THE AGE OF THE IPO: FASHION EXECS WEAR CROWNS OF ROYALTY
NEW YORK — Fashion’s perks are getting pricier: Private planes, weekend palaces, fleets of cars and art by the modern masters, to name a few.
Many a fortune has been made in the fashion business, but the take has gotten larger over the last three years, thanks in part to a rash of public stock offerings.
What used to be millions has translated into tens of millions and, for some, tens of millions has translated into hundreds of millions. There’s even a handful of billionaires.
From licenses, to stock sales, to huge paychecks supplemented by options and awards — fashion executives are earning big.
Calvin Klein, Donna Karan and Ralph Lauren are raking in tens of millions in royalties, simply by licensing out their names. Calvin Klein, for example, just received a check for $32.6 million for design and royalty fees from one of his latest licensees, Designer Holdings, which makes the CK Jeans line. And Donna Karan and her husband, Stephan Weiss, were paid $13.9 million alone last year for licensing Karan’s name to the company.
Company founders and families, such as the Lauders of Estee Lauder and Sidney Kimmel at Jones Apparel Group, are setting a new compensation standard, getting huge payouts from selling stock in their companies.
On the investor side, Investcorp for Gucci Group N.V. and Tommy Hilfiger’s Far East backers have made a killing in the stock market. Meanwhile, a number of top executives such as Linda Wachner, at Warnaco Group and Authentic Fitness are taking in hefty salaries, along with stock options and restricted stock grants worth millions.
Forbes magazine’s annual ranking of the 400 richest Americans has consistently included a few fashion-industry tycoons. Last year, several billionaires, namely Nike’s Philip Knight, Leonard and Ronald Lauder, Ralph Lauren and The Limited’s Leslie Wexner were among the top 100.
Knight ranked number six, with a net worth of $5.3 billion; the Lauder brothers placed 44th, with a net worth each of $2.1 billion, and Lauren and Wexner tied at 82, with net worth of $1.3 billion apiece. Gap’s Donald Fisher came in at 90, with a net worth of $1.2 billion.
Lauren stands an excellent chance of moving up on the list this year, as his impending IPO is expected to net at least $600 million, which he’ll share with his minority partner, Goldman Sachs. On top of that, the designer will still have a commanding share of stock — likely worth over $2 billion — and early indications are the issue will be in hot demand, further running up Lauren’s fortune.
But when it comes to executive compensation, the fashion industry still falls short of many other industries. In Business Week’s Executive Compensation Scoreboard, published last week, none of the fashion industry’s chief executive officers made the top 20 in executive compensation — populated by such companies as Green Tree Financial, Intel, Travelers Group, H.J. Heinz, Mattel and Union Pacific — whose ceo’s pulled in total pay anywhere from $102 million (Green Tree) to $21 million (Union Pacific).
Further down the total compensation scale were such fashion ceo’s as Liz Claiborne’s Paul Charron, who pulled in $2.17 million in 1996; Nike’s Knight, who earned $1.85 million, and VF Corp.’s Mackey J. McDonald, who received $2.2 million, according to Business Week.
Information about the way Seventh Avenue fills its pockets is becoming clearer as more and more companies tap the market with public offerings.
Lauren has it all — a highly lucrative licensing operation, a fat paycheck and, most importantly, a controlling 70 percent interest in his firm.
The designer, who is in a quiet period, declined comment for this story. But Lauren should get a tremendous payback for building his $2.5 billion empire, which includes all sales of Polo products, including licenses that produced $110 million in royalties last year.
Tommy Hilfiger Corp., largely seen as Lauren’s main competitor, is currently valued on the stock market at about $2 billion, but Lauren is substantially bigger.
For example, Lauren dwarfs Hilfiger both in size (sales should reach over $1.2 billion in its fiscal year ended March 30 versus about $650 million for Hilfiger) and in royalty income (Lauren’s licensing income should reach $130 million this year compared with about $30 million for Hilfiger).
