NEW YORK — Something was missing from New York Fashion Week last September. The Kenneth Cole New York show, which traditionally kicks off the week on Friday morning, was notably absent.
The move is all part of Cole's strategy to take his brands upmarket and get profits back on track.
"What you saw for spring was a good first step, but it's not there yet," said Cole, who instead of a show held a private presentation of the spring collection in his SoHo store in October. "We traditionally created clothes for the runway, but for this to really work, we need to create product for the customer."
The switch is the public symbol of even more significant internal changes at the $474 million company. With an almost entirely new management team — including brand presidents for the first time — the firm is elevating its Kenneth Cole New York brand from its former better status to what executives are calling "affordable luxury" — as in, contemporary — and at the same time positioning the Kenneth Cole Reaction label as a lifestyle brand that has taken over where the New York line left off.
"We made a big strategic decision about three years ago. We took a good hard look at not just the business, but also the brand and the customers," Cole said, "and we realized we can do this better. We made it our corporate purpose to create two individually viable brands that both serve a distinct customer."
Liz Dunn at Prudential Equity Group LLC labeled the strategy "lift and separate," and Allan Ellinger, senior managing director at Marketing Management Group, said Cole's strategy was dead-on.
"Historically, it has been harder to go up than down, but the redefining of the department store tier of distribution that just occurred will make it easier for some of the better brands to trade up. Brands, like Kenneth Cole, who trade at the higher end and have national recognition, will find it easier to trade up, and their success depends on how well it is presented and defined with clear demarcation between their best and better."
With a new management team and business plan, Kenneth Cole's brands may not be the only thing on the rise. As the product improves, Cole hopes its earnings will, as well. For the first nine months of this fiscal year, income dropped 27.9 percent, to $18.8 million, or 92 cents a diluted share, from $26.1 million, or $1.28, despite a 4.3 percent increase in revenues, to $401.5 million from $385 million. While wholesale contributes the most to the firm's top line, and licensing is highly profitable, retail — with 54 domestic stores — has been a drag on profitability for nine consecutive quarters of sales declines.Although analysts are optimistic about the firm's long-term direction, in the short term, numbers likely won't improve, as the company takes hits from reclaiming its Kenneth Cole New York women's sportswear license from Paul Davril Inc. After third-quarter results were released earlier this month, management said it expected to lose $5 million to $6 million in royalty revenue, plus $3 million to $4.5 million in advertising contributions, suggesting a potential 27-cent hit in 2007, though the company declined to give guidance until the fourth quarter report.
Since the repositioning began, Reaction is leading the way with an 82 percent increase in sales. Today, it is "an entire lifestyle brand" with 30 categories, with new product lines including men's and women's sportswear, which was launched in spring 2006.
"We took some of the businesses that should have been Reaction but weren't and made them Reaction," Cole said, "and we made Kenneth Cole New York the flagship brand, with elevated quality of design, quality of product and quality of distribution."
Reaction prices resemble those of the former New York line; women's sportswear ranges from $69 to $189; shoes, from $49 to $198, and handbags, from $78 to $178 at retail. The new Kenneth Cole New York line has approximately doubled in price to $118 to $350 for sportswear, $120 to $495 for shoes and $188 to $998 for handbags. After gauging customer response, the company lowered the price floor on the New York line.
Reaction took over the firm's existing accounts at Macy's and Dillard's, and Kenneth Cole New York aims for Neiman Marcus, Bloomingdale's, Nordstrom and Saks Fifth Avenue.
Saks and Cole have collaborated on launching outerwear and the RSVP fragrance, in partnership with Jon Bon Jovi, exclusively at the retailer. In addition, Saks started carrying Cole's men's footwear for fall, but at this time has no plans to sell other Kenneth Cole New York products.
"As each of his product categories evolve and develop, we hope we can find a place for them," said Ron Frasch, chief merchant at Saks Fifth Avenue. "It's less about the individual categories than the decision we have made that the Kenneth Cole brand is a good match for Saks Fifth Avenue, whereas a year and a half ago we would not have had this discussion, because of the new business strategy Kenneth has developed, combined with his great management team and personal vision."Selling primarily in Kenneth Cole stores for now, the New York line is more of a work in progress. The firm just reclaimed its women's Kenneth Cole New York sportswear license from PDI a year early. PDI began with the spring 2005 line, taking the reins from Liz Claiborne Inc., which had produced the brand's apparel since 1999. During the course of 2007, the sportswear will shift hands, and in-house designers will produce their first full line for women for fall 2007 and for men for spring 2008. The full impact of the firm's total control over the label won't be evident until spring 2008.
Cole has created brand president positions — "keepers of the brand" — whose primary responsibility is ensuring both consistency and quality over every category of their brand, both licensed and in-house.
"We need to get all parties to work together so the shoes look like the bags, the watches relate to the jewelry and the fit of the denim is consistent with the woman who would wear the handbag," Cole said. "We now have direct control over sportswear, shoes and handbags, which are all defining elements of the brand."
Kenneth Cole New York brand president Joshua Schulman, the most notable addition to the revamped executive roster, added, "Every important designer brand has control of its flagship categories."
Just moving into his post this month, Schulman came from Gap Inc., where he was concurrently managing director of international strategic alliances for Gap Inc. and senior vice president for international product development and merchandising for Gap brand. Before that, he worked at Gucci Group as executive vice president of worldwide merchandising and wholesale for Yves Saint Laurent, during the makeover of that brand.
On the Kenneth Cole Reaction side, Doug Jabukowski recently was named president. Formerly president of Perry Ellis men's wear, Jabukowski joined the company as senior vice president of Kenneth Cole Reaction in August 2005.
Joel Newman was named chief operating officer of Cole in February, replacing Paul Blum, who resigned a month earlier. Newman came from Tommy Hilfiger. In January, Richard Olicker joined as executive vice president and president of wholesale. Olicker, formerly president of Steve Madden, will help position the brands and create faster fashion, according to analysts. The firm hopes to cut a month off its turn time.Also in January, Henrik Madsen was named senior vice president and general manager of international operations. Coming from Jones Apparel Group's Kasper Europe division, where he was ceo and president, Madsen will help guide international expansion. International sales represent only about 2 percent of sales, but could grow to up to 30 percent, Dunn predicted.
On the third-quarter conference call, the firm said Jeff Cohen had filled the role of president of its outlet stores, a division that produced great returns in the third quarter. Analysts think the newly labeled "company stores" will continue to produce under a new strategy that allows them to do their own buying instead of serving simply as a clearance channel for products.
The only major remaining spot is head of the retail division, after Carol Sharp left in April. Newman and Cole have been handling her responsibilities.
"We are impressed with the executives that have been hired this year and believe in the strategy long term, as well," Dunn said in her report on the company. "The additions are all seasoned executives who have been successful in previous roles at other companies. We think fresh input and new skill sets have the opportunity to be a very big catalyst for Kenneth Cole. However, we do get the sense that Kenneth Cole is a dominant leader and sometimes his ideas supercede other executive input."
With his presidents in place, though, Cole said, "now I will be operating more at 20,000 feet."
From that vintage point, Cole plans to return to the runway when the product is ready — definitely by next September for the spring 2008 collection — if not for February. And this time, the product shown on the runway will be the product sold in stores.
"One is invariably more proud of what is a better product," Cole said.
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