By  on September 10, 2010

The acquisition of Tommy Hilfiger by Phillips-Van Heusen Corp. was first set in motion by an unlikely source: Joanne Chirico, the wife of PVH chairman and chief executive officer Emanuel Chirico.

As fate would have it, Joanne was seated next to Tommy Hilfiger at a charity dinner last September hosted by Macy's Inc. chairman, president and ceo Terry Lundgren. The designer casually told her that her husband should call Fred Gehring, ceo of Tommy Hilfiger, to discuss what the two companies might cook up together.

"That was a catalyst to call Fred, and we had dinner together, where we talked about possibilities," recalled Chirico, 53, who is known as Manny. "In October, we took a trip to [the Tommy Hilfiger headquarters in] Amsterdam, and we could see on the ground how strong the brand was and how strong its operations overseas were. It started a dialogue that kept intensifying, and the economics of a potential deal really fell into place around Christmas."

In May, PVH acquired Tommy Hilfiger from private equity group Apax Partners for a total price of $3.1 billion, including cash, PVH shares issued to Apax and assumption of liabilities. (Apax had acquired Tommy Hilfiger for $1.6 billion in 2006.) The deal catapulted PVH into the uppermost ranks of global apparel firms, and the combined companies' total 2010 revenue is forecast at $4.8 billion, with earnings before interest, taxes, depreciation and amortization of close to $800 million.

With the purchase, PVH leapfrogs ahead of apparel industry leaders like Jones New York, Liz Claiborne Inc. and Hanesbrands Inc. in size — although it's still behind Polo Ralph Lauren Corp. and VF Corp.

PVH now controls two of the best-known brands in the U.S. — Calvin Klein and Tommy Hilfiger — along with the Izod, Arrow and Van Heusen labels and a raft of dress shirt and neckwear licenses. The company was founded 130 years ago as a shirt maker and is today the largest manufacturer of dress shirts in the world, commanding more than a 45 percent market share in the department store channel, with numerous licensed brands such as Geoffrey Beene, Nautica, Kenneth Cole and DKNY.

In neckwear, PVH's dominance is even greater, as it makes 50 percent of all ties sold in the U.S. through a portfolio of more than 50 owned and licensed brands.

While the stable-but-staid shirt and tie categories provide a strong foundation to the PVH business, it's the Calvin Klein and Tommy Hilfiger brands the company believes will drive growth opportunities.

"We believe that we have two very strong growth vehicles in Calvin Klein and Tommy Hilfiger," said Chirico. "Given those two brands, their value and their financial proposition, we should become one of the most profitable apparel companies in the world. We will be generating a tremendous amount of cash over the next years and we want to continue investing that cash back into the business in ways that drive growth for the company."

As with Calvin Klein (which PVH acquired in 2003 for roughly $700 million, give or take, depending on earnouts), PVH intends to keep operating Tommy Hilfiger as an autonomous division of the company. Its headquarters will remain in Amsterdam — unbeknownst to most American shoppers, the company's center of gravity, along with half of its sales, is now in Europe — and its senior management team remains intact.

In the U.S., the integration of the two companies is running ahead of plan, according to Chirico.

"All the key steps focusing on the back office and logistics and warehouse all seem to be running ahead of schedule," he noted. "Even before the deal was signed and from the time it was signed and closed, we did a significant amount of planning with the management teams on both sides to get everyone to buy into the process, so all the groups were able to hit the ground running."

PVH accelerated by a year plans to open a 1 million-square-foot warehouse in the Atlanta area, which will consolidate both Tommy Hilfiger and PVH product from their respective warehouse facilities in New Jersey.

PVH is also consolidating some back-office functions between the two companies, including personnel in warehousing, finance, information technology and legal, with annual cost savings of about $40 million. "There was duplication between the two organizations in some noncore areas and the consolidation will lead to greater efficiencies and a better cost structure," explained Gehring.

Chirico was careful to point out that those impacted by the consolidations were paid stay bonuses for the transition period as well as severance packages upon their departure.

Gehring has been given wide latitude to continue overseeing the Hilfiger business as ceo. PVH aims to retain the corporate culture and brand identity of Tommy Hilfiger that has worked so well for the business in Europe.