Excluding any benefit from the IPO, Lauren has been adding to his fortune over the years, and, as the ultimate purveyor of lifestyle, putting his proceeds to good use. He’s got a 14,000-acre Double RL ranch near Telluride, Colo., where he raises cattle, as well as a lordly French limestone-floored mansion on 200 acres in Bedford, N.Y.; a sleek white Fifth Avenue duplex, a Japanese-inspired house in Montauk and an Anglo-Indian villa in Jamaica, not to mention all his valuable antique cars.
In fact, even without going public, the Lauren relationship with Goldman Sachs has been fruitful. By selling a 28.5 percent stake to Goldman in October 1994, Lauren received $135 million. In addition, under an agreement set up between Lauren and Goldman, Lauren received partnership distributions of $47.3 million in the most recent nine months ended Dec. 28 and $41.1 million for the full year ended March 1996. Lauren also received $3.5 million in salary last year.
Goldman received $19.3 million in “partnership distributions” in the most recent nine months and $18.8 million in fiscal 1996.
While Calvin Klein has resisted the temptation to go public, his conversion in 1994 of his business from a manufacturing operation to a licensing company, with the exception of the Collection business, has paid off. Patterned after his highly profitable fragrance license, these moves allowed Klein to pull in royalties in excess of $100 million in 1996.
In March 1994, Klein sold the trademarks and the business of his men’s underwear and women’s intimate apparel and licensed the rights for men’s accessories to Warnaco Group for $38.1 million in cash and 1.7 million shares of Warnaco stock. The stock, worth $22.8 million at the time of the deal, has risen in value to $53 million.
The Warnaco deal allowed Klein to erase a $58 million loan from Citibank, leaving his company debt free. Klein had used the Citibank loan to buy back his bonds from entertainment tycoon David Geffen, who bailed the designer out of financial troubles in 1992.
Klein in August 1994 received another $45.9 million from the sale of the business and licensing rights of his CK Jeans operation to Designer Holdings.
Under amendments made in April 1996, Klein was given 1.28 million shares of Designer Holdings, currently worth about $12 million, down from $40 million at the stock’s peak last year.
Nevertheless, the good times continue to roll. Just last week, Calvin Klein reported it received $32.6 million in design and royalty fees from Designer Holdings, as sales of the CK Calvin Klein line ramped up 29.4 percent to $466.7 million. Klein also gets royalties from shoes, a home collection, other accessories, as well as his golden $700 million fragrance business, where Klein collects a $38.5 million royalty from Unilever.
Despite a well-known disappointing initial public offering, Donna Karan and Stephan Weiss have also picked up a bundle since going public.
Karan, ceo of Donna Karan International, and Weiss, who is vice chairman, received $58 million as reimbursement for corporate taxes the two paid on profits in prior years. Another $5 million in proceeds went to Gabrielle Studio, which controls the rights to the various Donna Karan trademarks and is owned by Karan and Weiss.
In fact, the Gabrielle Studio agreement — essentially payment to Karan and Weiss for allowing the company to use her name — has proved to be lucrative. As noted, the designer and Weiss received $13.9 million in royalties last year under the licensing agreement. And the bigger she gets, the richer she gets: The Gabrielle Studio agreement provides for annual royalties of 1.75 percent of the first $250 million in sales, plus 2.5 percent of the next $500 million, plus 3 percent of the next $750 million, plus 3.5 percent of all sales over $1.5 billion.
Karan’s sales last year advanced 21.4 percent to $612.8 million.
On the downside, Karan and Weiss’s 24.3 percent stake in the company has lost more than half its value since going public at $24 in June 1996. Donna Karan closed Wednesday at 11, down 1/4 on the New York Stock Exchange.
The couple’s 5.3 million shares are now worth $58 million at current prices, down from $127 million at the time of the IPO.
In the Karan IPO, $58 million went to Tomio Taki and Frank Mori (the Takihyo Group), original financial backers of the designer company.
Whatever the market’s gyrations, Karan’s net worth has zoomed up, but the designer has yet to radically change her lifestyle. She’s still a renter on New York’s Upper East Side, where she’s lived nearly 20 years. A self-professed flea market and antique junkie, when asked by WWD if she collects anything particular, Karan said, “Yeah, floor plans. I’ve been looking for an apartment for five years!”
For weekends, however, Karan’s got a two-story, eight-room, 4,000-square-foot, bleached-wood beach house overlooking Gardiner’s Bay in East Hampton, N.Y.
