 "Calvin Klein- fashion")
Textile major Arvind is slowly and steadily stitching together pieces of its business of brands. In 2012, it had said it was looking at a topline of Rs 5,000 crore from brands in the next five years. When Arvind Brands and Retail, a subsidiary, acquired 49 per cent of the Indian business of global fashion brand Calvin Klein, for over Rs 80 crore, it added a crucial piece to its 'bridge to luxury' line-up of brands.
Not only is Calvin Klein expected to generate a business of Rs 500 crore in the next five years, it strengthens Arvind's positioning in the category called 'bridge to luxury', where the company owns 90 per cent share in the market with its joint ventures or licensee brands such as Tommy Hilfiger, Nautica, GANT and others.
Prashant Agarwal, joint managing director at Wazir Advisors points out that it is the bridge to luxury segment which is growing at 15 to 18 per cent, while luxury and mid segments are growing at 8 to10 per cent annually.
"It is a huge opportunity for Arvind. We will become a dominant player in this market. There is very small competition for us in the bridge to luxury segment," says J Suresh, mangaing director of Arvind Lifestyle Brands. Lacoste is the other player in this segment.
Arvind will step up advertising the Calvin Klein as it would the expansion of its standalone stores. It would be opening 15 stores in the top 25 cities each year, and take the tally to 70 in the next two years.
Suresh says "Our existing brands will give a business of Rs 3,300 crore and the rest will come from new brands such as Ed Hardy, Hanes, Calvin Klein." Apart from its range of denimwear, Calvin Klein is also strong in the innerwear, complementin Arvind's line-up, Suresh says.
Arvind, after all, had tied up with innerwear Hanes Brands, and is looking at substantial growth with the launch of US Polo innerwear. Innerwear accounts for Rs 70 crore of Arvind, but could increase to clocking Rs 500 crore over the next five years.
Agarwal of Wazir Advisors says Calvin Klein will do well with Arvind, as the latter has bargaining power in real estate, advertising and sourcing with its portfolio of brands.
For a hefty price
In a recent report, Jignesh Kamani, analyst with Nirmal Bang Equities, termed the Calvin Klein deal as expensive as at an enterprise valuation of Rs 180 crore, Arvind Brands bought 49 per cent stake at the high valuation of 16 times/1.4 times EBITDA/sales respectively.
"In the past, Arvind has entered into licensing agreement to market and sell Hanes with no upfront consideration, but only royalty payments to the brand owner. In the case of stake acquisition in PGWT (the licensee of Calvin Klein in India), Arvvind will pay about Rs 80 crore and also continue to pay royalty to the brand owner," Kamani says.
Arvind has also been facing challenges with some of the international brands it has acquired. According to the Nirmal Bang report, 18 months after acquiring the India rights to Debenhams, Next and Nautica, the brands are still incurring losses.
"With these acquisitions continuing to incur losses, the expansion plan has got delayed. We continue to remain concerned over aggressive capex by Arvind and also its effectiveness," Kamani says.
Suresh informs that things are about to change vis-a-vis its international brands. He says that Next is on the road to profitability and closing the year with 10 per cent same-store-sales growth. Suresh says the company is working with Debenham's UK team to sort out the challenges it is facing.
Even as some analysts say that contribution of Arvind's brands and retail business to the parent's profitability is small, Suresh mentions that after the recent acquisitions, the EBITDA margins are at 8 per cent in FY-2014. He says ths would increase to 12 per cent once the new brands start contributing to the business.
"Arvind owns stakes in brands which is more effective than being a franchisee as it gets returns on the brand on a long term basis," Agarwal says.
