WWD.com/beauty-industry-news/financial/warnaco-to-buy-one-business-license-two-from-calvin-klein-1153545/

NEW YORK — Two industry giants agreed to tie the knot Tuesday.

The Warnaco Group will acquire one business of Calvin Klein Inc. — men’s underwear — and license the trademarks for men’s accessories worldwide. Warnaco will also acquire the worldwide trademarks for women’s innnerwear when the U.S. license expires at the end of the year.

The deal, worth $64 million plus ongoing fees, gives Calvin Klein Inc. the capacity to be debt-free immediately, in addition to a steady stream of royalties.

The sale could also be the first of many similarly structured deals for various Klein divisions.

Sources said Klein has devised a strategy that will turn his firm into a complete licensing operation — with the exception of the Collection business — over the next few years, patterned after his highly profitable fragrance license.

For its part, Warnaco gets a powerful niche designer brand with enormous international growth potential.

In addition to the successful men’s business, Warnaco will acquire the international trademarks for women’s intimate apparel, which includes bras and panties and cotton underwear, when the license expires at the end of 1994, said Linda J. Wachner, Warnaco’s president, chairman and chief executive officer.

Warnaco will also license the worldwide trademarks for men’s accessories. The accessories license, a new venture to be launched in early 1995, will feature men’s belts and wallets that will be in main-floor accessories departments and in Calvin Klein men’s wear areas at major stores.

The deal is expected to be closed within 30 days.

According to the terms of the agreement, Klein will continue to design and create advertising for the men’s underwear, women’s innerwear and men’s accessories, which had formerly been designed in-house.

All showrooms and design studios for the three businesses will be at the Calvin Klein offices here at 205 West 39th St.

The deal will enable Klein to erase a $58 million loan received last June from Citibank. Klein used the loan to buy back his bonds from entertainment tycoon David Geffen. The loan is collateralized entirely by Klein’s royalty income. Sources estimate that Klein’s licensing income in 1994, including royalties from Warnaco, will be $42 million to $45 million, up from $35 million to $36 million in 1993.

This income is now potentially debt-free and interest-free, capping what one inside source described as “an extraordinary turnaround.”

“Less than two years ago,” the source said, “this company potentially could have gone into bankruptcy.”

The deal also gives Klein’s already lucrative underwear business increased international potential through Warnaco’s extensive production and distribution pipeline.

“These are two powerful companies getting together,” Klein told WWD, “taking what we can do creatively and what Warnaco can do in terms of manufacturing and the ability to market globally.

“We have ambitious plans,” Klein added.

Reached at Warnaco’s corporate headquarters here Tuesday, Wachner stated, “I think Klein got a very full purchase price. It’s a good deal going forward for them.

“Klein’s name is unparalleled in our [innerwear] industry. This is a big thing for us, and the news is our big entry into the men’s business. When we took over Warnaco in 1986, the company was an apparel conglomerate. Now, we’ve refocused our businesses and strategies, and we have become a worldwide men’s and women’s underwear company, as well as a men’s sportswear and accessories firm.”

Wachner is projecting annual sales gains at 12 to 15 percent for the men’s underwear, women’s innerwear and accessories businesses. Warnaco will take over the women’s innerwear license from Heckler Manufacturing & Investment Group at year’s end, she said. Heckler has had the license for Calvin Klein women’s innerwear since 1989.

Wachner said she intends to introduce Calvin Klein women’s underwear and intimate apparel to the international market for the first time in 1995. The 12-year-old Calvin Klein line of men’s underwear is already distributed in some international markets.

Target countries for Calvin Klein innerwear include the U.K., France, Belgium, Italy and Germany, she said.

Concerning the women’s innerwear license with Heckler, Klein said, “The women’s business has struggled under a series of sales. We’ve been at a disadvantage because it’s been sold a number of times, first to Kayser-Roth, then to Wickes…We’ve never been able to really build that business. In every one of our businesses, women’s is stronger, except for this one. It’s ironic because, in this area, we started this whole thing for women. The men’s business, when we bought it back from Bidermann, was only $6 million.”

This year, the men’s underwear business could hit $100 million in sales, sources said. The women’s underwear and innerwear business, in comparison, is expected to do around $16 million.

