertising and warehousing, and variable parts consisting of production and logistics costs,

2.1.2 Five Forces Analysis

The following part will use the Framework of Porter’s Five Forces to assess the attrac­tiveness of the Apparel market from the perspective of a wholesaler such as Warnaeo or PVH, The Five Forces contained in the framework are threat of new entrants, degree of rivalry, threat of substitutes, buyer power and supplier power. After analyzing the ap­parel market force by force, an overall result for the market attractiveness as suggested by Porter (2004) is presented.

Threat of New Entrants

The threat of new entrants is determined by two driving powers. The first are barriers to entry, the second are reactions by market incumbents. Barriers to entry can be caused by different mechanisms which will be discussed below.

Economies of scale may give market incumbents significant advantages. In the apparel industry economies of scale are not important in the production process as most wholesaler source their products from suppliers, and thus scale economies can also be absorbed by new entrants using the very same suppliers. They are, on the other hand, important in areas such as distribution networks, where relatively high one-time investments are needed for the set-up. The same is true for marketing activities, as bigger firms get better rates for advertising and gain experience in the related processes.

Joint costs are another source of barriers to entry. They may occur in the apparel industry specifically through the usage of brand names for additional products such as fragrances, watches, glasses and other accessories. Most commonly, the apparel companies do not produce/sell these products, but will receive royalties from the companies that do. Here, a new entrant will have a significant disadvantage if she cannot immediately materialize this. The same is true for customer relationships which can be used to sell another (private) brand to important customers, thus gaining additional profits.

Product differentiation, another barrier of entry, is a complex topic in the apparel market.

Clothing will, on the one hand, always be clothing and consumer loyalty is thus low, on the other hand, different styles and brands provide room for some differentiation. Well-known brands benefit from this through higher customer loyalty, but possibly also because they can charge higher prices per item, as they are known as “premium" brands. Therefore, it is easier to enter the apparel market in the private label segment, where brand names are not as important, than in the upscale segment, where people do buy a special brand to communicate a lifestyle or to show status.

Capital requirements in the apparel market are not high. It is easy to gain access to a portion of the market by sourcing a small amount from a single factory, only advertising in a single geographic market, selling only to a few select retailers or selling through an own retail store.

Switching cost for buyers, in this ease either retailers or end-consumers, are relatively low in the apparel market. Both groups can easily switch suppliers and wear/sell different clothing. But the access to distribution channels can create barriers to entry. In the apparel industry, common distribution channels such as space in existing retail stores and locations for new, company-owned retail stores are fiercely competed for. It is difficult for new players to gain access to these without price breaks. However, as online shopping has become ever more important, it is easy for new entrants to set-up an online store and access this particular distribution channel.

Cost advantages independent of scale are also important throughout the industry. Espe­cially premium locations for stores that may serve the brand recognition primarily and not sales, as well as a well-known brands create barriers of entry. The brand also helps to acquire and keep talented-workforce, which, in the apparel industry, is important in design and marketing. Here, differences in skills can create significant disadvantages for new entrants.

Lastly, government regulation influences the threat of new entrants. In the apparel in­dustry this is of no concern, since regulation is not aimed towards creating barriers of entry.

After an intense discussion of possible barriers to entry in the apparel industry, possible reactions of incumbents to new entrants are to be assessed. If a new entrant expects highly aggressive reactions by incumbents, this may lead to the decision not to enter the market at all. There can be various signals for such behavior, including aggressive measures in the past, capacities for launching counter-measures (e.g. high liquidity or spare capacities), and slow industry growth, which would increase the probability of a new incumbent decreasing existing hrnTs market-share. There is a possibility of incumbents starting a price war, but because the market is highly segmented, this is more probable to happen in concentrated segments such as private label clothing. Luxury and upscale segments also define their value via prices and are unlikely to engage in a price war. Therefore, in the apparel industry the probability of aggressive reactions seems modest.