Karan joined three other fashion companies — Mossimo Inc., Designer Holdings Inc. and Guess Inc. — in floating disappointing IPOs last year, and the heads of all these companies could reap tens of millions by putting some life into their depressed stocks.
Mossimo, Designer Holdings and Guess each went public in offerings priced at $18 a share, but the stocks have since lost around half their value. On Wednesday, Mossimo closed at 9 7/8, up 1 3/8, Designer Holdings at 8 1/4, up 1/4, and Guess at 11, up 1/8.
Nonetheless, Mossimo Gianulli, Mossimo’s designer and ceo, received $33.5 million from the sale of two million shares in Mossimo’s February IPO.
Mossimo’s stock soared to a high of 51 1/8 before collapsing to the single digits over earnings concerns. Gianulli, clearly feeling the crash of his firm’s stock, holds a 73 percent stake in Mossimo, or 11 million shares, worth $109 million. A lot of money, to be sure, but quite a plunge from the $560 million it was worth at the stock’s high point.
Describing the roller-coaster ride last year, Gianulli told WWD, “We didn’t execute to the degree we should have. We’ve been treated justly by Wall Street. I have 11 million shares. I’m making business decisions that will affect the company long-term.”
Gianulli said he doesn’t check the stock prices every day, otherwise it would drive him nuts.
“It’s not reality. The number we were trading at [51 1/8] wasn’t real, and the number we’re at today isn’t real. Although I’m cognizant of the market and want to do the right things for the shareholders, it’ll make you crazy,” said Gianulli. “I’m not concerned with what’s happening in the market. It’s a fickle business. We grew the top line 51 percent. The company still made $10 million last year.”
Still, Gianulli has no regrets about going public.
“I realized the market was doing very well at the time. It seemed to make sense. I wouldn’t change it for the world. I wouldn’t change a damn thing. I’ve got a long run at the company,” he said.
“Going public gave me a chance to diversify my own portfolio. I owned 100 percent of the company. I maintained 70-plus percent. We’re so young in our growth curve,” added Gianulli.
Gianulli admitted that making all that money changed his lifestyle “a little bit.”
“Making that kind of money allows you some freedoms,” he said. “I never thought in my wildest dreams I’d have this much money. If I hadn’t gone public, I wouldn’t have realized the cash. Being public, you’re under a magnifying glass. I’m putting the pressure on myself.”
He’s got his own chef now and lives in a luxurious house on the cliffs of Laguna Beach, Calif., in what In Style magazine described as “a modern-day castle.” The house has classic symbols of good luck — horseshoes, pennies, and rabbits’ feet — and Old World Italian oil paintings on the wall. For fun, there’s a pool table in a sprawling backyard lounge.
Arnold Simon, president and ceo of Designer Holdings and a Seventh Avenue veteran, scored big in the IPO market, earning $39 million by going public in May 1996. Simon now holds 8.9 million shares in the company, worth $74 million at current prices, but that’s down from $160 at the IPO price.
In August 1994, Simon received $20 million for selling a 50 percent interest in Designer Holdings to Charterhouse Equity Corp., a Manhattan investment firm. Charterhouse realized $57 million from selling stock in the IPO and still controls 8.7 million shares, or a 27.5 percent stake in the firm.
What has all this money meant?
Simon owns an expansive home in Saddle River, N.J., complete with a movie theater, gym and swimming pool, and word has it he’s installing a disco. He also has a ski house in Aspen.
“Personally, there haven’t been any changes [since going public]. What it’s done for us as a company is helped us focus our business to the next level. We can do more business, we have more money and have access to capital markets. It’s forced us to analyze our business and carefully develop long-term growth. When we went public, we had a proven success record.
“I think we’re a little misunderstood by Wall Street. It’ll take a little more time. We obviously make a lot of money as a company. We disappointed the street when we restated our numbers. We cut out diverting. It will enhance our brand for the future.
“I don’t actually look at the stock price everyday,” said Simon. “It’s sort of like when it was up to $34 a share, I’d look; when it’s down at $8, I don’t want to look.”
