By and  on February 27, 2006

NEW YORK - Designer succession is an issue that just gets stickier and stickier.

A slew of fashion brands have experienced the pitfalls in a name designer stepping aside, to be replaced by either an individual or a team. Gucci, Yves Saint Laurent, Jil Sander, Givenchy and even St. John are among the brands that have or are wrestling with the issue.

Now add Calvin Klein to the list.

Executives at Calvin Klein International and its parent, Phillips-Van Heusen, insist they are strongly behind the women's Collection, seeing it as potentially a $100 million business and the driving force behind the success of all those other products bearing the Calvin Klein label that generate global sales at retail of $4 billion annually.

Yet there are so many internecine battles, mixed signals and hiccups that questions continue to rage over whether the more mass-oriented PVH can run a high-end Collection business and whether the women's Collection designer, Francisco Costa, is the man they're banking on.

Costa, meanwhile, lately seems to be biting the hand that feeds him, as have so many other designers in the past who have gone public with complaints about their corporate overseers - from Alexander McQueen at Givenchy to Marc Jacobs at LVMH Moët Hennessy Louis Vuitton, and Jil Sander at her then-parent, Prada Group. The tactic has met with mixed success.

Nevertheless, in an interview Sunday with Cathy Horyn in The New York Times' T magazine, Costa let rip on his frustration with CKI and PVH, and his dissatisfaction over how he's been treated, even by Calvin Klein himself.

All this as Costa is in the middle of renegotiating his contract - for which he's enlisted his friend and former Calvin Klein chairman, Barry Schwartz. Schwartz also is the boyhood friend and former business partner of Klein, yet a chilly frost has formed between the two men since they sold out to PVH.

Costa's situation brings to light a bevy of issues that may be impeding the success of Collection and have caused successions at other design houses to derail. They include a team approach - Costa oversees only the women's Collection, with two other design directors handling men's and accessories; CKI downplays Costa's star potential in an attempt to maintain Calvin Klein the man as the image of the brand; questions remain over Costa's ability to produce a commercially viable product, and then there is the relevance of the high-end Collection at a company known more for underwear, jeans and fragrances.Sources said CKI executives anticipated a flattering profile of Costa in T magazine, and were surprised by its negative undertones. And in a classic case of playing both sides of the fence, Costa is said to have immediately apologized to CKI president and chief operating officer Tom Murry over his comments in the story, while at the same time, Horyn told WWD that both Schwartz and Costa contacted her to congratulate her on the article.

Costa wouldn't comment to WWD about the Times story, his contract or his demands, but insisted, for the record, that he was happy with the direction at CKI. Murry also remained tight-lipped about the Times story, allowing only that it was "incomplete."

Murry stressed PVH is investing a substantial amount in Collection - even though it loses money and is mainly an image-builder, like many high-end designer lines - and appears to wholeheartedly support it. Sources close to the company speculated that, within the last year, PVH spent about $20 million on Collection to position it for future growth.

Specifically, Murry pointed out that, in recent months, CKI has built an 8,600-square-foot runway show venue; brought the Collection sales showroom back in-house from its previous location within its licensee, Vestimenta in the Fuller building at 41 East 57th Street, and added an 885-square-foot press showroom.

PVH also negotiated a new license for Collection last October with Fingen after Vestimenta hit financial problems. Warnaco subsequently bought all of Fingen's Calvin-Klein related licenses and, as a result, in 2008, the Italian company will transfer production of Collection to Warnaco.

Murry disclosed the company is currently recruiting a team for Collection, including an executive to head Collection's U.S. business. In addition, the company is still looking for a person to replace Kim Vernon, senior vice president of global advertising and communications, who left last year. The venture with Fingen, called CMI, is also said to be looking for a key person to oversee merchandising. CMI flew in 23 people 10 days prior to the show last month to make sure things went smoothly.

"I think on a global basis, particularly now with Asia developing and our brand being as strong as it is; it's a $100 million-plus wholesale opportunity during the next five years," Murry said of Collection.PVH is said to be happy to absorb the cost because it feels Collection still gives the Calvin Klein brand an overall polish.

"The Collection part of Calvin Klein is an integral part of our company," Mark Weber, chairman and chief executive officer of PVH, said. "There's no question the interest around the brand and the $100 million worth of publicity we get has to do with the Collection and not the better-price goods. Nothing pleases me more than seeing the world's greatest actresses wearing the clothes."

Weber acknowledged there are large expenses that come with Collection, such as designers, showrooms and runway shows, but noted: "We think it's a legitimate cost, weighing it against the value of the brand."