Overall, the threat of new entrants to the apparel market is high. There are some barriers to entry, however, they do not apply immediately. The same is true for the reactions of market incumbents, Nonetheless, a market entry in niche segments, such as personal- tailored apparel or private label clothing in developing countries seems more likely than an entry into the upscale brand clothing segment with established brands such as Lacoste, Tommy Hilhger, Ralph Lauren or Calvin Klein, Finally, low-scale entries are easier and thus more likely.

Degree of Rivalry

This chapter looks at the degree of rivalry in the apparel market, A high degree of rivalry may be caused by several factors, A large number of firms in an industry or a large number of firms with the same market power may lead to increased rivalry. The apparel industry as such, is highly fragmented, from different customer groups, men’s wear, women’s wear, children’s wear, to different price segments, to different utilization such as business, sports or casual to different types of apparel such as shirts, pants, underwear, sleeping wear. This enables many firms to compete in niches with few direct competitors. Thus, the intensity of competition through the pure number of companies is moderate.

Slow growth in an industry also increases rivalry as firms constantly compete for market- shares and will not be able to grow solely from market expansion. Growth in the apparel industry has been moderate in recent years and is forecasted to continue this path (com­pare MarketLine (2012)), This again indicates a moderate degree of rivalry.

Also, high fixed costs or high storage costs may intensify rivalry, as it induces firms to fully utilize capacities in order to minimize fixed costs per unit. The apparel industry does not involve high fixed costs in production, as most wholesalers source from suppliers which in turn produce the garments and cover the costs. In the upscale segment, advertising is an important cost component that is fixed. This causes a higher degree of rivalry in these segments. Storage costs are also becoming increasingly more important, as retailers place orders more carefully due to increased economic volatility (see Barrie (2013a)), Over time this is likely to be passed on to suppliers as wholesalers adapt their logistics systems to the new environment.

Missing product differentiation or missing switching costs are other issues in assessing rivalry. Whereas product differentiation is given to some degree, the switching cost for retailers are low, while they are non-existing for consumers. To sum up, wholesalers enjoy limited protection through customer loyalty - caused by product differentiation - from this driver of rivalry.

Heterogeneity among firms as well as over-capacities and high barriers to exit may also induce rivalry in an industry, but do not play an important role in the apparel industry. Overall the rivalry in the apparel industry is modest, but may vary from segment to segment.

Threat of Substitutes

The threat of substitutes for the apparel industry is weak. There is no viable alternative to clothing. However, one can assess counterfeit products that offer brand clothing at lower quality to lower prices, as a potential substitute and thus as a threat. Also, home-made clothing is an alternative, but can only be regarded as a niche product.

Buyer Power

Buyers may demand lower prices for the same or better quality for the same price. The degree of power they can induce onto the seller depends on different features. First, the share of total sales of the single buyer is positively correlated with its power. For the apparel industry this implies that retail-chains with a large share of total sales have more leverage than the single end consumer in company-owned retail or outlet-stores.

The importance of the product group for the buyer plays a crucial role. With increasing importance, the willingness to search and pay for a better price also increases. For an apparel wholesaler, this seems to be the case to a lesser degree, as large retail chains often have a highly differentiated product portfolio (e.g, Maey’s or Kohl’s in the US, Kaufhof or Karstadt in Germany), However, this may differ from consumer to consumer. For end consumers searching for a better price has become more of an issue due to information availability through the internet, Beeause eonsumers are often focused on a specific brand, wholesalers will receive their revenue from one source (own retail stores/online shop) or another (other retail store/online shop, which the products were sold to).

Again the degree of standardization/differentiation of a product influences buyer power. In the apparel industry most wholesaler differentiate their products through a distinct brand identity and the associated styles. Thus, the degree of standardization is low, but can be very high for non-branded private labels. This is true for both retail-customers and end eonsumers.

As mentioned above, switching costs for buyers are low, especially for end eonsumers as they can just buy a different brand or go to a different store. However, brand-loyalty will decrease the switching probability. For retail customers it is easy to switch the supplier, but this may be associated with significant risks regarding quality and the handling of sudden shifts of demand.