At Guess, three Marciano brothers continue to hold 83.6 percent stake in the company, or 35.7 million shares, and have not sold any of their shares. Their stake is currently worth $390 million, down from $640 million at the IPO price.
Maurice Marciano, chairman and ceo, owns 16.4 million shares, worth $180.4 million; Paul Marciano, president and chief operating officer, 13.4 million, worth $147.4 million, and Armand Marciano, 5.9 million, worth $64.9 million.
At the firm’s current market value, Guess stock is worth less than in August 1993, when another brother, Georges Marciano, sold his 38 percent stake in the company for $214.2 million.
However, in addition to their current holdings, the three remaining brothers continue to haul in healthy paychecks. Maurice received $3.4 million last year; Paul, $2.9 million, and Armand, $2.2 million.
On the bullish side, successful IPOs have paid off handsomely for executives at Estee Lauder, Gucci Group, Jones Apparel, St. John Knits, Tommy Hilfiger and Kenneth Cole.
The Lauder family has made a killing from selling stock in both the initial public offering in October 1995 and a secondary offering in February 1997.
Ronald Lauder, chairman of Estee Lauder Laboratories and Clinique Laboratories, has raised $388.1 million from stock sales, including $183.4 million in the IPO and $204.7 million in the firm’s secondary offering. As for spending habits, Lauder, who is bankrolling an ambitious media venture in Russia, made news recently by buying Cezanne’s “Still Life With Flowered Curtain and Fruit” for $50 million.
Leonard Lauder raised $115.8 million from sales in both offerings, and Estee Lauder Trust, which is controlled by the two brothers, earned another $135 million in the IPO.
And similar to Donna Karan’s licensing arrangement, the Lauder family also received $26.1 million in royalties last year from licensing out the Estee Lauder name to the Lauder company.
Other founders reaping benefits from the stock market include Sidney Kimmel, chairman and ceo at Jones Apparel Group, and Kenneth Cole, chairman, president and ceo at Kenneth Cole Productions.
Kimmel, who founded Jones Apparel while working for W.R. Grace & Co. in 1970, has realized over $300 million from selling shares of Jones Apparel since taking his company public in May 1991. Kimmel paid a total of $7.4 million for Jones Apparel to Grace in 1975 and in buying out a partner’s interest in 1989.
Kimmel, 69, continues to hold 12.1 million shares, or a 23 percent stake, worth $475 million at current market prices. Kimmel received a salary of $750,000 last year, but does not receive a bonus or stock options because of his large shareholder positions. His salary was bumped up to $850,000 at the start of this year.
Kenneth Cole earned $42 million from the sale of 1.4 million shares of Kenneth Cole Productions in a secondary offering in May 1995. The designer, who started the business from scratch in 1982, currently holds 5.9 million shares — or a 45 percent stake — in his company, worth $120 million at current market prices.
Kenneth Cole Productions went public at $6 a share in June 1994 (adjusted for a stock split) and closed Wednesday unchanged at 20 1/4.
“It’s not as much what it’s done for me personally, but what it’s done for the business,” said Cole, who now tools around in his own jet.
“It gave us access to a funding stream and financial independence through liquidity we might not have had. It creates a breadth of opportunities in allowing us to expand the business.
“It also takes a little bit of pressure off me personally,” continued Cole. “I’m a little bit more comfortable taking certain chances and being more aggressive. The single greatest change is the secondary discipline. First is being able to manage the business, and second is managing expectations. We have to do what we say we’re going to do. We have to anticipate the needs and performance and deliver on those needs. Wall Street has been kind to us, and we have done what we said we were going to do.”
“It wasn’t about money for me. Luckily, the business always served my personal needs. It did relinquish any concerns I might have had. I never fantasized about creating that kind of wealth,” said Cole.
Cole, who built his fortune on value-priced footwear, now lives in a Stanford White home in Purchase, N.Y., complete with pool and tennis court.
The success of Gucci Group NV as a public company has paid off handsomely for Investcorp, the investment giant based in Bahrain, Saudi Arabia.
Investcorp earned $1.4 billion so far from sales of Gucci, including $1.22 billion in a secondary offering in March 1996 and $228 million from selling shares in the October 1995 IPO.
