LINDA’S LATEST PLAY: WARNACO NEGOTIATING FOR DESIGNER HOLDINGS
Byline: Karyn Monget / Thomas J. Ryan
NEW YORK — The Warnaco Group confirmed Tuesday that it is negotiating to acquire Designer Holdings Inc., a move that would give Warnaco an even bigger hold on the Calvin Klein money machine.
Other companies, including VF Corp. and Jones Apparel Group, reportedly are eyeing Designer Holdings as well, but company officials declined to comment and Warnaco certainly appears to be well ahead of the pack.
In a telephone interview Tuesday, Linda J. Wachner, Warnaco’s president, chairman and chief executive officer, insisted: “Warnaco is not in a bidding contest with anybody.”
“We make our decisions with respect to price based on diligence — period,” Wachner bristled.
As for details, Wachner, typically close-mouthed when ironing out a deal, would not elaborate, except to say, “We are still negotiating. I just can’t comment.”
But word leaked out somehow and a published report Tuesday led to feverish trading in Designer Holding stock. Two million shares of Designer Holdings changed hands Tuesday, and the stock rose 1 3/16 to 9 3/8 on the New York Stock Exchange. Warnaco closed at 33 15/16, up 1/8.
Arnold Simon, DH’s chairman and ceo, could not be reached for comment. Simon owns 8.9 million shares of Designer Holdings, representing a 31.5 percent stake that’s worth about $85 million.
Sources speculated that Simon may be seeking $11.75 to $12.50 a share, but that could be too rich for Wachner.
Designer Holdings generated revenues last year of $480.8 million, almost all of it coming for the firm’s licensed CK Calvin Klein jeanswear business, but the company has forecast drops in sales and profits for this year, as it streamlines distribution.
Warnaco’s Calvin Klein business — including intimate apparel, men’s underwear and men’s accessories — is expected to hit $340 million this year, according to Wachner.
A Warnaco-DH deal would be “a spectacular fit for both companies, and should be an exceptional opportunity to create value for shareholders at both companies,” said Wachner.
While neither Klein nor other officials at the designer’s company could be reached Tuesday, the designer has in the past described his underwear union with Wachner as “a win-win situation.” Consequently, Klein and partner Barry Schwartz would be expected to readily approve a DH sale to Warnaco. As an added incentive, Klein owns 1.28 million shares of DH stock as well as 1.7 million shares of Warnaco stock.
Analysts noted that Warnaco has developed a sterling track record of acquiring underperforming businesses and quickly turning them around, and expect the company would be able to pull the same trick with Designer Holdings.
“Warnaco has a terrific track record with acquisitions. It’s really an unparalleled track record,” said Faye Landes, an analyst at Smith Barney.
Wachner, who heads Warnaco Group — which, in addition to intimate apparel, makes men’s wear — and the Authentic Fitness swimwear and activewear company, is largely credited with masterminding a series of business turnarounds at both her firms.
After three sterling years of growth since acquiring the Calvin Klein jeans license in August 1994, Designer Holdings is predicting declining sales this year and in 1998 and is currently reducing head count to reflect the lower sales level.
CK Calvin Klein jean’s sales have slowed, largely due to tough market conditions, particularly for denim jeans. That area has recently seen new launches of denim collections from Tommy Hilfiger, Polo Ralph Lauren and Nautica.
Although CK Calvin Klein jean’s sales grew to $466.7 million last year, it widely missed projections. DH’s Simon had projected in late November that the business would do about $625 million in 1996.
Part of the projected sales decline also reflects efforts to curtail distribution in certain specialty store chains and Latin America, while increasing its focus on higher margin department store customers and selected licensees. And the company took a hit last year to reflect the bankruptcy filing of County Seat Stores in Ocotber 1996.
Earnings at Designer Holdings this year are projected to fall to about 45 cents this year, down from 85 cents in 1996. In August it announced it would take a charge of $14 to $18 million to increase efficiencies, cut costs and introduce in-store shops. For 1998, earnings are expected to be only slightly higher than 1997.
Most analysts think Warnaco would be able to rejuvenate the Calvin Klein jeans business, pointing to Warnaco and — particularly — Wachner’s ability to succeed in a large variety of businesses.
