IS PENNEY’S COMING BETWEEN BIG STORES AND THEIR CALVINS?
Byline: Karyn Monget / David Moin
NEW YORK — Calvin Klein Underwear is getting under the skins of a lot of retailers, particularly the department store variety.
For years, they’ve questioned The Warnaco Group’s strategy to broaden the distribution of the premium underwear brand to discounters and warehouse clubs — it’s even sold on the Internet now — and find it particularly irksome that Warnaco has decided to sell the underwear to moderate-priced giant J.C. Penney. Warnaco’s move was first reported last Thursday in these pages.
Innerwear manufacturers that compete with Calvin Klein, however, see the development as an opportunity to bolster their positioning at department stores, and raise the possibility of Calvin Klein underwear losing some prime floor space.
As reported, Linda J. Wachner, Warnaco’s chairman and chief executive officer, plans to distribute Calvin Klein men’s underwear and women’s intimates to 400 of Penney’s 1,150 department store doors beginning in early January. Warnaco owns and distributes the line, while the Calvin Klein company creates the product and the advertising. The news that Calvin Klein Underwear is being sold to Penney’s comes at a time when the Calvin Klein business is up for sale and is being scrutinized by a number of possible suitors. Bids are said to be due within the week.
The Calvin Klein name in intimates is not only regarded as a world-class designer label, it also carries a track record of a big-time commodity and, true to the Calvin Klein legend, a strong element of controversy. When asked about the Penney’s move, Klein declined to comment and referred queries to Wachner.
As Hal Kahn, chairman and ceo of Macy’s East stated, “Between expanding distribution into chain stores, clubs, outlet centers and outlet stores, designers have got to seize control of their brands. And although Linda is making the right decision for Warnaco, this is probably not in the best interests of the Calvin Klein brand. I would imagine Barry Schwartz and Calvin Klein are very upset. I would only hope Calvin doesn’t go the way of Halston.” (For a look at the latest development for the Halston brand, see story on page 2.)
Kahn further noted that Macy’s has basically built business around brands with “limited distribution” to department stores.
“Calvin is a very big brand at Macy’s, and over a period of time, we will review our profitability, productivity and space in our locations with Calvin Klein intimates,” said Kahn. “Someone is going to have to prove to us that Calvin Klein is a label that we want to develop and expand as we approach licensed products and intimates. If it’s intimates today [at mass chains], what will it be tomorrow? It’s Wall Street that’s driving their business. Designers have lost control of their brands.”
Kahn also raised the question of whether the Calvin Klein label is too upscale for mass chains, saying, “Selling Penney’s is one thing. Penney’s selling the product is another.”
Michael Gould, chairman and chief executive of Bloomingdale’s, said, “My feeling is that this does not enhance the Calvin Klein brand. That’s not a reflection on the quality of Penney’s at all. Penney’s is a fine organization. But when you want to expand the distribution that much, to basically a chain store, you have hurt your brand. The total Calvin Klein brand is vitally important to Bloomingale’s. It’s one of three or four biggest brands in the store. The underwear has been a spectacular performer. But this dulls the luster of the brand.”
Some store executives saw the label losing some luster several years ago, as distribution widened to off-pricers and warehouse clubs. Saks Fifth Avenue, for example, dropped the men’s underwear, after a long run selling it.
Neiman Marcus carries it, in a limited way. H.W. Mullins, vice chairman of Neiman Marcus, said, “We do have Calvin Klein underwear in men’s. We’ve always been concerned about the distribution. If the distribution is further widened, it only gives us further cause for concern.”
Mullins added that the underwear is more “an accommodation” in men’s wear areas at Neiman’s, and does not represent a huge business for the luxury chain.
Bluefly, the 15-month-old off-price online retailer, sells Calvin Klein underwear. “There has been a quiet and dramatic shift of power over the last five years in favor of the brands,” said Ken Seiff, founder and ceo of Bluefly. “The cost-cutting by traditional retailers and focus on margin improvement have led them to focus their merchandise strategies on a limited number of key brands. In addition, they have forced what has traditionally been their job, such as merchandising and buying and margin responsibility, down onto the brands.
Selling Calvin’s underwear to Penney’s, Seiff said, is “a bold move, but I believe a correct one for the brand. It’s a home run for Penney’s, an absolute win for Calvin Klein consumers and a smart move for Warnaco. Traditional retailers will live with it, because there is nothing to replace it with.”
Penney’s, of course, is thrilled with its coup.
“We are excited about the opportunity to bring Calvin Klein intimate apparel and underwear to J.C. Penney customers,” said Vanessa Castagna, executive vice president and chief operating officer of Penney’s stores, catalogs and merchandising, in a statement. “We have had substantial growth and success in our intimate apparel and underwear categories with brands such as Olga, Warner’s, Bali, Jockey and Vanity Fair, and we are pleased to be strengthening our brand offering.”
Over the past several years, a pack of other megabrands — including licensees Ralph Lauren Intimates at Sara Lee Corp., Donna Karan Intimates and DKNY Intimates at Wacoal America, Tommy Hilfiger sleepwear and robes at Cypress Apparel, Liz Claiborne Intimates by Jockey International and Nautica sleepwear and at-homewear, which is produced in-house — have gobbled up space at department stores with numerous shop areas. Next year, a licensed line of Tommy Hilfiger intimate apparel and foundations will be launched by the Vanity Fair Intimates unit of VF Corp.
