Steeped in fashion and financial lore, Warnaco Group Inc. has had a highly volatile and storied past — and a lot of it revolves around Calvin Klein.
This story first appeared in the November 1, 2012 issue of WWD. Subscribe Today.
Linda J. Wachner, a former foundations buyer at Macy’s Herald Square who served as Warnaco’s president, chairman and chief executive over a 15-year span, led a leveraged buyout with an investment group in 1986, wresting control of Warnaco away from existing management. Observers say the move was akin to those of other Nineties buyout specialists such as Henry Kravis, Saul Steinberg and Ronald Perelman.
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Wachner and her group paid 14 times cash flow — $500 million in borrowed money and a $200 million revolver for working capital — at a time when the going rate for that kind of deal was about six times cash flow. Warnaco went public in 1991 at $20 a share, effectively $10 a share based on a two-for-one stock split in 1994, the same year it completed the purchase of the business and trademarks of Calvin Klein Inc.’s men’s underwear and a license for the trademarks in Calvin Klein men’s accessories worldwide. By 1996, Wachner had taken Warnaco from a $425 million-a-year apparel smorgasbord to a sharply focused, branded apparel maker that generated sales of $1.06 billion. Wachner said the Calvin Klein name gave Warnaco a major entry into the men’s underwear business worldwide, while adding a strong designer name to the group’s core innerwear portfolio.
Warnaco’s bread-and-butter brands are Warner’s and Olga, both basic bra labels sold mainly at department stores.
The 128-year-old Warner’s specializes in seamless bras, average sizes and proprietary post-molding applications. The Olga brand is reportedly the second-best-selling bra brand and Warner’s is the third at department stores.
Diversifying the product mix is one way Wachner continued to grow Warnaco’s empire. Warnaco’s aggressive acquisitions posture took shape in 1996, when it made three major purchases: GJM, a $100 million private label maker of sleepwear based in Hong Kong, which does Calvin Klein sleepwear; Lejaby-Euralis, a $120 million manufacturer of Lejaby bras and swimwear in Lyon, France, and Body Slimmers Inc., a shapewear specialist with estimated 1996 sales of between $30 million and $34 million.
However, the crown jewel was the Calvin Klein Underwear and Jeans brands. Warnaco bought the accessories business from Calvin Klein Inc. in 1994 in a deal worth $62.5 million ($38.5 million in cash and $24 million in Warnaco common stock), plus ongoing fees. In late 1997, Warnaco acquired Designer Holdings Ltd., the maker of Calvin Klein Jeans, in a deal worth about $354 million. At the time, the pact gave Warnaco one-third of the $2.5 billion Calvin Klein worldwide money machine.
Warnaco’s series of acquisitions in a little more than two years had positioned it as a world-class competitor with only two real rivals in the Nineties: Sara Lee Corp. and VF Corp.
The relationship between designer Calvin Klein and Wachner wasn’t always a smooth one, though. Calvin Klein grew increasingly frustrated over the distribution of the underwear and licensed jeans lines in discounters and, in 2000, CKI sued Warnaco and Wachner for federal trademark violations and breach of fiduciary duty and contract. Warnaco countersued in one of the highest-profile lawsuits in fashion history.
Klein publicly referred to Wachner as “a cancer on the industry.” But the designer and Wachner famously kissed and made up in January 2001. The lawsuit, settled moments before trial was set to begin, added legal costs to Warnaco’s highly leveraged financial structure. The mudslinging and unsavory nature of the spectacle in national print and on TV — including an appearance by Klein on CNN’s “Larry King Live” — caused erosion in investor confidence.
All of it toppled Wachner’s empire and Warnaco filed for bankruptcy in June 2001 with $3.1 billion in liabilities and $20 million in monthly debt payments. Wachner was succeeded as ceo in May 2001 by Antonio Alvarez, a turnaround specialist brought in as chief restructuring officer. Wachner left the company completely that November.
Warnaco emerged from bankruptcy in February 2003, and turned a page that month when it named Joe Gromek as its new ceo. Market observers said the story of its turnaround effort was by no means over. But Gromek, who had served as chairman and ceo of Brooks Brothers, curbed the company’s sales erosion and successfully put it back on track. Gromek retired in February, and Warnaco named Helen McCluskey president and ceo. McCluskey was formerly chief operating officer, a post she was promoted to in October 2010.