The degree of information available to the buyer is another important factor in determin­ing buyer power. For the end consumer it is hardly possible to gain informational rents through the knowledge of the costs for the supplier, in this ease the wholesaler. The single most important issue here is the value of the brand and its design which is priced by the wholesaler. There is no clear underlying calculation which would be visible for the buyer. The same is true for retail-customers, but as most of them have relations with more than one wholesaler, they possess some inside information and may be able to receive better prices as they may be able to play wholesalers off against each other.

The quality of the product received is crucial for the quality of the end product in the apparel market. This means that retail-customers depend on the quality of the garment received by wholesaler and are thus less price-sensitive,

A threat of backward vertical integration by the retail customer is not viable, as they do not possess the brand names owned by the wholesaler. Talking about private label goods, this can be a threat though, as retail customers can seek to buy directly from the manufacturer.

Looking at all the arguments put forward, it can be concluded that buyer power from a wholesaler perspective is modest to high. Especially the high concentration through large retail chains affect this issue. Vertical integration and the opening of more self-operated retail stores may decrease this in the future.

Supplier Power

Another important group influencing the attractiveness of an industry are the suppliers. Their power again depends on a variety of factors.

Concentration again is an important topic. Higher concentration means more power for a single company. The suppliers in the apparel market (clothing manufacturers) are highly fragmented and often each factory is operated by a different owner. Thus supplier power due to concentration is weak.

Competition through substitute products, on the other hand, is not given in the ap­parel market. Wholesalers need the garments and cannot switch to a substitute product. However, this is offset by the high fragmentation of the market.

Also, the wholesalers as such are the most important customer for the clothing manufac­turer, They are essential for the suppliers, in turn reducing supplier power.

The products delivered by the suppliers are also essentials for the wholesalers’ business. However, they can store the products (at least for the current season) and differentiate their supply chain, receiving the same product from different suppliers.

Lastly, a viable threat of forward vertical integration is hardly possible. An involvement of the manufacturers in the private label business may be possible, the building of a brand and entry into and upscale market seems unlikely.

All in all, supplier power in the apparel market from the wholesaler’s point of view can be assessed as weak. Especially the competition among many developing countries induces a high competition among the suppliers and eases pressure on the wholesaler.

Overall market attractiveness

After analyzing all five relevant forces of competition identified by Porter (1979) an over­all result regarding the attractiveness of the industry at hand is presented. From the wholesaler perspective, the apparel market is still an attractive one to operate in. Even though the entrance of new market participants is likely and buyer power, especially from retail chains, is modest to high, the overall environment seems set for ongoing modest growth. Firms that are able to differentiate the customer base to decrease buyer power and compete successfully against new entrants, while utilizing weak supplier power to increase efficiency in the supply chain, will continue to earn above-average profits.

2.1.3 Challenges & Opportunities

The next section will give an overview of potential challenges and opportunities arising in the apparel market. It draws heavily on statements gathered by just-style, an online portal for the textile and apparel industries.

First, challenges in the marketplace will be discussed. As for most industries the overall economic situation brings great challenges to apparel companies. Many if not all developed countries are in dire straits due to the financial crisis and Euro-crisis, so growth in these markets is very limited regarding apparel. Also, price levels are stagnating while costs in sourcing countries (especially in south-east Asia) are increasing. It will not be possible to move to new countries as the number of those capable of producing apparel is very limited. Rising production costs are accompanied by an increasing public awareness regarding working conditions (partly because of factory accidents in Bangladesh). The pressure to create better working conditions is on the manufacturers which in turn will further increase costs and put pressure on margins Barrie (2013a).

The economic environment also leads to a situation where retailers place smaller, but more frequent orders as volatility in sales increases and they are trying to reduce inventory and thus risk. This risk is in turn passed on to the wholesalers. Dealing with smaller orders requires a flexible supply chain and suppliers capable of reacting and delivering on short notice (ibid.).