Through Warnaco and Authentic Fitness, Wachner’s businesses include underwear, intimate apparel, dress shirts, neckwear, swimwear, men’s accessories. Warnaco already makes jeans under the Chaps by Ralph Lauren name.
“I believe that Linda Wachner knows how to build business, and I believe that Linda Wachner knows how to make money,” said Laurence Leeds Jr., at Buckingham Research.
“Arnie Simon has built a very successful $450 million business with the Calvin Klein name, but I believe the management strength and manufacturing muscle of Warnaco would propel the Calvin Klein jeans business to new heights.”
“Linda Wachner and her management team have proved to be very successful at building large businesses and producing superb margins,” Leeds added.
Josie Esquivel, at Morgan Stanley, however, is one analyst with some reservations about how the acquisition would fit into Warnaco.
“It expands the breadth of their Calvin Klein brand, but l think it is a totally different business. While denim is a very basic business, it still needs the right operator to run it properly.”
She also noted that the deal may hinge on the licensing contract with Calvin Klein Inc. She said most contracts are non-transferable. However, she added that Warnaco’s past success with Klein could give Warnaco “an edge over any potential buyer, if there is anyone else interested.”
The Calvin Klein underwear and intimate apparel business and the Calvin Klein jeans business have seen tremendous growth since each were licensed out in 1994.
The success of rebuilding CK Calvin Klein jeans enabled Designer Holdings to float an initial public offering in May last year that was initially warmly received.
However, like a number of other fashion IPOs last year, shares of Designer Holdings eventually got battered by Wall Street after the company came up short on projections.
Designer Holdings went public in May 1996 at $18 a share, above the projected range of $14 to $16 a share estimated by underwriters — and quickly ran up to its high of $34 that month.
The company’s prospectus boasted it was able to turn a dormant CK Calvin Klein jeans business, which did only $59 million in sales in 1993, into a $361.4 million giant in 1995.
Continued sales gains seemed likely after Designer Holdings acquired the Calvin Klein license in August 1994. Last year marked the initial rollout of 150 CK Calvin Klein in-store shops, the format that has propelled growth at firms such as Tommy Hilfiger Corp. and Polo Ralph Lauren. Also, an agreement to make Donna Karan’s jeans line was expected to provide Designer Holdings with another huge leg of growth.
However, Designer Holdings failed to live up to its growth expectations, largely due to the crowding in the denim market, and the collapse of the potentially lucrative deal with Donna Karan in March 1997.
The Donna Karan licensing deal, first announced last September, fell apart in March after the parties couldn’t agree on production scheduling and the extent of the merchandise to be covered by the license.
Karan has since moved to launch her denim business in house.
Designer Holdings announced that it would continue to search for new licenses. Reportedly, the firm was negotiating with Gianni Versace for a denim license at the time of his death. While Simon is said to still have hopes of getting the Versace license, a prospective deal no longer exists, sources said.
Designer Holdings also owns the license for Bill Blass jeanswear as well as the Rio brand. The company sublicensed the Bill Blass business to a new company, Commerce Clothing, which is 25 percent owned by Designer Holdings. The firm also sublicenses CK Calvin Klein children’s jeanswear. The Rio brand has been inactive recently.
Meanwhile, Warnaco has seen momentum continue for its Calvin Klein men’s underwear and accessories and women’s intimate apparel lines, which the company acquired in March 1994. Sales of Warnaco’s Calvin Klein lines rose to $255.4 million in 1996 from $163.6 million in 1995 and are projected to reach $500 million within three years.
Last year, Warnaco made three acquisitions: GJM, private label maker of sleepwear and intimate apparel; Bodyslimmers, the leading designer of body slimming undergarments; Lejaby/Euralis Group, a leading European intimate apparel maker.
But the most impressive accomplishment was the turnaround of Warnaco Group itself, which Wachner acquired in 1986 with an investor group in a leveraged buyout. Warnaco’s sales hit $1.06 billion last year from $425 million in 1986.
Wachner has found similar success at Authentic Fitness, which Wachner spun off from Warnaco in 1990 using the Speedo swimwear brand as its core business. Authentic recouped its investment in acquiring the Catalina, Cole and Anne Cole brands in 1993 within a year.