Since the CKI acquisition in 2003, PVH has added close to $1 billion in additional sales, including men's sportswear, women's sportswear and footwear, said Weber. Overall, he said, the Calvin Klein business is "generating record earnings for our company," so the cost of Collection, as well as running its own in-house advertising agency and other expenses, are part of running the business.

But if PVH is behind Collection, that doesn't mean it is ready to push the polite, soft-spoken Costa fully into the spotlight. He is creative director of women's, while Italo Zucchelli is design director for men's and Ulrich Grimm is design director for shoes and accessories. Murry reasserted there is not one single big vision, but three at Collection.

"I think the representative face of our house is Calvin Klein, whether he is physically on the premises or not," said Murry.

Klein, who continues to be a consultant for the business, is involved in advertising and keeps an office on the 10th floor. Klein declined to comment for this story.

Weber said, "Calvin Klein corporate drives the brand, but Francisco drives the brand in women's. This company is not about superstars. Francisco has distinguished himself as a young designer. He's done a great job staying within Calvin Klein's [aesthetic] and establishing himself."

Costa noted that the brand DNA is so strong that "anything that's done here gets Calvinized. You can't go too far from it."At least with WWD, Costa didn't seem too perturbed about not being the face and sole creative force behind Collection. "I don't have that big of an ego…as long as there's acknowledgement of the work," he said. "When the time comes, and it's the right thing, yes, but I think we have so much work to do now with Collection, to make it happen…that my plate is kind of full now."

PVH and CKI have two logical reasons to keep growing Collection.

"It is an image business and the bigger it is, the more image it creates," Murry said. "Also, no one wants to be in a business that loses money. And there is no reason that we can't achieve critical mass and profitability with consistent execution. We have one of the top fashion brands in the world and one of the top designers."

When asked for his wishes for the future, Costa said: "I really wish in the long term that we build this business and make it substantial, because it's a reflection on my work. Consistent manufacturing, which has been a difficult area in the past, is very important, [as is] that we continue to get the support we have gotten here. The fact that we just created the [runway] space and brought back the showroom here made that point."

That said, sources have been speculating that since Klein's departure, a power struggle had ensued between Costa and Vernon. The advertising and communications executive had begun to give herself equal billing to Costa, and several invitations to Calvin Klein-related events featured her name as a co-host with Costa. Sources said Vernon received preferential treatment on trips to Europe in Costa's early days, staying at the Four Seasons hotel in Milan during the shows while the designer stayed in small, less central hotels. Vernon could not be reached for comment. Schwartz believes "a lot of problems stemmed from Kim Vernon," but he didn't want to elaborate.

While Schwartz acknowledged that Costa went through a tough time, he believes the designer doesn't have any ill feelings toward PVH. Costa has had offers from European and U.S. design houses, said Schwartz, "[but] he loves the company and he's the perfect person to continue what we have done."The designer and Schwartz met though Costa's boyfriend, John DeStefano, who is a horse trainer, and Schwartz was responsible for bringing him into CKI. But the friendship must be putting Costa in a complicated position within CKI. Sources said relations between Klein and Schwartz are now nonexistent. Once friends and model business partners, they rarely see each other now even though they both own homes in Florida. The breakup apparently concerned details of the sale and its price to PVH.

"Calvin hasn't spoken to Barry for more than two years," one source said.

Schwartz downplayed the rift, but conceded that, since he and Klein sold the company to PVH, he hasn't seen Klein that much. "We travel in such different circles. We haven't seen a lot of each other," Schwartz said. "He's gone to South America a lot, and I've been involved with horses and the farm and was chairman of the New York Racing Association. We haven't had that much contact."

But both remain vital to CKI and to its parent, since Klein and Schwartz are large shareholders in PVH. And Schwartz, for one, believes PVH and CKI are now intent to make Collection work. Schwartz said they plan to put a sample room back in the New York headquarters, they've put in a new showroom and have started to invest a lot of money in the business. "They [PVH] are smart people. They're not going to let the Collection wither and die," he said. He added that, if he and Costa didn't believe that they were investing in the business, "we wouldn't sign a new contract."

Schwartz still has two years left on his non-compete clause with CKI and he often speaks on the phone to Murry, whom he hired many years ago.

"Tom has given me all the assurances that [Costa] will get all the support he needs to produce the collection," said Schwartz. "Francisco's future will be fine in his matter. Tom has promised me it will."

Schwartz stressed that it's imperative to keep Collection alive.

"Collection is obviously the most difficult to run, but it's the engine that drives everything else," said Schwartz. "It validates the Calvin Klein name."Tom [Murry] is very aware that you need to give validity to the licenses. Tom is running the Collection business and they have to understand the importance of it. If you stopped doing a collection, there will come a time when the name isn't important anymore."

Most financial analysts and industry consultants agree Collection is vital to the overall image of the brand.

