By Alex Gavrish, Etalon Investment Research; author of “Wall Street: Back to Basics

Glenview Capital Management position in PVH Corp

Glenview Capital Management, a firm that is managed by Larry Robbins, disclosed in recent SEC filing that it accumulated a holding in shares of PVH Corp (NYSE: PVH), one of the world’s largest apparel companies. As of December 22, 2014, the fund owned approximately 4.5 million shares that were valued at $562 million. The position represented approximately 2.9% in Glenview’s total portfolio that was valued (as of September 30, 2014) at $19.1 billion dollars. Robbins is one of the top performers in the hedge fund industry and generated strong returns in 2013, in part by investing heavily into the healthcare related stocks. Last year, using insight from analysis of Glenview’s portfolio, we successfully identified CareFusion (NYSE: CFN), which was recently acquired by BD (Becton Dickinson) for $12.2 billion. Since our recommendation

on January 13, 2014, the stock returned 45.1%. We therefore decided to look deeper into the recent position disclosures of Glenview Capital Management.

Company profile

PVH Corp., one of the world’s largest apparel companies with $8.2 billion in 2013 revenues, owns and markets a diversified portfolio of iconic designer lifestyle apparel brands, led by Calvin Klein and Tommy Hilfiger, which together represent over 85% of its operating profits and are expected to continue to drive future revenue and profitability growth. Company is also the world’s largest shirt and neckwear company, and through its Heritage Brands division, designs, sources and markets a varied selection of prominent brand label dress shirts, neckwear, sportswear, footwear, swimwear and intimates and licenses its heritage brands for an assortment of products. Company’s brands include its own brands, Van Heusen, Calvin Klein, Tommy Hilfiger, IZOD, ARROW, Warner’s and Olga, and its licensed brands, including Speedo, Geoffrey Beene, Kenneth Cole New York, Kenneth Cole Reaction, MICHAEL Michael Kors, Sean John, Chaps, Donald J. Trump Signature Collection, DKNY, Ike Behar and John Varvatos.

Additional holdings in the same sector

According to most recent quarterly holdings report, Glenview Capital Management had a number of other companies from the retail sector in the portfolio, such as Dollar General Corp (NYSE: DG), Family Dollar Stores (NYSE: FDO) and few other companies. Our attention however, was captivated by two other names: Fossil Group Inc (NASDAQ: FOSL) and Carter’s Inc (NYSE: CRI). What is interesting about these two holdings is the fact that in addition to belonging to the same industry sector (retail), these companies share a similar business model with PVH Corp (NYSE: PVH): large proportion of their sales is done through wholesale and third-party distribution, while own stores and retail presence is relatively small. It is reasonable to assume that it is exactly because of this business model that Glenview Capital Management chose these companies. During periods of strong consumer demand and favorable retail environment these companies are well positioned to reap the rewards as they are not burdened so much by high fixed costs associated with large scale retail store networks.

Contrary to the perception one might get from buzz headlines in the financial media, the fund did not establish these positions overnight, but initiated all of them during second quarter of the last year and steadily accumulated over past 18 months. In terms of share price performance, the stocks of PVH Corp, Fossil Group, and Carter’s Inc did not move much: they returned 1.1%, 6.5% and 14.3%, respectively during this period. Based on the most recent disclosures, Glenview Capital Management accumulated positions in these three companies that constitute 5.5%, 6.2% and 5.5%, respectively, of total shares outstanding. The largest investment, by dollar value, is PVH Corp ($573 million), followed by Fossil Group ($358 million) and Carter’s Inc ($248 million).

Eminence Capital position

Eminence Capital, which is managed by Ricky Sandler, who last year was involved in Jos. A. Bank / Men’s Wearhouse transaction also owns Fossil Group and PVH Corp in its portfolio. As of September 30, 2014, the fund owned 5.5% of Fossil Group and 0.8% of PVH Corp, holdings that are currently valued at $307 million and $82 million, respectively. Last year’s takeover battle between Jos. A. Bank Clothiers and Men’s Wearhouse, which ended in Jos. A. Bank Clothiers being acquired by Men’s Wearhouse brings one to a speculative idea that a similar transaction might occur with PVH Corp acquiring Fossil Group.

Valuation

As Carter’s Inc specializes in apparel and related products for babies and young children, we decided to focus on PVH Corp and Fossil Group. Based on a recent share price, PVH Corp had market capitalization of $10.4 billion and enterprise value of $13.8 billion. Company is currently valued at an EV/EBITDA multiples of x13 and x16, based on annualized 9m 2014 and full 2013 year results, respectively. Fossil Group had market capitalization of $5.6 billion and enterprise value of $6 billion. It is valued at an EV/EBITDA multiples of x11 and x9.4, based on annualized 9m 2014 and full 2013 year results, respectively. The two companies are not the cheapest ones in the retail sector. However, favorable retail environment, attractive growth profile, business model, brands component of the business and increased allocation by leading hedge funds to retail sector make these stocks interesting investment candidates for a long-term oriented investor.

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