NEW YORK — Calvin Klein’s strategy to turn his firm into a complete licensing operation — except for the image-setting signature women’s collection — took another big step Thursday.
Calvin Klein Inc. and Rio Sportswear Inc. have entered into a letter of intent for Rio to buy the CK men’s and women’s jeans divisions for $35 million plus ongoing royalty payments. Negotiations are expected to be completed by mid-March.
The announcement confirms reports in WWD on Feb. 2 that such a deal was pending.
Rio will acquire the assets of the jeans business, which include a laundering facility in Nesquehoning, Pa., and a sewing plant in Abbeville, S.C. According to the agreement, Rio will also receive the license to manufacture and sell Calvin Klein jeans and jeans-related products. The two firms have also agreed to launch a children’s jeans business in the future.
The transaction is similarly structured to Klein’s pending deal, announced last month, with The Warnaco Group, involving the sale of the Calvin Klein men’s underwear business and licensing agreements for men’s accessories worldwide. In that deal, which will give Warnaco licensing rights to women’s innerwear at the end of this year, Calvin Klein will receive $64 million and ongoing royalties.
“It feels very good to have reached an agreement,” said Klein in a phone interview from the Los Angeles area, which he was visiting on his way to San Francisco for a benefit fashion show Monday night. “Jeans started as a license, and now that we have our strategy to license out our businesses, it falls right into place.”
“We really believe we have been way under potential in the way of what the jeans could be,” said Barry Schwartz, chairman of Calvin Klein. “It was a several-hundred-million-dollar business when it was licensed before, and we feel we can make it that again.”
Rio manufactures and markets girls’ and junior jeans under the Rio brand, and produces under license L.A. Gear and Bill Blass jeans. It has extensive sourcing overseas, in Italy, Hong Kong, Taiwan and Central and South America.
“I think it’s unlimited — I really do — in terms of what we can do with the jeanswear,” said Arnold Simon, chief executive officer of Rio.
The jeans collection will continue to be sold under the CK label, and will be designed in-house at Calvin Klein. Rio’s Simon said he hopes to work closely with the design team.
“In a year that was tough for jeanswear, we went ahead 30 percent,” he added.
If the deal closes when expected, the new arrangement would be effective with the fall season’s collection, with most of the production concentrated in Hong Kong, Taiwan and Italy.
In addition to the manufacturing of the line, Rio will handle sales and distribution and will provide funding for advertising and marketing, although the creative effort for advertising will continue to be developed in-house at Calvin Klein’s in-house agency.
Under the new arrangement, Daniel Gladstone will remain as president of the men’s and women’s jeans businesses, becoming an executive of Rio, said Schwartz. A search is being initiated for an executive to oversee CK women’s sportswear, Klein’s bridge sportswear collection, which had also been under Gladstone.
The design studios and a showroom for the jeans business will be maintained in Calvin Klein’s offices at 205 West 39th St. Schwartz said eventually he and Klein would like to have all of the licensees’ collections housed in the Calvin Klein space. Of the decision to go with Rio, Klein said he was attracted by the options it would open in terms of better pricing and product development. “Our strengths lie in the area of designing and marketing,” he continued.
The Calvin Klein jeans business was launched through a licensing agreement with Puritan Fashions Corp. in 1978, and by 1983 — when Klein and Schwartz acquired Puritan — had reached a volume of about $220 million. But a year or so later, the volume had dropped to about $130 million.
Although executives at Calvin Klein will not confirm figures, market sources say volume for the CK casual business is currently about $150 million, although it lost about $7.7 million in both 1991 and 1992. The jeans business accounts for a most of those sales. “We took over our jeans business at a bad time, in terms of the jeans industry,” said Schwartz. “And we haven’t funded it in a proper way, in terms of advertising and general funding.”
CK jeans are sold in bridge departments of major specialty and department stores. During the last year or so, retailers have said the line has had problems selling because it is targeted toward a younger audience than the bridge customer, but is too expensive for younger shoppers.
“We definitely will revamp the pricing, and prices will be reduced,” said Schwartz, though he asserted the line would not be repositioned into a juniors or misses’ line, the current markets for Rio’s products.
“We’re looking to build a big business but we’re not going mass or breaking any new ground with distribution,” Schwartz added. “We’ll stay with our current stores.”
Klein said he was excited about the ability to lower prices because of Rio’s volume and sourcing options.
“Part of the whole strategy is being able to have a different pricing structure,” he noted. “A designer name on a product is not enough anymore. It has to be well designed, made and priced. We were not able to lower the prices on our own.”
An interesting dimension to the agreement is that Rio is currently in negotiations with Oshkosh B’Gosh, one of the largest children’s wear makers in the U.S, which announced in September its intentions to buy Rio. Simon confirmed that negotiations are ongoing, and will involve the sale of all of Rio’s businesses to Oshkosh, although he would remain in control of the CK jeans business.
Both Klein and Schwartz said they are perfectly comfortable with the pending Oshkosh deal.
“We have no problem with it,” said Klein. “I think it would be great.”