According to the prospectus for its IPO, Investcorp paid only $245.8 million for its initial stake in Gucci in 1987 and the last Gucci family member in 1993, giving Investcorp more than a fivefold return on its investment.
Investcorp, which farms out its holdings among investors in the Middle East, also did well in Tiffany Corp., which it took public in 1987.
Saks Fifth Avenue, which is controlled by Investcorp, went public in May 1996, but Investcorp has not yet made its money back on this investment. Investcorp paid $1.6 billion to acquire Saks in 1990 and put in another $300 million equity infusion to shore up the business in 1992.
So far, clients of Investcorp have earned $250 million from selling stock in Saks in a secondary offering in September 1996. That reduced Investcorp’s and its clients’ stake in the retailer to 65 percent from 78 percent.
Of Saks’ principals, chairman Philip Miller has 351,048 shares, worth $10.6 million, and president Rose Marie Bravo has 157,273 shares, worth $4.8 million.
There’s no clear indication of how Gucci’s management is making out from the company’s success. As part of the IPO, however, eight senior executive officers — including Domenico De Sole, president and ceo, and Tom Ford, creative director — received a total of 1.45 million shares in stock options exercisable at $7.78 each. The stock is now selling at 73 7/8, down 1 3/8 Wednesday.
Tommy Hilfiger and his backers have largely cashed in on Tommy Hilfiger Corp.’s nifty run since going public in September 1992, with the designer himself netting at least $60 million.
The stock went public at 7 1/2 (adjusted for a stock split) and closed at 51 1/2, up 5/8 Wednesday.
Hilfiger sold his stock through Apparel International Holdings Ltd. (AIHL), which is about 70 percent owned by Hilfiger’s Asian backers: Silas K.F. Chou, the company’s chairman, and Lawrence Stroll, ceo of Tommy Hilfiger Far East. Through three secondary offerings since its IPO, AIHL realized a staggering $325 million on an original investment of $206,000.
Hilfiger is also one of the highest-paid executives of a public apparel company. He earned $7.3 million for the fiscal year ended March 1996, and he should earn upward of $9 million under his contract for the fiscal year just ended. All this good fortune has afforded Hilfiger a baronial lifestyle, with a 17-plus acre farm purchased from Ambassador Joseph Reed in Greenwich, Conn., with tennis court, pool and guest house, as well as palatial vacation homes on Nantucket and Mustique, where his neighbor is Mick Jagger. And Tommy’s driving habits now include a Range Rover, Mercedes 600 and, of course, a Ferrari.
Linda J. Wachner continues to pull in big bucks as head of Warnaco Group Inc. and Authentic Fitness Corp., with combined compensation of $10.3 million for her work for both firms last year.
Wachner earned $18 million from selling shares of Warnaco in October 1995, but has not otherwise sold stock in her companies. Wachner’s 8.3 million shares in Warnaco are currently worth $251 million, and her 2.8 million shares in Authentic Fitness are worth $44 million.
Why all the big money now?
One financial executive told WWD: “[All the public offerings] never happened in our industry, but it happened in every other industry. It’s about time SA is shown that kind of insight. It’s much more focused than it ever was. There’s longer-range planning and global thinking.
“What’s happened is a lot of these [fashion] companies have become mature. They’re not the entrepreneurial companies we had in the old days. There’s more management, more sophisticated controls, more global expansion. Hard goods companies have been light years ahead of us.”
Follow the Dollar
If you had $1,000 to invest in a fashion stock, where would you put it? Here, a look at what a $1,000 investment in various recent IPOs would be worth at Wednesday’s closing prices.
COMPANY WHEN PRICED CURRENT VALUE
Tommy Hilfiger September 1992 $6,866
Jones Apparel May 1991 $5,607
St. John Knits March 1993 $5,234
Kenneth Cole June 1994 $3,375
Gucci Group NV October 1995 $3,334
Estee Lauder November 1995 $1,673
Saks Fifth Avenue May 1996 $1,240
Tag Heuer September 1996 $982
Guess August 1996 $611
Mossimo February 1996 $548
Designer Holdings May 1996 $458
Donna Karan June 1996 $458