The need for higher flexibility, as well as the aforementioned awareness regarding working conditions, calls for closer relationships with suppliers, supporting them in building effi­cient plants and for a geographically much broader supplier network, which will in turn reduce delivery time. This also assures better knowledge regarding ones supply chain and the working conditions associated with it. Possible locations could be North-Africa for the European market and Guatemala or Mexico for the US, Canadian and Latin Amer­ican market. Furthermore, vertical integration into manufacturing may be a promising possibility for apparel companies, because it can further reduce information asymmetry and enable apparel companies to design their supply chain according to their respective needs. However, vertical integration also implies that apparel companies would take on the risk now passed down by retail companies (ibid.).

Nevertheless, margin pressure also means that competition on prices is more difficult and thus quality and brand become more important. For apparel eompanies like PVH and Warnaeo, both active in the upscale segment, this may turn out positive.

Another important challenge is the fact that ever more shopping is done online. Here too, apparel eompanies have to decide whether to position themselves with their own online- store or by selling via online-retailers, not to forget that mobile shopping applications are gaining importance fast. They may include a mobile shop as well as news, coupons, a store locator or even payment solutions. Along with this comes the fact that most apparel eompanies do not possess a vast amount of knowledge in the held of online or mobile sales and marketing. This also includes utilizing customer data and improving market intelligence to better understand customers and their preferences and habits (ibid,). Together with the challenges above come ever-more demanding customers, which are well informed and request to receive adequate value for what they pay. It will be of crucial importance to understand this and implement solutions accordingly. Also, services, online and offline have to be adjusted (ibid,).

In general, it will remain a major challenge to improve processes as well as decision-making to increase efficiency and thus counter the above described margin pressure. Alliances as well as consolidation may be ways to generate economies of scale and to bring down costs, Next will be an overview of opportunities for the apparel industry in the coming years. Interestingly, many of the challenges mentioned above also transfer into opportunities for the apparel industry. First, closer relations with suppliers can help to cut costs, improve technology, reduce delivery time, increase flexibility and thus increase profitability Barrie (2013b).

The same is true for utilizing the new distribution channels mobile and online. Firms that do well here will catch a good part of market growth. Also, eompanies that own well-known brands are in a good position online, as people use their perception and experience regarding a brand to judge the quality, fit and style of a product. Together with this, the data aspect of online/mobile shopping creates an opportunity to better understand customers, increase their happiness and consequently transfer it into profit and/or increased loyalty (ibid,).

Furthermore, developing countries - and thus new markets - pose a great opportunity for the apparel market. As income increases, clothing, and especially the status aspect of it explained in 2,1,1, becomes more important. Thus, solid growth in the marketplace in many segments ean be predieted, as income rises at different speeds in different countries. Demography is also an important opportunity for the apparel market. In developing countries such as India, a large group of children and teenagers will turn into adults with own incomes, thus increasing demand for adult clothing (ibid,).

The apparel market is a complex one, involving customers that are very different across the globe. Together with a high degree of globalization in the supply chain this results in an environment with many challenges and many opportunities that companies have to deal with. Xot acting and continuing as before is not an option. Those firms that find the best solutions to the trends described above will improve their position, other firms will fall behind. Apparel is a market of change,

2.1.4 Company Analysis

Following the market analysis, the next part specifically deals with the two companies involved in the deal analyzed by this thesis, Warnaco and PVH, Besides a brief history of each company, the business model, management and shareholder structure and any other relevant issues are discussed,

Warnaco Group

The history of Warnaco ean be traced back as far as 1874 when the brothers DeVer and Lucien Warner started selling “Dr, Warner’s Health Corset" (Fundinguniverse (2002)) which was to replace the classic corset they thought to be “hazardous to women’s health”. In the 1910’s H.D, Warner, Chief Executive Officer (CEO) at the time, bought the patent for the modern bra which proved a success until 1920, After a series of ups and downs the diversified company went public in 1961, “generating annual revenues in the USD 100 million range” (ibid,), “The company changed its name to Warnaco in 1968” (ibid.) and achieved record-sales in the year of its 100th anniversary, 1974, After some missteps in the 1970’s and another crisis in the mid-1980’s, Linda Waehner, a former Warnaco employee, bought the majority of the company in 1987, forming Warnaco into the company known today, (ibid.)

