Tuesday, Credit Suisse upgraded Warnaco Group Inc. (WRC) shares to Outperform from Neutral and increased its price target to $56 from $45.
Analyst Saad said that two factors give him confidence in WRC's outlook: rebounding global growth for Calvin Klein, WRC's key business; and the potential for a PVH-WRC deal to combine CK under one roof. CK is one of the few American brands with global potential, and with 80%+ of company profits derived from CK, the analyst believes Warnaco is well positioned to benefit from CK's international expansion.
The analyst said that less than half the size of Hermes, Coach, and Bulgari in Asia and Gucci, Diesel, Hugo Boss, and Ralph Lauren in Europe, CK is highly underpenetrated internationally. Growing at a 13% CAGR the last 3 years, the analyst estimates that Calvin Klein's global retail roll-out coupled with 4-6% comps could drive a 12% international revenue CAGR over the next 5 years and 6%-8% total growth.
The analyst noted that strong results last week suggest CK is setting up nicely for 2010 as constant currency international growth accelerated. Regardless of what happens with M&A in the branded apparel sector near-term, the analyst expects PVH and WRC to unify the Calvin Klein brand under one roof at some point in what he believes would be a highly synergistic transaction.
The analyst added that though it's not clear when such a transaction would occur, the case to combine the key licenses and brand ownership is compelling given that Ralph Lauren shareholders were rewarded with $6+ billion of market value creation as the company acquired and consolidated most of its major licenses over the last decade.
In a deal scenario, the analyst estimates that PVH could pay as much as $75 for Warnaco and still generate solid EPS accretion and strong returns for its own shareholders.
Currently, WRC is up $1.45 or 3.20% and trading at $46.75.
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