NEW YORK — Calvin Klein Inc. is bringing its much-traveled Collection business back in-house and, to help cover the costs, CKI owner Phillips-Van Heusen Corp. is getting $38.5 million from Warnaco Group Inc. for several new licenses.
In the multifaceted deal, expected to close in mid-January, CKI will take over Warnaco’s shares of Calvin Klein Collection licensee Confezioni Moda Italia Srl, or CMI. Warnaco was due to begin producing Collection in 2008, which would have marked the first time it made designer-level ready-to-wear.
Now Warnaco will instead acquire the rights to operate Calvin Klein Jeans accessories stores in Europe, Asia and Latin America; ck Calvin Klein accessories boutiques in Europe and Latin America; Calvin Klein Jeans e-commerce for the Americas, Europe and Asia, and Calvin Klein Jeans accessories e-commerce for Europe, Asia and Latin America through 2044. It will also enter a sublicense and distribution agreement for Calvin Klein Golf through Windsong Golf LLC for Asia.
In return, Warnaco will pay $38.5 million to PVH “to offset projected losses for the Calvin Klein Collection business,” according to a PVH statement. “The Collection business would be expected to have no material financial impact on PVH. The company would acquire CMI free of all debt and would pay Warnaco an amount based on the net working capital of CMI.”
“[The deals] went hand in hand,” said Joe Gromek, Warnaco’s president and chief executive officer.
The news confirms a report CKI was taking Collection in-house in WWD Monday.
“It’s something we have been discussing for the past six months with Warnaco,” said Tom Murry, president and chief operating officer of Calvin Klein Inc. “Everyone understands that it’s really best for a Collection business to be operated in-house. Most of our businesses fit the licensing model very well, and Collection is the most difficult to license for several reasons.” Those challenges include the in-house presence of creative directors Francisco Costa and Italo Zucchelli, head of women’s and men’s, respectively, versus external operations, as well as the pressures of maximizing profitability in a licensing arrangement.
“With most Collection businesses, profitability is not necessarily the number-one objective,” Murry said. “Everyone obviously wants to make a profit or lose as little as possible, but the main reason for a Collection business is to drive the image and create the halo for the brand.”
Gromek said, “I believe that the Collection business is very viable. However, I felt the way it was currently managed was not in the best interest of either Calvin Klein or the licensee running it. Without having total control over the design, development, sourcing and sales combined, it is a difficult arrangement.”
Gromek added that when he broached the subject of Collection with Murry and PVH chairman and ceo Emanuel Chirico, they agreed that control should be in-house.
“The number-one objective is investing in the business, in personnel and structure to do the right things to create a world class global luxury business,” Murry said.
CKI is expected to open more freestanding Collection boutiques over the next three years. Murry also disclosed that announcements of key executive hirings, including that of a New York-based Collection president and two top merchandisers for women’s and men’s wear, could be made within the next week. Fabio Fusco will continue as Milan-based ceo of the division.
The manufacturing locations are not expected to change “dramatically,” according to Murry.
“We have been in many of the same locations now than we have been in since 2000, prior to licensing this business out,” he said.
“The problem we have had with the business has been lack of investment,” he added. “It’s not that they were doing things badly. In my view, they were not making an appropriate investment in terms of people and operating style to really grow the business over time.”
Since PVH acquired CKI in 2003, the top tier has faced its share of troubles. Collections by Costa and Zucchelli have received as many strong reviews as mixed ones, and the line has been challenged at retail. The misfortunes of licensee Vestimenta, which went bankrupt and couldn’t produce timely deliveries, caused many retailers to reduce their real estate for the line.
Murry added Warnaco’s additional Calvin Klein businesses made sense “under any circumstances.” At Warnaco, the Calvin Klein businesses currently represent two-thirds of revenues. Over the next five years, Warnaco expects these additional licenses to rake in nearly $150 million in revenues.
For CKI, bringing Collection in-house allows full control over a business that may not be a revenue machine but adds much marketing value.
“Even though it has not been the level of commercial success it was before we began to license it out, we continue to have a tremendous amount of press coverage and exposure as a result of being in this business,” Murry said. “We get over 16,000 estimated pages editorially globally, including more than 2,800 full pages. The full-page editorials alone equate to $50 million in advertising value, or the advertising cost equivalent of approximately over $150 million. That alone justifies being in the Collection business. Now, we are looking forward to creating a commercial success that is commensurate with our press success.”