CALVIN: THE CONTROL QUESTION
Byline: Lisa Lockwood
NEW YORK — These days, licensing, especially on the megabrand level, is a collaborative effort between two willing partners. But in recent weeks, a major part of Calvin Klein’s empire, and the product where he built much of his fame — jeans — landed unexpectedly in the hands of Linda Wachner’s Warnaco Group.
Klein officials were unable to block the agreement in principle between Designer Holdings, which makes the CK Calvin Klein Jeans, and Warnaco Group, the $1.06 billion apparel giant whose divisions include Calvin Klein underwear, intimate apparel and accessories. Klein’s hands were tied, and even though he’s thrilled with Warnaco’s underwear’s and accessories’ success, there were serious reservations about so much business being in the hands of one company.
While the new Calvin Klein jeanswear deal with Warnaco has the potential to become a blockbuster, the anxiety level was high among Klein executives. But after much behind-the-scenes fretting, Klein officials appear to have come to terms with the fact that they’ll soon be partners with Warnaco in the jeans business.
Observers question how Klein managed to let the license slip away. Why wasn’t there a clause in the Calvin Klein-Designer Holdings jeans contract that gave the designer the right to veto such a deal? And will this deal force Klein to give up the thing he covets most: control?
Gabriella Forte, president and chief operating officer of Calvin Klein Inc., put a positive spin on the new deal.
“Warnaco did not buy the jeans company or the CK brand for jeans. Wachner bought the company that holds the CK Calvin Klein Jeans license. All those covenants cannot be changed. She is acquiring the company that has those covenants.”
“Calvin Klein and his design studio have the right to design the [jeans] collection, create the image and govern the marketing of the product.”
Whereas Warnaco bought the Calvin Klein Underwear business outright, this is a totally different situation, said Forte.
“Warnaco bought the underwear — the Calvin Klein brand — and our relationship is managed by administrative agreement. Mr. Klein designs the underwear and has a say in the advertising,” said Forte. The ads are created by CRK Inc., Klein’s in-house ad agency.
“The two partners have exchanges,” she said, “but with any good partnership, the advertising has to meet certain business objectives. If she [Wachner] is trying to push lace and we don’t show lace [in the ads], she will have her say.
“But she does not own the CK Jeans. Advertising is the complete rule of Mr. Klein. Our conduct is to work with our partners on choosing the right images,” she said.
Forte said the contract stipulates that Klein has the rights to approve the president of Calvin Klein Jeans, a position currently held by Danny Gladstone.
But Forte acknowledged that Wachner will make her own assessments about other CK Jeans personnel. “We have the right to approve the president. We will exercise that right if any changes occur or we don’t agree.”
Forte said the CK-DH jeans deal didn’t have a clause about rights of refusal if DH were to be sold because “it was an existing business and it was the sale of an existing business — usually you have those clauses when it’s a new business,” she said.
“But it doesn’t matter. The relationship is governed by the contract, not who owns it. We’re very happy that Warnaco is a very solid partner, both financially and businesswise,” said Forte.
Forte said she expects Wachner to apply the same growth strategy to the jeans as she did with the underwear, which would include thorough attention to points of sale, deeper penetration within existing points of sale and expanded fixturing in shop-in-shops.
“I’m sure how she manages the underwear is a reflection of how she’ll manage the jeans business,” said Forte. “One of the good things she’s done in underwear is protect the brand.”
Forte said Calvin Klein Inc. continues to maintain a strong relationship with Frattini Group, which has the European and Asian license for CK Jeans. While Wachner is said to have her eye on those markets, the Frattini Group has a 30-year license that is governed through a joint venture with CKI, which owns 22.25 percent. “In changing control, it has to have approval of Calvin Klein Inc.,” said Forte. Warnaco will have the CK Jeans license for North and South America.
Forte said she doesn’t foresee any changes in how the product is designed. “Calvin Klein, in all its licensing contracts, is the sole designer of any collection that comes out with his name on it,” emphasized Forte.
She noted that in all its endeavors, “our company looks for a strategic partnership in expanding the business.
“We look for strategic partners where they bring know-how to the business. We are an excellent design and marketing company. We look for our partners to become dominant players in each of the businesses.”
Asked if she’s concerned that Warnaco will control about one-third of the Calvin Klein business, Forte replied, “I don’t think it’s a problem. It’s something we deal with. I think she’s been an excellent partner. For now, it’s one-third; in two or three years, maybe it’s not.
When Warnaco took over Klein’s underwear business four years ago, it was doing $55 million in volume. Today, it’s over $300 million.
“She did that by expanding markets and flow of products in stores, putting fixtures in place and making sure the infrastructure dealt with the expansion of the business,” said Forte.
“I don’t think anybody loses control if they manage the contracts,” said Forte. “We have developed that with all our partners, whether its eyewear with Marchon, which does about $120 million in sales, or with Mr. Frattini, who also does more than $120 million.
“Our business is to develop business and become a dominant player,” said Forte, pointing to the fragrance deal with Unilever, which does over $650 million in retail volume with Calvin Klein fragrances.
“Calvin Klein has to be involved every step of the way. A good partner wants to utilize that. It’s Calvin Klein’s infrastructure, led by Mr. Klein,” said Forte.