Elizabeth Montgomery, equity analyst at S.G. Cowen, observed, "For a lot of brands, particularly the luxury brands, the Collection is important for advertising purposes so the brand stays important to the consumer. Because the Calvin Klein revenue base is primarily from licensing, and PVH does so good a job at marketing, the Collection is a lot less important for them than it would be for another company."

Richard Hodos, founder and principal of retail brokerage and consulting firm Madison HGCD, which specializes in luxury brand leasing and remerchandising, concurred that Collection is an important part of the business, which helps maintain a desire for the brand by the aspiration shopper.

"If the Collection stores and runway shows were to go away, then the brand could deteriorate because the masstige appeal of midlevel merchandise and the licensed products would diminish," Hodos said.

CKI executives believe they finally might be on the right path with Collection after struggles with production that date back to even when Calvin Klein was at the design helm and the line was licensed to Burani. Vestimenta took over the license once held by Burani and, according to Murry and Costa, Collection has been most challenged by the unraveling of Vestimenta's fortunes, which caused delivery problems and prompted stores to drastically reduce the space for Collection, or get rid of it altogether.

And even though Fingen will have the Collection license for only two years, CKI executives believe the transition of the line to Warnaco will go smoothly. For its part, Warnaco professes it also is fully behind Collection, even though it has nothing to do with the line at this point.

"We think Collection is a very important part of the Calvin Klein business," Joseph Gromek, Warnaco's president and ceo, said. "It's the umbrella for all the licensed products, which is why we signed up to do it. We believe there is growth opportunity, and we will take on the business, whatever size it will be, in 2008."Murry conceded there have been predictable "bumps" in the transition to the Fingen-run CMI, which once again will mean late deliveries of the spring Collection to retail. And even though this reinforces the trend seen at the company under Vestimenta, Murry isn't too fazed by it. "The Collection business has predictably shrunk as a direct result of poor execution. Conversely, we believe it will begin to grow back with good execution," Murry said optimistically.

But that growth will be coming from franchised specialty or department stores since CKI now no longer wants to own its own Collection stores apart from the flagship on Madison Avenue. In December, CKI closed its Calvin Klein Collection store in Dallas' Highland Park Village after 20 years, and late last month, it closed its flagship on Paris' Avenue Montaigne.

In the U.S., Collection is currently available in 27 doors, including Neiman Marcus, Saks Fifth Avenue, Bloomingdale's and Bergdorf Goodman. It also sells to two doors in Canada and, globally, in 85 doors.

"We were, quite frankly, not aggressive about trying to get additional doors for spring, because we knew the execution and delivery would be a little late as a result of the transition of Vestimenta to CMI," Murry conceded. "We will begin to get aggressive about door growth for fall and into spring '07. It's all linked to execution. Once we are comfortable with the execution, we will begin on a global basis to push hard for additional points of sale."

The issue is whether all this investment is in time to rescue the dwindling Collection business. Retailers said the problems with the line's execution over the past few seasons have dampened the potential of the Collection line under Costa, causing many to reduce the real estate devoted to it.

"The business has been challenging, but much of the challenge has been due to production and delivery issues," said Jim Gold, Bergdorf Goodman's president and ceo. "We have been in a series of meetings with them, and we know there is a new group in place. I am very confident they will tackle the challenges that have existed in the past few seasons. In spite of these problems, we are confident we can build the business, because we feel very strongly about Francisco's abilities."Many agreed Costa has proven himself in the last two seasons, which has given them confidence in rebuilding the business. "We have been really impressed with the last two runway collections," Ann Stordahl, executive vice president of women's apparel, Neiman Marcus, said. "Calvin Klein is a very small business at Neiman Marcus today, and we have good hopes for it because of Francisco's talent."

Frank Doroff, senior executive vice president and general merchandise manager for ready-to-wear at Bloomingdale's, concurred. "We have high hopes for Francisco Costa, and we're planning on going forward with it."

Bloomingdale's once had a significant Collection business in most of its doors, which slowly declined over the years. It currently only sells it in the 59th Street flagship in a space that was reduced to a rack from a prominent shop-in-shop last year.

"Francisco is a definite talent on the American design scene," said Jennifer Wheeler, vice president of women's designer apparel at Nordstrom. "We currently have the collection in six locations and hope to be able to grow the line in the future."

Not everyone believes Costa has what it takes to turn Collection around, though.

"If Francisco is such a talent, why don't his clothes sell?" a prominent industry executive said. "That's the bottom line. It's always the same. When product doesn't sell, you blame late deliveries. For years, Prada was always late, it never hit the floor, and when you called Barneys, each piece was booked already. If you're hot and late, no one cares."

- With contributions from Vicki M. Young

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