TRYING TIMES: TOUGH CHOICES AHEAD FOR WARNACO, WACHNER

Byline: Karyn Monget / With contributions from Vicki M. Young

NEW YORK — Can Linda Wachner turn Warnaco around?
Despite a dire warning from the company’s auditors last week, many retailers and competitors are betting that Warnaco — and Wachner — will survive. But the price of survival will involve the sale of a major asset. And shrewd maneuvering will be essential.
The company’s auditors, Deloitte & Touche, wrote in its report to The Warnaco Group’s board and shareholders that it had “substantial doubt” about the firm’s “ability to continue as a going concern” because of a working capital deficit and the uncertainty of negotiations with lenders to win additional financial waivers, as reported.
Stanley Silverstein, Warnaco’s general counsel, told WWD that the firm continues to be in discussions with lenders “to secure permanent amendments to its bank agreements,” which were extended for a month on April 16.
What’s clear is that Warnaco Group is in an extremely difficult financial position, and Wachner, its chairman and chief executive officer, acknowledged late last month that she did not rule out selling assets.
The embattled Warnaco, which is going through Wall Street’s unforgiving grinder following the announcement that it was highly unlikely it would see a profit this year, had a staggering fourth-quarter loss of $198 million, or $3.68 a share, versus the $569,000, or 1 cent a share, profit it had in the preceding year’s quarter, and has seen its stock plummet. Warnaco shares closed at 79 cents Friday on the New York Stock Exchange, down from their 52-week high of $11 and less than one-third above its 52-week low of 60 cents.
Wire reports later in the day said that an additional shareholder suit alleging management concealed Warnaco’s true financial condition was filed on Friday in Manhattan federal court, the latest in a series filed against the company since Aug. 22.
Wachner holds a seat on the NYSE board and would likely hold some sway over a possible delisting of Warnaco, given the dramatic erosion in the company’s market capitalization, which stood at about $41.8 million on Friday. The NYSE considers delisting stocks when they fail, for 30 days or more, to maintain $50 million in global market capitalization or meet other criteria, such as a $1 a share minimum price.
Meanwhile, industry observers offer mixed feelings about the banks’ waiver. Some said it’s a positive sign because the grace period could provide the time frame needed to close a deal or joint venture. Additionally, some executives believe the Federal Reserve’s rate cut last week will ease credit overall and decrease the rates that Warnaco will have to take on, if and when it restructures its debt. Others though, anticipate Warnaco will have considerable difficulty getting a permanent waiver, given its poor standing on Wall Street.
Through a spokeswoman, Wachner declined comment on Warnaco’s situation. But filing for Chapter 11 bankruptcy protection, which many executives see as a possibility to curtail the company’s $1.43 billion debt load, could be an embarrassing option for one of America’s few women Fortune 500 ceo’s, whose strong-willed persona is fabled in the industry.
A stumbling block to a potential sale of the entire company could be the cost of buying Wachner out. Not only is she a major shareholder, with beneficial ownership, including options, of about 21 percent, but her severance package is said to be significant, pegged by several sources to be at least $30 million. However, in a Chapter 11 filing, Wachner’s golden parachute liability could vanish.
Executives said if Warnaco has a fail-safe formula, it most likely will rely on selling or licensing certain valuable assets — including direct businesses, such as its coveted core apparel brands.
UBS Warburg has been brought in as financial adviser to Warnaco and is reportedly shopping an asset deal around. The crown jewel in the firm’s stable of licensed and proprietary brands is the company-owned Calvin Klein Underwear and the licensed Calvin Klein Jeanswear businesses, which generated combined wholesale sales of $943.2 billion in fiscal 2000. In 1999, Calvin Klein Jeanswear generated close to $700 million of Warnaco’s $2.1 billion volume.
If a deal is struck to buy Warnaco’s Calvin Klein businesses, it is believed that Warnaco would not require approval from Calvin Klein Inc. Warnaco has the jeanswear license for North, South and Central America locked up until 2040.
In fiscal 1998, it acquired certain inventory and other assets, as well as the sublicense to produce Calvin Klein children’s jeans in Canada and Mexico. The total purchase was $53.1 million. Warnaco bought Klein’s men’s underwear business and the worldwide trademarks for women’s underwear in 1994 in a deal worth $64 million, plus ongoing fees. The women’s business came under Wachner’s aegis in early 1995.