Wachner, easily one of the shrewdest executives in the apparel business, will now be control of a $470 million-plus jeans business, in addition to the $302.4 million underwear, intimate apparel and accessories business. She declined to comment for this article.
Sources believe that because Wachner will be holding the purse strings, she will have greater say in Klein’s product line and distribution, and particularly his advertising — those sexy, provocative ads that helped make Klein a household word.
“She’ll tweak it and tweak it until he loses his real edge,” contended one source.
Wachner certainly made no secret of rejecting earlier Calvin Klein Underwear ads that she felt were too provocative.
The DH-Warnaco merger will give Warnaco control of close to one-third of the $3.5 billion Calvin Klein wholesale business worldwide. The acquisition price is the equivalent of $11 a share, putting the value of the deal at about $354 million.
According to the 1996 Designer Holdings prospectus, the initial term for the jeans license was 10 years, with the option of four 10-year renewal terms. On April 22, 1996, the license was amended to change the terms to a 40-year term with one 10-year renewal.
The license expires on Dec. 31, 2034, and is renewable for one additional 10-year period provided Designer Holdings has net sales within the U.S. and Mexico of at least $375 million and net sales within Canada of $35 million during the 12 months ending June 30, 2034. In addition, the license had an amendment in February 1995 to include the Khaki Collection.
The contract stipulates that DH was required to make royalty payments of 7 percent of net sales to Calvin Klein Inc. The license provided for minimum annual royalty payments for jurisdictions other than Canada that increase from $4.4 million in the first year to $22 million in the 40th year.
According to DH’s prospectus, the license could be terminated upon the occurrence of certain events, including failure to make payments within a certain time, decrease in Designer Holdings’ consolidated net worth to less than $10 million, failure by Designer Holdings to make minimum sales thresholds and a bankruptcy filing by Designer Holdings. In exchange for the modifications, CKJ received 1.275 million shares of non-voting stock.
The prospectus points out that the licensee must contribute not less than 3 percent of gross sales of Calvin Klein Jeans label products to Calvin Klein Inc. for advertising. During 1996, DH incurred about $16.6 million for ad expenditures.
Still, some observers question whether Klein would have been better off licensing his jeanswear to another denim manufacturer.
“He [Klein] is now too removed,” said Dick Gilbert, president of Mudd Jeans, a New York denim firm. “With Arnie [Simon, president and ceo of Designer Holdings], he had more control. Linda [Wachner] will do what’s best for Warnaco, not what’s best for Calvin Klein.”
“Arnie used to ship, ship ship. They have to create something brilliant and hit a home run [with the product] and then add the Calvin Klein name. They can’t live on the name forever,” said Gilbert.
“When you’re a public company, you have to add volume every year. You can’t do $400 million, then $350 million and $300 million. If you want your stock to go up, you have to get mega-big,” added Gilbert. “Linda has added $400 million by buying Designer Holdings. With Linda, it’s money first. It’s all business. She’s done a good thing for Warnaco. But the basics business has slowed down tremendously. The small guys are doing very creative things and very sexy things,” said Gilbert.
“Since Arnie failed in acquiring DKNY [Jeanswear], he had nowhere to go. You have to add value every year, and Linda has done that by acquiring the Calvin Klein name,” said Gilbert.
“It’s a little tough to fight with that lady,” said R. Fulton Macdonald, president of International Business Development Corp., a consulting firm here, referring to Wachner. “She eats people for lunch. She’s obviously a skilled and shrewd merchant. She’ll get a lot more mileage out of the jeans business.”
“Conceptually, it’s a win-win situation for Calvin and Barry [Schwartz, Klein’s business partner]. It is less control, but they’ve been a bit of a roller coaster…She [Wachner] will make money for them, even though there’s a lot of posturing and fighting back and forth. She’ll make more money for them than Designer Holdings would have,” said Macdonald.
Macdonald was one of many who were surprised there wasn’t a clause in the contract giving them veto power over a new license. “They screwed up. The small print was missed. They never expected Designer Holdings would sell it lock, stock and barrel.”
Jeffrey Ceppos, vice president, director of fashion and apparel licensing at IMG, an international licensing and sports marketing firm, said that the stronger the licensor is, the more control he has over the use of his name, the advertising, the product and where it’s sold.
“In an absolute world, nothing under the name Calvin Klein, Ralph Lauren or Cynthia Rowley for that matter, can be put out without the designer’s approval,” said Ceppos.
Ceppos observed that since Wachner is in control of the money, she will choose the ads, produced by Klein’s in-house ad agency, CRK Inc., that she likes. “There’s a fine line between who has the final say. They [CRK] will only present to her what they’ve accepted already.”
Ceppos pointed out that Wachner already generates a lot of money for Klein. “It becomes somewhat of a cooperative venture. Now, all of a sudden, one major licensor will generate $30 million in royalties for you with the combined businesses. It puts more control in the hands of this one person, but it’s not absolute.
“It gives Linda, through Warnaco and Designer Holdings, millions more to put behind the Calvin Klein image,” said Ceppos.
“Would Calvin have been better off had Arnold stayed separate from Linda and kept on the current path individually?” he asked. “Arnold needed Linda’s ability to make money for everybody.”