RV/Special situation: Perry Ellis (PERY US)
Initiating BUY RATING PERY: US$ 14.25; target (initial): US$ 18.00
PERY owns and manages a portfolio of over 30 apparel and accessory brands with Perry Ellis as the key premium brand of the company. PERY’s brand portfolio targets a range of market segments from luxury market to sports market. PERY’s products are sold via a combination of channels ranging from department stores to online outlets. Despite having some key premium brands, PERY continues to lag behind Ralph Lauren (RL) and PVH (owner of Calvin Klein and Tommy Hilfiger) on margins. The consensus expects the operating margins for both RL and PVH in 10%-15% range while for PERY it is around 4.5%. PERY’s margins are depressed by low brand power vis-à-vis RL and PVH, dilution by weaker performing brands and heavy promotional activity both by PERY’s customers and PERY to address the weak retail sales volume. We believe that this situation could be turned-around and PERY has scope to expand its margins. First, PERY is already in the process of divesting underperforming brands in its portfolio and focusing its effort heavily on Perry Ellis, Rafaella sportswear businesses, and golf-lifestyle business. This together with the general recovery in the economic conditions should help PERY’s margins. Secondly, we note that an aggressive expansion in the license business could expand the margin significantly. Although the license segment generates ~3% of total revenue, it contributes to ~46% of the EBITDA. PERY could drive further revenue growth via licensing its brands in under penetrated markets such as Europe, Latin America, and Asia. In FY2014 (period ended Feb 1, 2014), license income grew by ~9.4% vis-à-vis a ~6% drop in brand sales. PERY is undervalued on a relative value basis and we estimate a fair value of ~$18.0 for PERY. On DCF basis, we value PERY at around $16.5 a share. Although we do not see any short-term positive catalysts, we believe that PERY is a buy given our view that it will re-rate positively over the medium term. FULL REPORT ATTACHED
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