"Fred is responsible for how the brand is positioned both internationally and domestically," said Chirico. "I said from the beginning it would be very similar to how the Calvin Klein business operates within PVH. The business is hitting its numbers and better. There is really no reason for me to get actively involved, except for staying on top of things and making sure resources are provided."

Gehring has also taken on additional responsibilities for overseeing PVH's legacy brands, such as Arrow, Izod and Van Heusen, in overseas markets. He will expand those businesses initially into Europe and manage the Asian and South American businesses, which are currently done under license.

Gehring's existing five-year plan, which was already in motion when PVH bought Hilfiger, remains the brand's blueprint for growth. Germany and Spain will continue to be the biggest markets for Tommy Hilfiger in Europe and the company will further expand in those countries. In secondary markets like France, the U.K., Italy and Russia, Hilfiger is growing at double-digit rates, said Chirico, and the company will focus on gaining further footholds in those markets.

"Expansion into Asia, particularly operating either directly or with a joint venture in China, will be a key initiative," added Chirico.

In the U.S., the PVH ceo expects Tommy Hilfiger to double its wholesale business over the next five years, with continued investment in brand messaging and a focus on maintaining consistent positioning. The parent company plans to invest in buying back Tommy Hilfiger licenses, both by category and geography, and bringing those businesses in-house.

"I think in the short term, in the next two to three years, probably the type of acquisitions we will make are those that enhance and grow the Tommy and Calvin businesses going forward," explained Chirico.

If PVH's success with Calvin Klein is any indicator, Hilfiger's growth prospects look bright. Since 2003, Calvin Klein's retail sales have increased at a 16 percent clip annually. In the same period, PVH companywide has improved its top line with a compound annual growth rate of 7.3 percent through fiscal 2009, an EBITDA expansion of 14.5 percent a year and a total market capitalization increase of 25 percent annually.

The biggest challenge to PVH's plans for Tommy Hilfiger is the uncertain direction of the macroeconomic climate, said Chirico.

"We have a lot of momentum but the biggest issue is the backdrop of the global economic situation. You can't help but get a sense of anxiety," he noted. "When you are dealing with the world at large, there is a lot of uneasiness out there and a lot of negative sentiment. It puts up a real cloud and an uncertainty: How aggressive do you step back or go forward? I don't think it changes our plans, but it's more a question of how fast you step on the pedal. It's a timing issue. Both Tommy Hilfiger and Calvin Klein are very well positioned as we continue to grow, but it gives one pause."

Gehring, for his part, emphasized that the questionable economic outlook is largely belied by Tommy Hilfiger's actual sales trends.

"There is a surrealness to that from my perspective, in that the business is actually relatively strong everywhere we look. Both the current retail business and the wholesale bookings are quite satisfactory," he pointed out. "Then you look around you and it's doom and gloom. So there's a bit of a disconnect between what we see in the business today versus what everybody thinks of the business tomorrow. I'm hoping that the outlook is wrong but normally the outlook is a self-fulfilling prophecy, so we are probably heading for some tough times. But I'm confident about our ability to deal with it."

The Tommy Hilfiger deal also adds a big overseas business to PVH's portfolio and exposes it to greater currency exchange volatility. International markets generate 37 percent of PVH revenue, up from 10 percent prior to the Hilfiger acquisition. Tommy Hilfiger purchases the majority of its merchandise in U.S. dollars, which exposes the business to foreign exchange risk from the fluctuation of dollar and euro exchange rates.

"You don't expect that kind of volatility in currencies to be bouncing around like that and it creates issues of how you manage expectations and how you hedge," said Chirico. "Our financial guys are working together to manage the volatility. You have huge swings up and down in the week-to-week activity and it's another indication of the economic uncertainty out there."

Those kind of vagaries impacting the fashion and retail industries makes Tommy Hilfiger's 25th anniversary all the more impressive, noted Chirico.

"This is a very volatile industry and within fashion and apparel you see brands come and go, and a lot of flashes in the pan. When a brand stands the test of time for 25 years, it's a testament to the organization and an indication that it's here for the long term," said Chirico, adding cautiously, "As long as you keep properly investing in it."

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