NEW YORK — Some marital discord may be inevitable in the future, but the designer, retail and financial communities lavished praise on the union of Calvin Klein’s design and marketing talent and Phillips-Van Heusen Corp.’s financial, operational and sourcing strengths.
This story first appeared in the December 19, 2002 issue of WWD. Subscribe Today.
Analysts applauded the partnership as a way for PVH to step decisively into the apparel industry’s top tier of suppliers, elevating revenues and margins that have stalled in recent years, and bring a largely pristine designer name with widespread appeal to the masses. Meanwhile, other designers envied Klein’s ability to finance and promote his collection, while continuing to expand his megabrand in a way that might never be replicated.
But Klein’s agreement to sell his designer collections, his luxury retail operations and all the licensing rights to his name to a company more associated with men’s dress shirts also raised a lot of questions, especially in relation to how the Calvin Klein franchise would be impacted by the demands of Wall Street once it becomes part of the publicly traded PVH.
PVH shares dropped 5 cents, or 0.4 percent, to close at $12.49 in New York Stock Exchange trading Wednesday.
Some asked whether PVH’s intentions to push the Calvin Klein brand into better-priced sportswear would impact the image of the designer collection or whether PVH would continue to produce the designer line in-house, or once again license the collection to an outside manufacturer. One thing that is clear is that changes will be coming soon, as Bruce Klatsky, chairman and chief executive officer of PVH, said Wednesday that he wants a women’s better-priced Calvin Klein collections in stores by 2004.
“That means we’ll probably do something in the first quarter,” he said, noting that several major apparel companies had approached PVH following the confirmation of the acquisition on Tuesday.
Several designers applauded Klein on his decision, although under similar circumstances, few volunteered that they would have done the same. What interested many people who work with similar goals of building a designer brand — those who have followed the European trend of taking back control of ancillary products and avoiding secondary lines — is Klein’s interest in pursuing a situation that would likely result in more licenses, as well as his distribution to more department stores with lower-price offerings.
But Klein, unlike many other designers, hasn’t been confronted by a glut of licensees.
Some questioned whether Klein’s partnership with PVH would really mark a turning point for designer strategists, either indicating that the scales might tip back toward licensing or back toward broadly distributed designer diffusion brands, but they also pointed out that Klein’s timing appears to be right. Retail spending analysis has pointed that sales of apparel have continued to trend toward luxury items at the very high end or toward goods that are very low priced and considered disposable fashion, with a widening void in between.
“The things Calvin has put his name on so far are really strong in terms of his brand image,” designer Peter Som said. “That is something he has done very well in expanding his range beyond clothing, while still giving cachet and credence to what his core collection is all about. If PVH takes what Calvin has done and continues with that, I think it could really be well done.”
However, Som and other designers who are at the beginning of their careers questioned whether the future will offer them the same opportunities to develop into a megabrand like Calvin Klein.
“It seems like the landscape of the fashion business has changed so drastically from when he started,” Som said. “It seems very tough to grow a business in a way that is really effective these days. There are a lot more obstacles in the way. There’s a huge press buildup for so many designers today that it seems to happen so soon that it’s almost too much to handle.”
Bill Blass designer Lars Nilsson similarly expressed some concern that the megabrands Calvin Klein helped to establish might be adversely affecting smaller designers. “In business today, you have to get together with a bigger company to have better distribution and to have more secure spots in certain stores, but that also makes it harder for a small designer to start today,” he said. “It’s tough to be a designer with a vision that takes 10 to 15 years to build, when everyone is asking, ‘Who’s going to be the new Calvin Klein?’ People want results in six months today, not six years.”
As for their interest in licensing, several designers felt that the lessons learned from over-extension in the Eighties continue to make them leary of many proposals. “I don’t think licensing is going to be the wave of the future,” Tuleh designer Bryan Bradley said. “This is good for Calvin, but I don’t think it signifies anything more than that.”
“It’s a great pay day for a company that basically started out as a rain coat,” added Bud Konheim, chief executive officer of Nicole Miller, referring to Klein’s entry into the outerwear business in 1968.
“There’s a mixed message in the world about how a designer can sell out to a mass distributor, but you don’t get $700 million if they’re confining their sales to Bergdorf Goodman,” he said. “We’re all in business. Why doesn’t everybody wake up to that? You’ve got to be schizophrenic to be a designer and not think about making money. If they didn’t make a deal like this and just did more of the same, it would have been like endorsing the idea that they are aloof and above it all. You almost got that idea when they had the fight with Linda Wachner — that they were off mass distribution. But that’s not the case.”
Lee Backus, senior vice president and analyst at Buckingham Research, professed that he “loved the deal. I love that [the Calvin brand] does close to $2 billion of wholesale business without a footwear or a sportswear business to speak of. I love that 40 percent of the business is done internationally and that the brand has such international appeal. You go into the department stores and you see these monuments to Ralph Lauren, Tommy Hilfiger and Nautica, but the only thing you see for CK is fragrances and underwear, and for that they spend $200 million in advertising a year.”
