Banking, finance, and taxes

More Apparel Deals Coming? (PVH, WRC, VFC, RL, ARO, ANF, OXM, LULU, UA, COLM)

Phillips-Van Heusen Corp. (NYSE: PVH) has traders and investors speculating about or pondering which other apparel companies may become acquisition targets or which could end up in ‘mergers of equals’ as companies aim to strengthen their market positions.  The PVH bid to acquire Tommy Hilfiger from Apax Partners for about $3 billion is technically a leveraged deal because the market cap for PVH was around $2.3 billion before it was announced.  But now PVH shares are up almost 9% around $52.00 and we saw a 52-week high this morning of $54.64.

This deal may have put others in the spotlight.  Warnaco Group Inc. (NYSE: WRC), V.F. Corporation (NYSE: VFC), Polo Ralph Lauren Corporation (NYSE: RL), Aeropostale, Inc. (NYSE: ARO), Abercrombie & Fitch Co. (NYSE: ANF), Oxford Industries Inc. (NASDAQ: OXM), Lululemon Athletica Inc. (NASDAQ: LULU), Under Armour, Inc. (NYSE: UA), Columbia Sportswear Company (NASDAQ: COLM) and many more are companies are now worth a second look in the sector.  Most of these are more likely acquirers rather than targets, although not in all cases.

We wanted to take a sector review here on each as far as market capitalization rates, brands, and other issues which could or would come into play if more consolidation heads the way of clothing and accessories.

Warnaco Group Inc. (NYSE: WRC), with a $2.1 billion market cap, was in the M&A spotlight back during wave we saw from 2005 to 2007 when companies could get easy access to deal financing.  The problem is that they are deemed a consolidator rather than a consolidation victim.  In short, a buyer rather than a seller if the company has its own choice. It has brands such as Calvin Klein, Speedo, and Chaps.

V.F. Corporation (NYSE: VFC) is a monster in the sector, and one which likes owning brands. With a strong stock and a market cap close to $8.75 billion, VF can have the pick of the brands it wants to own.  It has acquired The North Face, Vans, and others.

Phillips-Van Heusen Corp. (PVH) will probably only add to that Hilfiger rivalry with Polo Ralph Lauren Corporation (NYSE: RL).  With Ralph Lauren having a market cap of nearly $8 billion, the company has always been a wild-card acquirer.  And its most recent guidance failed to win over Wall Street and investors.  Still, it seems as though many think that an acquisition of a smaller growth brand may represent brand dilution or may become a distraction for a model that obviously worked well through time for the Ralph Lauren and Polo brands.

Aeropostale, Inc. (NYSE: ARO) is a name which has been rumored as being a a target, although never with much conviction.  And a $2.7 billion market cap and targeted young audience makes the company a risk for any buyer that does not specialize in that market.  We’d throw out a ditto for Abercrombie & Fitch Co. (NYSE: ANF) with its focus, and note that it is even larger and worth about $3.8 billion.  These two are likely not going to be targets of a buyout.

Oxford Industries Inc. (NASDAQ: OXM) is a name that comes up occasionally in M&A circles.  This issue is that this may be more of having attractive brands a new owner would to own rather than being a company that wants to sell.  It houses the Tommy Bahama and Ben Sherman brands as well as others.  With shares being down a fraction today, Oxford is not showing any hint of a deal coming its way despite it only having a market cap of $350 million or so.

Lululemon Athletica Inc. (NASDAQ: LULU) has been rumored as a buyout candidate before, but valuation and founder-insider controls have made this harder to be true.  A $2.5 billion market cap is most likely going to push away many buyers even if the company became for sale and even if a significant pullback came.

The big player that is a dream-team target is Under Armour, Inc. (NYSE: UA).  The company is a small threat to Nike, and its stock has stagnated unless you compare it to the market lows of last year.  Rumors, or ‘rumours’ if you want to mirror its Old English spelling of ‘armor,’ have been out there before.  The biggest problem is that it has insiders with control and it seems as though it would take a high premium to make management jump at anyone with cash.  That being said, its $1.4 billion market cap might not be anywhere near what it would take to own that brand.

Another specialty apparel player is Columbia Sportswear Company (NASDAQ: COLM), and it has bought brands. With a $1.7 billion (or close to it) market cap, it would not be a huge target but the company has been an acquirer.  It seems likely that it would prefer to be a buyer rather than a seller, at least if history is any indicator.

There had been a longer-term belief that ultimately a Warnaco and Phillips-Van Heusen merger could come over the old Calvin Klein ties.  That can now probably be written off.  That is why Warnaco Group Inc. (WRC) shares are down 1.6% at $46.67 in mid-day trading.  Still, a reaction of 1% or 2% is not even as critical as a reaction based upon a key analyst call.

Phillips-Van Heusen has the Calvin Klein licensing segment, IZOD, BCBG, and many more.  Now you can add Tommy Hilfiger to that lineup.  The apparel industry goes through waves of consolidation from time to time.  Today’s $3 billion deal is going to have many speculating or looking to see which brands could be gobbled up next.  The problem is that this $3 billion deal may have taken a natural predator off the market for smaller brands for years.

It seems that most of the companies here are either more probable buyers of smaller companies or are deals which may have come and gone.  If you have seen anything out there, the most obvious is to never be overly surprised when companies do deals.  If shareholders of PVH would have known on Friday that the company was going to announce a deal larger than itself to make an acquisition, the gut reaction would have probably been to expect a sell-off.  Meanwhile, its shares are up.

So far we are not seeing reactions that are indicative of a wave of deal making.  We’ll be looking at some of the smaller and more vulnerable brands out there over the coming days.

JON C. OGG

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