Those businesses might have trouble commanding a premium price now, given the tentative economic climate and sluggish retail environment. Officials at Calvin Klein would not comment. But one industry executive said he believed Klein and partner Barry Schwartz would not be opposed to a new licensee, particularly following the embittered legal dispute between Calvin Klein and Warnaco, a war that raged for more than six months and thwarted attempts to sell Klein’s business. The settlement of the dispute limits over time Warnaco’s ability to sell the Klein product to discounters, a strategy that had helped Warnaco’s top line growth.
According to retailers, manufacturers and analysts, a strategic acquisition of one or more of Warnaco’s bread-and-butter brands would likely come from some big players, such as VF Corp., Sara Lee Corp. and Kellwood Co., each of which has engineered major mergers and acquisitions over the past decade. There’s also German-owned Triumph, a global lingerie specialist whose volume is believed to exceed $3 billion.
Officials at VF could not be reached, but sources said late last week that VF is scoping out various Warnaco properties. VF ceo Mackey J. McDonald has said on several occasions that the diversified giant has been looking for “strategic acquisitions” in lucrative fields such as intimate apparel and jeanswear. A VF union with Warnaco’s Calvin Klein franchise would not only beef up VF’s Global Intimate Apparel Coalition with a marquis label, but it would also give one of the world’s largest public apparel makers a designer name in jeanswear. It hasn’t had that kind of presence since the Marithe & Francois Girbaud jeanswear and khakis license was discontinued in 1998. Entry into the designer jeanswear arena would add an upscale tier of distribution to a company that is focusing on products for a variety of different consumer bases.
VF already has a designer intimates license through its Bestform division — Tommy Hilfiger Intimates, which was introduced last summer — and because of that, Calvin Klein Jeanswear is its primary target, according to sources.
VF’s Global Intimate Apparel Coalition, which includes the Vanity Fair, Vassarette, Lily of France and licensed Natori and Josie bra brands, does not break down its intimates business, but annual wholesale sales worldwide are between $1 billion and $1.5 billion, according to industry estimates. VF’s jeanswear stable holds more than a 25 percent share of the U.S. men’s and women’s jeans market through its Lee, Wrangler, Rustler, Riders, Britannia, Chic and Gitano brands. In 2000, jeanswear and related products accounted for $2.94 billion of VF’s $5.55 billion volume.
Sara Lee Corp., whose Intimates and Underwear Division in 2000 posted wholesale sales of $7.6 billion, may also be gunning for a designer brand like Calvin Klein that has worldwide recognition. As reported, Polo Ralph Lauren and Sara Lee mutually agreed to discontinue the Ralph Lauren Intimates license this spring.
Sara Lee’s megabrands include Playtex, Bali, Wonderbra, Just My Size, Lovable and Hanes Her Way. While the company has recently restructured its lines of business away from apparel, sources noted that Sara Lee may not be opposed to broadening its product range in a new area such as jeanswear.
Charles Nesbit, president and ceo of Sara Lee Intimate Apparel, declined to discuss Warnaco’s problems or any potential interest from his firm.
Kellwood Co., which has the marketing clout and financial muscle to take over one or more of Warnaco’s premium brands, had annual revenues of $2.36 billion in 2000, with intimate apparel comprising $191 million, said a spokeswoman. In addition to private label, Kellwood’s intimates brands include sleepwear under the Romance du Jour and LA Intimates labels, foundations by Berlei, and robes and loungewear by Stan Herman at Crowntuft.
Hal J. Upbin, chairman and ceo of Kellwood, through a spokeswoman, declined to comment.
There’s also a possibility of a white knight scenario with a high-rolling investor from the apparel or nonapparel sectors. In April 2000, Texas billionaire Sid Bass plunked down $48 million for an 8.5 percent stake in Warnaco. Last October, he bought another 2.5 million shares, and his stake now stands at 14.9 percent, making him Warnaco’s largest shareholder outside of Wachner.
It could not be learned what, if anything, Bass plans to do with his Warnaco holdings. But if his stake remains the same, his holdings would be worth just over $6.2 million as of Friday.