After the buy-out, Warnaco went public again in 1991, In 1994 the purchase of the business and trademark for Calvin Klein men’s underwear and a license for Calvin Klein men’s accessories followed. Until 1996, the company had been reshaped into a focused, branded apparel producer, increasing sales from USD 425 million to USD 1,6 billion. From there on Linda Waehner grew Warnaeo through aggressive aeqnisitions diversifying into sleepwear and swimwear. In late 1997, Waehner added the Calvin Klein Jeans business to the portfolio, paying roughly USD 354 million, A world-elass apparel eompany had been built, but it would not last long. After a lawsuit against Calvin Klein himself, whieh was settled just moments before the trial began, investor eonbdenee eroded. In June 2001, Warnaeo hied for bankruptcy and Linda Waehner left the eompany in November of the same year (Monget (2012)),

The eompany emerged from bankruptcy in 2003 and was put back on track by Joe Gromek, the CEO at that time. He retired in October 2010 when Helen MeCluskey, a former Warnaeo Chief Organizational Officer (COO), took over (ibid,),

Warnaeo, traded under the symbol “WRC” at the New York Stock Exchange (XYSE) with a market capitalization of approximately USD 2,1 billion on October 26th 2012, achieved sales of USD 2,5 billion in 2011 with an operating profit of USD 243,0 million (9,7% profit margin).

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Figure 3: Warnaeo Shareholder Structure

Its shareholder structure is char­acterized by a large share of in­stitutional investors, whieh own almost 92% of shares outstand­ing, The Top 10 shareholders own 46,3% of shares outstand­ing, Among them are Black- rock (8,7%), Royce & Associates (6,3%) and the Vanguard Group (5,4%) as the three largest share­holders, Other institutional investors are public institutions such as the Xew York State Common Retirement Fund (0,3%) or the California Public Employees[5] Retirement System (0,3%), All together public institutions own 2,3% of all shares outstanding. Insiders of the eompany own a total of 8,1% of shares outstanding, the largest individual shareholder be­ing the former Chief Financial Officer (CFO) Lawrence Rutkowski (0,1%), This category also includes Adage Capital Management (4,3%) and Buckingham Capital Management (2.2%).

The eompany operates in three business segments, namely sportswear, swimwear and intimate apparel. It still owns the license for Calvin Klein Jeans and Swimwear and also owns the Calvin Klein Underwear, Sleepwear and Lonngewear trademarks as well as the Warner’s and Olga trademarks, which are active in women’s underwear. Warnaco also owns a license for the Chaps brand for men’s sportswear, jeanswear and activewear in North America. The sportswear segment is the by far largest in sales, generating USD 1.3 billion or 52.0% of total sales in 2011. The other two segments generate USD 932.1 million or 37.0% of total sales (intimate apparel) and USD 275.5 million or 11.0% of total sales (swimwear) respectively. Wholesale, the companies’ main distribution channel generated 71% of sales in 2011 while the retail channel generated 29%. The company operated 1,757 stores in 2011, 1,629 of which were located in Europe and Asia and jnst 128 in the Americas. Still the company generated most of its sales in the United States (44% in 2011). The next largest geographic market was Europe (25%), followed by Asia (17%), Mexico, Central and Sonth-America (8%) and Canada (6%) (The Warnaco Group (2012)).

Warnaco uses trends observable in the worldwide apparel mar­ket, discussed in 2.1.3, to deter­mine its strategic direction. The current strategy involves three key aspects. First, one focns is global expansion, driven by ex­isting platforms and opportunities for growth, especially in the devel

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Figure 4: Warnaco Geographic Sales Split

oping markets of Asia and Latin America. The second aspect is achieving high growth in its direct-to-consnmer opera­tions, which is triggered by the fact that there are not many multi-brand stores in China and other emerging markets. However, single-brand stores also enjoy higher brand vis­ibility, allow closer interaction with the customers and are under direct control, thus enabling Warnaco to ensure a consistent brand communication. Also, the diversification of distribution channels helps to diversify risk, as end consumers have less bnver power (see 2.1.2). The third important aspect of Warnaco’s strategy is building a consumer centric organization.

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