He said he expects that, at some point in the future, either PVH or VF Corp. will acquire some or all of Warnaco’s CK business. “That will happen eventually, but not right now,” he said.
Prospective licensees for women’s sportswear include Liz Claiborne but not Jones Apparel Group, which has a number of licenses from Polo Ralph Lauren, or Kellwood Co., which is busy launching Izod women’s sportswear under license from PVH.
Backus noted that PVH “was off everyone’s radar screen, and now here they are front and center with control of a major international lifestyle brand. They’ve been no-growth and low-margin and will immediately have growth and improved margins.”
At Wells Fargo Securities, analyst Jennifer Black noted, “I think it’s a fabulous deal — a pivotal point for PVH. PVH gives Calvin Klein a very solid platform to grow the business. I’ve covered PVH for a long time and I think they are very good at doing their homework.”
She said she isn’t concerned about a culture clash either: “The incentives given to Calvin Klein and the way this whole deal has been structured — I don’t see any ego clashes at all. PVH is a company where the people have no egos. They give back to the community.”
At C.L. King and Associates, analyst Thomas Lewis praised PVH’s brand management instincts. “They just about brought Izod back from the dead, and they just do everything right when it comes to distribution and marketing of their brands,” he said. “The Calvin Klein people have the experience and expertise to license their brand internationally, a skill the PVH people don’t really have, which is another benefit. I don’t look for a whole lot of Calvin Klein outlets right away, but you have to look for those somewhere down the road. PVH knows how to do outlets and they do them very well.”
He even rated PVH and CKI as having a good shot at avoiding the friction that often accompanies designer-parent relationships. “It will be really incumbent on the leadership of PVH to make sure the inevitable frictions do not become problems,” he asserted, “but I’ve know Bruce Klatsky for a long time and I think he’s up to it.”
Fashion directors at stores that carry Klein’s high-end collection generally were enthusiastic about the move as well, considering the deal would logically give the designer the financial ability to further its growth.
“This will free Calvin up to focus on his collection and his creativity,” said Robert Burke, vice president and senior fashion director, Bergdorf Goodman. “Right now, I feel Calvin is at his best. This last spring, you couldn’t have asked for a better collection. It was feminine and still modern, merchandised beautifully, with great prints and beautiful fabrics.”
Bergdorf’s carries the designer’s collection, swimwear, shoes, accessories and coats. “Clearly, there is enormous growth potential for this brand,” Burke added. “On the whole, while the brand has been well recognized, as the modern American designer for men and women, it has not been attainable to the general population,” aside from the licensed products.
Other retail sources said PVH could end Calvin’s difficulties on the production and logistics side of the business and allow him to focus more on designing.
“As long as he retains creative control, it seems like the company is going to have money infused into it, which is always a good thing,” said Jaqui Lividini, senior vice president fashion merchandising at Saks Fifth Avenue, which carries the designer’s shoes, coats and handbags. “This past spring collection was one of his strongest. It had the essence of Calvin, but also a femininity or softness to it that was really quite beautiful.”
Kal Ruttenstein, senior vice president of Bloomingdale’s, added that the expansion of the Calvin Klein franchise offers a lot of opportunities for the chain. “We did well with Calvin’s CK bridge sportswear, which unfortunately disappeared. We would do really well with better sportswear under the name Calvin Klein. His name is well known, and he was one of the first American designers to have a shop at Bloomingdale’s,” he said. “We have a core Calvin customer. The collection will do well this spring. It’s an amazing collection.” In addition to the collection, Bloomingdale’s sells Calvin’s underwear, jeans, fragrance, coats and accessories.
Moody’s Investors Service put PVH’s debt on review for possible downgrade following news of the planned acquisition. The review will focus on the “impact of the financing package to the capital structure and credit statistics of the combined company,” said the rating agency in a statement. “The review will also incorporate the expected benefits to PVH that should derive from the acquisition of CKI.” Currently, PVH’s senior implied debt rating stands at “Ba2,” two steps into speculative or junk territory.
Moody’s fixed income analyst Catherine Guinee noted, “This is a very good acquisition for them, the ratings review is just looking at the financial implications.” The CKI business is the kind of acquisition PVH has been looking for, she noted, in that it’s “a solid brand, not a broken brand and one where they could use their expertise in licensing, outlet stores and solid back office operations to grow the business.”
Standard & Poor’s said the deal would have “no immediate impact” on its ratings of PVH’s debt, which rests at “BB.”
“Calvin Klein represents a unique opportunity for Phillips-Van Heusen to strengthen its brand offerings and provides it with a new avenue of growth,” S&P said in a statement.
Joseph Abboud, the men’s wear designer whose grievances against GFT USA and its various parent companies recently culminated in his filing a lawsuit against them, noted, “I think it’s good for Calvin and Barry, and I think it’s good for PVH. It opens up the market for acquisitions of other companies, too.”
But, reflecting on his own assimilation difficulties, he concluded that acquisitions and alliances of this sort don’t always perform as expected or hoped: “They all sound pretty beautiful when you head into them, but they don’t always come out beautifully on the other side.”