In addition to the Calvin Klein franchise, Warnaco has a full plate of other assets: the national bra brands Warner’s and Olga; the Bodyslimmers shapewear label; a men’s wear business with labels like Chaps Canada and the licensed Chaps by Ralph Lauren name; a stable of swimwear brands including Catalina, Cole of California, and the licensed Oscar de la Renta line at its sister operation Authentic Fitness, which Warnaco bought in 1999.
Warnaco also owns GJM, a $100 million Hong Kong-based maker of private label sleepwear, which produces Calvin Klein sleepwear, a network of retail outlet stores, and Penhaligon, the upscale British toiletries concern. In addition, the company owns the Van Raalte trademark in moderate lingerie, which has been sold at Sears, and Izka, a $1 million French maker of seamless innerwear. In 1999, Warnaco bought A.B.S., a $40 million contemporary sportswear and dress firm.
One source noted, “There aren’t many risk takers out there today. I don’t think she’ll find a buyer for Authentic Fitness, or a smaller [intimates and swimwear] operation like Lejaby/Euralis, which isn’t big enough to ease the debt load. But giving up Calvin would allow Linda to focus on her core businesses in intimates, expand her business overall and make her company healthy again.”
While the 61-year-old, better-price Olga bra label and the 128-year-old upper moderate-to-better price Warner’s brand in bras are household names, observers pointed out that one obstacle for potential buyers is the ongoing decline of the department store share of the bra market, as consumers move their bra purchase dollars to discounters and specialty stores like Victoria’s Secret.
Depending on how weak the Warnaco intimates businesses are from a volume perspective, potential buyers could be faced with a substantial investment above the purchase price to rebuild positive sales momentum. The prospect of an after-purchase marketing investment could reduce the up-front price a buyer would pay for the business.
Merchants and innerwear executives agree on another point: The downfall of such a diversified, high-profile company as Warnaco would have a negative impact on the industry.
Michael Gould, chairman and ceo of Bloomingdale’s, said, “Everyone has a lot invested in Warnaco. It’s an enormous part of our intimate apparel business and a very important resource for us. Retail in general has been very difficult, but these [Warnaco] brands are going to be around. We are doing everything we can to ensure that business continues to grow.”
Robert Pawlak, vice president and divisional merchandise manager of intimate apparel and coats at Milwaukee-based Carson Pirie Scott, said: “Linda is extremely bright. But I believe her greatest strength is her guts. If anybody can pull it off, she can.
“Warnaco is a company that represents such a huge segment of our business that it would be detrimental for everyone if the company folded. We all need Warnaco to be healthy.
“Linda is going to have to be more receptive and I think the appointment of Dave Clark is a very good move because he’s an inside guy and has worked many different sales angles.”
As reported, Clark succeeded James R. Mogan, who exited the company in early April as president of Warnaco’s Intimate Apparel division, which excludes Calvin Klein Underwear.
One retail executive who did not want to be named, but has experience in reviving a company that had been in Chapter 11, said, “Turning a company around requires a tremendous amount of focus and Linda’s done that before. Warnaco has great brand names and her divisions have made really big contributions to the market.”
“Whenever you think Linda is down and out — everybody is dead wrong,” said one department store executive who requested anonymity. “She’s smart, but tough. She’ll have to step back, run a cleaner business and not focus exclusively on quantity, but on quality and profits of the goods.”
Richard Murray, president of Wacoal America, the U.S. unit of Kyoto-based Wacoal Japan, said, “She will need to sell a very valuable asset to increase cash flow, certainly not an Authentic Fitness. But I can’t imagine that she would be willing to sell Warner’s or Olga.”
Josie Natori, chief executive officer and founder of Natori Co., said, “I doubt Warnaco will go Chapter 11. She’s too smart. She just made some valuable additions to her board of directors, some very smart people who are very well connected.”
As reported, Harvey Golub, chairman of American Express, and Frank A. Olson, chairman of The Hertz Corp., were named to Warnaco’s board earlier this year.
Tristine Berry, apparel merchandising manager at BASF, noted, “I don’t think Linda is going out; no way. She is the most driven individual I know of — beyond description.”
Liz Miller, a vice president of Trevor Stewart Burton & Jacobson, an investment management firm, said, “I don’t think Warnaco’s current debt load is insurmountable. You have to give management the benefit of the doubt in making strategic business decisions in managing the debt load. But the jury is still out.”

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