Inside Wall Street: Calvin Klein Is Making Warnaco Look Sharp

Gene Marcial's Inside Wall Street -- Warnaco
Gene Marcial's Inside Wall Street -- Warnaco

Despite worries about the economic slowdown and tepid consumer spending, shares of Warnaco (WRC), a global designer, maker and marketer of apparel, are on a tear. Since February, the stock has bolted from $38 to a 52-week high of $49.43 on Apr. 5. Now nearly $48, Warnaco had plunged to a 52-week low of $24 on Apr. 7, 2009.

What's behind the stock's big surge? Warnaco has been gaining market share, thanks to the continued strength of its widely popular Calvin Klein line. Indeed, Warnaco might as well rename itself Calvin Klein because that brand is mainly responsible for firing up sales and earnings growth. And analysts expect the advance to further accelerate. Some analysts see Warnaco's stock hitting $55 this year.

"Calvin Klein's positioning as an affordable luxury brand and benchmark for product quality and style is supporting market share increases in Europe, Asia and Latin America," says analyst Jason N. Asaeda of Standard & Poor's. "We look for the Calvin Klein brand to remain Warnaco's primary growth engine," he adds.

Rating the stock a buy, Asaeda notes that Warnaco's Calvin Klein line will be a major source of product innovation, expanded distribution in developed and emerging markets, and "impactful marketing." Warnaco's broad line of apparel includes intimate wear, jeans, swimsuits and sportswear. The Calvin Klein line accounted for $1.5 billion, or 75%, of total company net sales of over $2 billion in 2009.

Rights That Are Worth $150 Million

In an odd twist, Phillips-Van Heusen (PVH) still owns the rights to the name Calvin Klein, which it acquired from the fashion designer. Warnaco has been buying various rights to the Calvin Klein name from Phillips-Van Heusen. For example, in January of 2006, Warnaco acquired the businesses that operate the wholesale and retail businesses of Calvin Klein jeans and accessories in Europe and Asia. It also acquired the CK Calvin Klein line of sportswear and accessories in Europe. Warnaco owns the global rights to Calvin Klein underwear. And in January 2008, Warnaco bought from Phillips-Van Heusen several new Calvin Klein licenses, including e-commerce rights in the Americas, Europe and Asia.

Those rights are expected to generate $150 million in incremental business over the next five years, says Asaeda. As of Jan. 2, Warnaco operated 1,097 Calvin Klein retail stores worldwide and three online stores. The U.S. has only one, located in Manhattan's Soho neighborhood. Llicensees or franchisees also operate 624 Calvin Klein retail stores. Other brands that Warnaco owns include Olga, Speedo swimwear, Warner's and Chaps.

Despite the tough global economy in 2009, Asaeda says Warnaco's strong brands, broad geographic exposure, multichannel distribution model and cost-cutting initiatives supported further improvement in operating results. For 2010, the analyst forecasts Warnaco will earn $3.20 a share, up from 2009's $2.82.

"Growing the Right Way"

Warnaco has aggressive plans to further expand its mainstay Calvin Klein brand. Analyst Eric Beder of investment firm Brean Murray Carret says he's impressed with management's plan to take the brand to the next level and with its focus on Calvin Klein and the international segments. He notes that Calvin Klein-derived revenues jumped 17% in the fourth quarter, while the other legacy businesses expanded just 4%.

The company is "growing the right way," Beder says in a report to clients. He expects Warnaco's earnings to reflect the continued expansion, and he forecasts earnings of $3.44 a share in 2011, up from an estimated $3.15 in 2010. He rates the stock a buy with a 12-month target of $55 a share.

With an economic recovery on the way, apparel makers are likely to be among the initial gainers from stepped-up consumer spending. Warnaco's widely popular Calvin Klein brand should be high up in shoppers' lists -- and the stock could help dress up investors' portfolios.