KENNETH COLE: FIRING ON ALL CYLINDERS
Byline: Thomas Cunningham
NEW YORK — Kenneth Cole is opening an 18,000-square-foot store in Rockefeller Center in October. His women’s line makes its debut at retail next fall. And his stock is up over 120 percent in the last 12 months — defying the slump that has depressed so many wholesalers.
So where is Kenneth Cole on a Thursday morning in mid-April?
He’s playing principal. And not company principal.
Politically correct, perhaps to a fault, and politically connected, Cole is spending his morning serving as a principal for a day at the Bronx High School for Social Change.
It’s an assignment Cole has been looking forward to, as the school is scheduled to be shut down at the end of this semester. Cole wants a chance to encourage the students, who are nervous about their future.
“Change can be scary if you let it knock you down,” he tells 120 teenagers clustered on the gymnasium bleachers. He discards a microphone, preferring a more personal approach.
“This is a great time to redefine yourself and create new opportunities for yourself. It’s all about resourcefulness and being creative.”
He should know. Starting from a footwear business 18 years ago, Cole, president and chief executive of Kenneth Cole Productions, has built a $310 million business with a model fundamentally different from many of the designer-driven businesses that have gone before him.
“We’re not a traditional company,” Cole said. “We’re not a wholesale purveyor of fashion.”
And yet, fashion has come to Kenneth Cole. The dark, downtown, lug-soled look with lots of leather and techie details is spot-on for fashion.
Asked if Kenneth Cole was a department store’s best offense against the likes of Banana Republic, Stuart Goldblatt, senior vice president of Federated Merchandising Group, said: “There’s no single answer. But in conjunction with DKNY and our own exclusive brands, the answer is yes. The timing is perfect for his sensibility.”
With retailers, competitors and Wall Street analysts ready to anoint him the next megabrand, he’s trying to dodge the sometimes onerous label.
“I try not to be distracted by terms like that,” he said. “I’m not sure what they mean. A superbrand or a supermodel, by definition, is here today, gone tomorrow.”
Last year, KCP’S earnings rocketed 52.6 percent to $24.9 million, or $1.78 a diluted share, from $16.3 million, or $1.20. The company’s total revenue jumped 36 percent to $310.3 million from $228.1 million, as licensing revenue climbed 79 percent to $15 million.
Wall Street observers say Cole has what it takes to keep up the pace.
Joseph Teklits, analyst at Ferris Baker Watts said that KCP should be able to maintain its torrid growth at least for the next two years. He estimates that this year KCP’s per-share earnings will jump almost 30 percent, to $2.28 a share, and reach $2.84 in 2001.
Its core footwear business alone did $295.4 million last year.The extensive network of licenses is, by most reports, without a weak link. His newest women’s venture is a licensing deal for sportswear with Liz Claiborne, starting for fall retailing. That could help fuel retail sales of Kenneth Cole’s brands — including Kenneth Cole New York, Reaction and Unlisted.com — to more than $1.2 billion this year, according to the company. That’s up from about $700 million last year. And the competition is intensifying among beauty companies, who are angling to do a deal for a license in men’s and women’s fragrance, which the firm hopes to seal within the next few months.
“The bottom line is every aspect of their business is hitting at the moment,” said Steven Marotta, analyst at Wasserstein Perella Securities. “Kenneth Cole New York, Reaction, and Unlisted — everything is doing well. In years past, even though the company as a whole was performing well, there were at least pockets of weakness, but now they’re just hitting on all cylinders.”
This year, KCP has a full agenda that includes the fragrance deal; a sportswear license for young men’s apparel under the Unlisted.com name; building or expanding eight to 10 retail stores, including two new units in New York; and moving to a new headquarters on the corner of 50th Street and 11th Avenue in June.
“We’re thinking about Home, but that’s too much to do right now. We’ve tried to always do one thing at a time,” he said.
Marotta said it was possible the Kenneth Cole brand could someday be as big as Ralph Lauren. “Liftoff occurred 30 seconds ago and they’re picking up speed,” he said.
Cole is also beginning to consider his next step: taking his brands into South America, Asia and Europe. But as he weighs options, Cole retains the poise and focus that observers say has been a key to his success thus far.
“We have to stay focused,” Cole said. “It would be very easy to get distracted. There are opportunities every day to veer off course. We could have done men’s wear five years ago, but it wasn’t the right time. We’ve been very deliberate and very cautious. This business is not an overnight business. It took 18 years to get here.”
During that time, the company’s top line has never grown less than 22 percent in a year and never more than 60 percent, the 46-year-old Cole said. Although KCP started in women’s footwear and moved into accessories, it wasn’t until Cole started marketing apparel that KCP caught the attention of the fashion world and Wall Street, he said.
“We made this big step, when the men’s wear first came out [in 1998],” Cole said. “We were underneath the radar screen, but now more people are paying attention.”
Kenneth Cole products are distributed through the company’s more than 60 retail and outlet stores, a catalog, a Web site at Kencole.com, and in more than 3,700 department and specialty store doors — a number inflated far beyond most apparel wholesalers’ distribution because of the footwear retail distribution.