Could the sale to Warnaco be a precursor to going public for Klein? No, said the designer. While sources noted that Klein in the past has examined the possibility of going public as a way to bring down debt, that strategy is no longer needed.

“Do I think about going public? I think about just building businesses. We’ve struggled to build businesses and build them globally,” the designer said.

“What we’ve demonstrated with our fragrances,” Klein continued, “is that we can market well in Europe. By the end of 1994, we will have launched every Calvin Klein fragrance in every country.

“Simultaneously, we’re selling the Collection in Europe, opening stores in Barcelona, St. Moritz and Munich. Now, the natural strategy is to take our commodity products that can be easily marketed worldwide overseas,” Klein said. He noted that Europe and the Far East are key expansion targets.

Sources said the structure of Klein’s highly profitable fragrance business inspired the shift in corporate strategy toward a licensing enterprise. Klein’s fragrances are licensed to Unilever, which has boosted the business into a lucrative “half-billion-dollar” enterprise, producing over $20 million in royalty earnings annually for Klein.

One source noted, “Klein concluded this deal with no investment bankers…and if Calvin Klein just exchanged this business to erase his debt, it would be a very good deal for him.”

Concerning advertising, the designer said the women’s and men’s underwear will be marketed separately.

“They are separate businesses, sold through the same sales organization,” Klein said.

“Selling this company will get us to the next level,” said Barry Schwartz, Klein’s business partner. “There is substantial growth potential. The women’s business could eventually be even larger than the men’s. Warnaco will take a broad look at the big picture.”

With increased international distribution, Schwartz said the men’s and women’s underwear businesses could each represent “several hundred million dollars.”

Schwartz also noted that the company is “looking at all our options for all our divisions, except for Collection,” for similar sale or licensing arrangements.

“We’ve done very well as licensors, clearly better than when we’ve run the manufacturing business ourselves. We know where our strengths are,” he added, citing marketing, design and product development.

Schwartz said Calvin Klein Inc. will continue to operate the Collection business as an ongoing concern and an image builder. Schwartz called the division “the largest women’s Collection business in the U.S. and profitable.”

Sources put the Collection business at about $60 million.

Concerning global expansion, Schwartz noted that the organization has been “setting up a new company” over the last two years in Japan that will lead to Collection and CK stores throughout the Far East, in Singapore, Taiwan, Hong Kong and Japan.

As for advertising, Klein will maintain creative control, and while Warnaco will set the budget, Schwartz said he expects “a lot more spending,” adding, “Linda’s a big believer in advertising.”

In addition to its latest acquisition, Warnaco produces a licensed line of Fruit of the Loom bras that are distributed to mass merchandisers, women’s bras under the Olga and Warner’s brands, and sleepwear by Blanche. Warnaco also holds the sleepwear and at-homewear licenses for the Valentino Intimo, Scaasi and Bob Mackie names. Warnaco’s men’s wear labels include Hathaway, Puritan/Thane, and three licensees: Golden Bear by Jack Nicklaus, Christian Dior, and Chaps by Ralph Lauren.

Warnaco’s overall sales in 1992 were $625.1 million, and for the first nine months of 1993, they were ahead more than 13 percent. The company’s innerwear business in 1992 totaled $384.8 million, and men’s apparel and accessories generated sales of $200 million.

Warnaco’s retail outlets rounded out the volume by contributing $40.3 million in 1992.

Calvin Klein innerwear was a division of Kayser-Roth Apparel Group until 1989, when John J. Heckler, the division’s chief executive, acquired it from Wickes Cos. in a management-led buyout with Smith Barney Upham Harris & Co., an investment group.

Heckler did not return telephone calls Tuesday. Late last week, he said he did not anticipate any changes regarding the women’s innerwear license. He noted then, however, that he would be meeting with Barry Schwartz on Monday.

Calvin Klein innerwear reportedly has had some rocky moments since Heckler began manufacturing it. The focus of the sleepwear line changed a year ago when the Heckler firm repositioned the sleepwear from polyester charmeuse to a “lifestyle line” of cotton knits that could be merchandised with Klein’s women’s underwear. The polyester charmeuse items reportedly had not been selling well at stores.