Vendors of branded and private label intimates said they believe the move to Penney’s will create opportunities for smaller brands at department stores, brands that have either been left out of the matrix or edited down to the bare bone. Smaller vendors complain they’ve been squeezed into areas at the back of departments many call Siberia, but could get better exposure if department stores start reassessing their big brand presentations.
Michael Fitzgerald, ceo of Wundies Industries Inc., said, “Linda Wachner fired a shot. The Calvin Klein [underwear] brand is so strong that department stores won’t throw it out. I don’t think it will hurt her department store business because Penney’s has proven it is very disciplined with the Warner’s and Olga brands. She’s really a pioneer. Calvin Klein underwear has been sold at CostCo and Sam’s Club for about two years.”
Isaac Lagnado, president of Tactical Retail, said, “Once brands germinate and mature under the umbrella of the department store, they are bid for by the chains, and at some point eventually some of the stuff goes to discounters. It’s a tough balancing for the brands to safeguard their brand equity and cache, as opposed to going for more volume. “The pencil Penney’s becomes hard to resist when you are a shareholder in a growth-driven company like Wachner’s. You’ve got to look for growth. It’s unlikely to come from comp-store sales, and new store growth from the major traditional department stores, like May Co., is of course, quite limited.”
“Big brands have got to get bigger, particularly given companies’ own aspirations and Wall Street’s insistence on growth,” added Arnold Aronson, managing director of retail strategies, Kurt Salmon Associates. “You can only look in that many places before you realize you have to move it into other channels of distribution. There’s a growing reality that the department store channel has kind of stabilized. In fact, it’s been decreasing over the last five to 10 years.
“Department stores are looking to preserve as much differentiation as they can, and brands in the last few years have been their major weapon. Any time a brand defects, department stores have good reason to be unhappy. On the other side, Penney’s and Sears have tried to get more of a department store image. The big volume they offer a brand becomes very attractive.”
Niki Sachs, president and ceo of Hanro USA, noted, “Department store retailers will now probably look at their floors in a different way. I think it will be very hard for stores to turn their backs on Calvin Klein because of the volume it delivers.”
Regarding a shakeout of megabrands on the selling floor, Sachs said, “I’ve heard that some stores are already considering that.”
As for how Penney’s does business with vendors, Carole Hochman, president and ceo of Carole Hochman Designs Inc., said, “Penney’s has this thing: After a product has been in their stores for more than 24 hours, it’s discounted. It may go in as normal margin, but they don’t maintain it.
“I’m very happy that Calvin Klein Underwear and Penney’s are doing this, because maybe it will change the course of events at major [department] stores. There already is no identification among the major stores. As soon as more brands start going to Penney’s, there soon will be no differentiation among the brands.”
One executive whose company sells designer intimates to department stores and did not want to be identified, said: “Warnaco is doing a commodity business with a designer label. Why not sell it to the high-end stores as well as chains if Wachner can cleverly do that? She had to get her shares up and she went for it.
“Manufacturers today clearly cannot rely on department stores for growth. Companies and their brands need creative ways of growing their businesses and gaining a greater share of the market. Warnaco was big enough to do that.”
Peter Keyloun, president of Ariel Designs, a division of John David Associates, said, “I think Calvin Klein Underwear going to Penney’s will set off a red flag. Department stores are already fighting Calvin Klein Underwear being sold in outlet stores and discounters — wherever last season’s overruns are dumped. They say the products are irregulars, but I’ve bought and opened the packs and they look regular to me.
“But I think the move with Penney’s is really mutiny. I’m sure the department stores will use any excuse — as they usually do, a decline in sales or margin — and they’ll throw it right back in Warnaco’s face.”
Wall Street was generally pleased with the official announcement of the distribution deal, although shares moved up only modestly. Penney rose 3/16 to 21 1/8 and Warnaco nudged up 1/8 to 11 15/16.
Todd Slater, at Lazard Freres, viewed it as a positive for Warnaco because it increases distribution of the brand to about 400 of Penney’s better doors. He also doesn’t see it hurting Calvin Klein’s image.
“Penney is not a discounter; it a full-price department store and it has made inroads with other traditional department store brands. Besides, we’re not talking about designer couture or a high-ticket item. So I don’t think putting the brand in Penney’s best stores in any way dilutes the brand.”
Leslie McCall, at Brown Bros. Harriman, also believes that since the Calvin Klein underwear brand is already “broadly distributed,” the move shouldn’t hurt the brand’s image.
“It’s a little bit of a surprise, but not huge surprise,” said McCall. “A lot of the companies have chosen to sell Penney a different brand or slightly different version of brand, but I don’t think it should really hurt the Calvin Klein brand because there are more than a few department store brands already available at J.C. Penney.”
For Penney, gaining another major name is a plus because the firm has struggled to differentiate itself without access to brands. But it’s not viewed as the savior for the struggling chain.
“I view it as positive for Penney,” said Wayne Hood, a retail analyst at Prudential Securities. “It’s always important for them to get more brands because the consumer push for brands clearly has hurt them over the last couple of years. But it doesn’t address the issue of too much clutter in the stores, and they’ll probably be getting rid of many secondary brands over the next year.”
Wachner could not be reached for comment Friday. On Wednesday, as reported, she told WWD, “Warner’s and Olga are in Penney’s, which has done an exemplary job in intimate apparel. They won’t discount, and they’ll adhere to normal sales periods.”
Calvin Klein Jeans are not part of the deal. Warnaco is licensed to distribute the jeans in North America and Mexico.
In another development, Penney’s is reportedly developing a line of intimates bearing the retailer’s Arizona private label. The line is expected to be aimed at a younger consumer who buys Arizona jeans.