KCP’s performance is particularly impressive when compared with that of some other lifestyle brands, including Tommy Hilfiger, whose stock price has fallen over 70 percent in the last year, and Polo Ralph Lauren, which is down about 25 percent. On Friday — a day on which the Dow Jones Industrial Average plummeted 617.78 points — KCP lost 4 to close at 38 1/8 on the New York Stock Exchange. The stock is still not too far from its 52-week high of 46 1/8, however, and more than double its low of 17 5/8.
Analysts point to Cole’s distinctive advertising, sophisticated Internet presence and creditable job of distinguishing his brands.
While managing his business, Cole maintains an unflagging commitment to public service. He has been on the board of the American Council for AIDS Research since 1985 and has also been a big supporter of HELP USA, the homeless assistance group chaired by his wife, Maria.
“Kenneth Cole has all the qualities of being an early-stage, updated version of the likes of a Ralph Lauren,” Teklits wrote in a recent report. “At this point, KCP’s valuation, which tops any and all of its peers, is close to properly reflecting the company’s strengths and long-term potential.”
KCP is also well respected on Wall Street because it has not missed expectations in the last 2 1/2 years and in recent quarters has far exceeded the Street’s forecast, Marotta said.
Certainly Paul R. Charron, chairman and chief executive of Liz Claiborne, likes Cole’s prospects. To cement the licensing deal, which was announced last year, Claiborne spent $29 million to buy one million newly issued shares of KCP, giving Charron’s firm a 7.5 percent stake in KCP.
KCP is still small in comparison with the lifestyle giants. For example, Polo has annual revenues of about $1.75 billion and a market capitalization of $1.67 billion and Hilfiger has revenues of about $1.92 billion and a capitalization of $918.6 million. KCP’s market capitalization is around $790.8 million.
A key to KCP’s well-rounded brand presentation is its ability to select licensees cautiously and then work closely with them, Marotta observed.
“The benefits are twofold,” he said. “First, you outsource the design and manufacturing to someone who knows the business better than you do. Second, it minimizes your financial restraints for starting a new line, because you receive fee income from licensees with few up-front costs.”
KCP now has more than 20 licensing partners and is on the hunt for more.
“We’re very careful to go into categories that serve the actual as well as the aspirational needs of our customers,” Cole said. “We make certain to find partners that will create products with the same price-value aesthetic that we have. If we ever miss that, we will confuse our customers and could hurt what we’ve worked hard to create.”
“This is not an overnight success,” said Marotta. “By branching into accessories first, and layering the business with licensees over a period of time, they were able to build the underpinnings to launch the [segments with big potential], which are men’s and women’s.”
Although the Kenneth Cole look is urban and contemporary, the brand still sells well in heartland chains like Dillard’s because it is functional and priced well, according to Electa Varnish, president of Kenneth Cole Dress Shirts and Hosiery at Cluett Designer Group.
“Most of America gets Ken Cole,” she said. “He puts out a product that everybody can understand. It’s not tricky.”
In Varnish’s opinion, Kenneth Cole is not in danger of overexposing his brand, because he is committed to growing it at his own pace.
“I think the plans he has are very strategic. He seems to be making all the right decisions,” she said. “You see some brands that are in it for the moment, but [Cole] is very focused and he stands for what he believes in and he doesn’t waver. He’s not in any hurry to become a huge megabrand.”
Since the Claiborne deal raised his company’s profile, Cole has been deluged by offers from potential partners around the world, he said. Although the firm does some business in Holland, Canada, and in Asia through a license agreement with Dickson Concepts, it has yet to make any serious move into the international arena.
“We’d like to do a deal to get us into South America, where our brands are very well recognized,” Cole said. “We would probably go into Asia next, then Europe.”
Most European brands are either upper-tier luxury names, or moderately priced retailers like Zara and H&M, leaving Kenneth Cole with a particular challenge in the European market.
“There’s not a big place in the middle,” Cole said. “Its a great opportunity, but we need to figure out how to do it.”
And as time goes on, KCP’s licensing business will make up a bigger part of the company’s overall business. In its recently released annual report for 1999, KCP said it expects women’s apparel to grow into its largest licensed category.
Of his three brands, Reaction is the fastest growing and could eventually be a bigger business than the signature line — and if Unlisted successfully reaches the elusive teen consumer, Cole thinks it could be bigger than both.
He feels the stores help KCP to define its brands and also give the company valuable feedback from its customers. Along with the other planned openings, the stores will boost Cole’s selling space about 30 percent to 230,000 square feet by the end of the year, analysts estimate.
An 18,000-square-foot store on Fifth Avenue and Rockefeller Center is scheduled to open in October, and a 4,500-square-foot Reaction store, the company’s first, will open at the corner of Lexington Avenue and East 57th Street early next year.
The retail business has turned in impressive results for KCP. Last year same-store sales were up 20 percent at the company’s retail operations.
Sales per square foot were more than $2,000 at certain stores, Stanley Mayer, KCP’s chief financial officer, said earlier this year.