NEW YORK — The CK jeanswear business is back in play.
Fruit of the Loom said Tuesday it has terminated its negotiations with Calvin Klein Inc. to acquire the company’s jeanswear division. The two organizations have been negotiating since mid-April.
“The major reason was we just couldn’t reach an agreement on what we felt were some fundamental issues, including a definition of the product line,” said William Farley, chairman and chief executive officer of Fruit of the Loom, in a telephone interview from Chicago where FTL is based.
“The truth is we’re not in negotiations anymore,” said designer Calvin Klein, who is vice chairman of his company. “We both agreed this is not going to happen. There was some misunderstanding about product categories in the jeanswear collection.”
This latest development could be a setback to Klein’s plan to turn all of his businesses — excluding the Collection — into licensing operations. However, sources said that since a letter of intent with FTL expired in late May, Klein has been engaged in discussions with other U.S. manufacturers for the jeanswear license, and another deal might be in the wings. Klein declined to comment on a new jeanswear deal.
Discussing the collapse of the talks, Farley noted, “I do think it’s disappointing. I do think it was frustrating. We’ve done a lot of deals over the years; we’ve made a lot of acquisitions and have a good record of consistency, saying we’re going to do something and sticking to it.”
Farley said the main problem stemmed from FTL’s wanting to do more categories than just denim jeans.
“We felt the definition should be more inclusive than exclusive. Is it just denim? Or is it more into knits and wovens? We wanted the definition broader. For months we had an agreement it was to be a broad definition. But just recently the definition changed, and they wanted it exclusive.”
For future growth, Farley said, FTL needed a broader product line.
“Denim has a way of going up and plateauing,” he said. “If you have denim, knits and wovens, you can maneuver a business. If you’re in strictly a denim situation, you’re more confined.”
Farley said there were other business issues that prevented the deal, including the “calendarization of the product introductions,” which means on-time debuts of product lines that would be designed by Klein’s staff.
“We wanted specific calendars and then significant penalties if the calendars weren’t met,” he said.
Farley said the jeans would have remained at the $45 level, a move that Klein had already made, taking the product down from a $60-and-above price range.
Farley said he had planned to take the CK Jeans business into Europe through FTL’s expansive distribution channels. The company does a sizable business in Europe selling FTL casualwear, said Farley, who thought that would have been an attraction. FTL does $350 million in wholesale volume in Europe, he noted.
Farley said he had been negotiating with a group that included Schwartz, Klein and entertainment tycoon David Geffen, the designer’s friend and adviser.
In addition to the problems enumerated by Farley, Klein reportedly had some concerns that FTL didn’t have the relationships needed with department store executives for his product, since the thrust of FTL’s business has been with mass merchandisers. Klein declined comment on that.
Farley said the deal would have included purchasing the CK Calvin Klein women’s and men’s jeans business for between $40 million and $50 million, as well as the purchase of receivables, inventories and plants. There would have also been long-term royalty payments to Calvin Klein, renewable every 10 years.
This is the second deal that’s fallen through for Klein’s jeanswear. Earlier this year, Klein was negotiating with Rio Sportswear. A letter of intent was signed for Rio to buy the business, for about $35 million plus ongoing royalty payments.
The deal reportedly collapsed due to personality differences between the designer and Arnold Simon, president of Rio. Klein then began negotiations with Fruit of the Loom. In May, the Federal Trade Commission gave Fruit of the Loom the green light to buy CK Calvin Klein jeans.
The CK jeans business is reportedly a $100 million operation and accounts for the bulk of the volume done by the designer’s CK label, which also covers bridge sportswear.
In March, Klein sold his men’s underwear business to The Warnaco Group, which also licensed the trademarks for men’s accessories worldwide. Warnaco will acquire the worldwide rights to Klein’s name for women’s innerwear when the U.S. license for that business expires at the end of the year.
The deal for the men’s underwear and accessories was worth $62.5 million, and there will be additional royalty payments on the men’s underwear once the business, currently doing about $70 million annually, tops $200 million.
Farley said he was not currently negotiating for any new licenses.
In addition to underwear, FTL’s main products are casualwear, imprinted activewear, family socks and sports-licensed apparel.
For its first quarter, FTL’s earnings dropped 43.1 percent, to $25.1 million from $44.1 million. Sales rose 2.2 percent, to $438.2 million from $428.9 million.
Farley acknowledged that FTL performed “so-so” in the first quarter, but the second quarter “has gotten very strong.”
“We think the third and fourth quarters will have good comparisons to a year ago and 1995 should be excellent,” he said.
Turning to Gitano, which FTL acquired in March for $100 million, Farley said, “The challenge is simple. To regain our distribution in Kmart and Target and in the regionals and to show some product differentiation to retailers.” He said he has a substantial presence in Wal-Mart. “We’re making good progress in the second half of 1994.”