Calvin Klein Inc.’s growth streak shows no signs of abating.
Since Phillips-Van Heusen Corp. acquired the designer brand in 2003, CKI’s volume has nearly doubled from less than $3 billion to $5.4 billion in 2007 — and is on track to double again in the next five years, consistently outperforming its goal to grow 10 percent annually. Even the lackluster economy hasn’t significantly dampened Calvin Klein’s boom, which is heavily fueled by international retail expansion.
“Barry [Schwartz] and Calvin [Klein] are entrepreneurs and perhaps geniuses,” said Tom Murry, president and chief operating officer of CKI. “Many times entrepreneurs can bring a business to a certain level, but for more strategic growth, you need help, and PVH has created a platform for that growth.”
In addition to the back-end functions the corporate giant has provided, Murry — who has been with Calvin Klein for more than a decade — pointed out that PVH has bestowed “a pragmatic approach.”
This has resulted in what the company dubs “the Calvin Klein brand pyramid” of three clearly differentiated collections: the $200 million Calvin Klein Collection designer business, the $1 billion bridge ck Calvin Klein business and the $4.2 billion better-priced Calvin Klein white label business. All figures are retail sales.
“What PVH did a great job with when it got Calvin Klein was differentiate between black, gray and white — that didn’t really exist before they bought it,” said retail analyst Brad Stephens, describing the color of the brands’ designer, bridge and better labels, respectively. “Instead of going out there and just licensing everything to the world, they’ve done a very good job in only adding a controllable amount every year. They have very controlled distribution.”
In the U.S., the company’s top priorities are Collection (or black label) and the better white label, for which it began rolling out a retail concept this year. The white label store product is separate from the better-priced sportswear carried by department stores — product that now will be made by G-III after years of underperforming as a Kellwood Co. license.
“The issue with [women’s] white label sportswear in department stores was not the make or quality, but more merchandising and pricing,” Murry said. “It’s a different product than what you see in our specialty stores, which is made in-house and is younger and more fashion- and trend-driven.”
The plan is to ultimately roll out more than 100 stores, but through the rest of this year and next year, the company is “trying to sit back and evaluate” the 10 8,000- to 10,000-square-foot stores that have opened during what Murry called a “test period.” Additionally, Calvin Klein has launched e-commerce to complement the white label retail experience.
The bridge ck Calvin Klein collection, a business that sources say Kellwood is also in danger of losing, is not a priority for Calvin Klein in the U.S., though it could reemerge as one in time. Outside the U.S., however, where the white label business doesn’t exist due to differences in department store channel structure, ck Calvin Klein bridge sportswear is a significant business.
“When we bought the company, we felt the ck Calvin Klein and Calvin Klein white labels weren’t as clear about [their relative positions] on the outside to our customers and retailers,” said Emanuel Chirico, PVH chairman and chief executive officer. “The Calvin Klein brand benefited from PVH logistics and infrastructure. Calvin and his team were marketing and design geniuses, but he would be the first to say the business could benefit from our back-office expertise. After we successfully integrated the company from a back-office point of view, we could very efficiently layer on growth from licensing.”
Calvin Klein licenses more than 40 categories worldwide. Much of CKI’s growth has come from entering new businesses, such as men’s and women’s better sportswear, outerwear, footwear, accessories, men’s and women’s golf, men’s sport, women’s performance wear and a beauty line. But Murry is quick to point out that the company has not sacrificed integrity to achieve that growth.
“We haven’t gotten into anything that we shouldn’t have,” Murry said. “We’re not below the department store tier, and we always make sure we have the best partners, and if a business is not working, we figure out how to fix it.”
For example, in January, the Calvin Klein Collection business was brought back in-house through the acquisition of Confezioni Moda Italia Srl, the worldwide licensee for the label’s apparel and accessories. Since then, Calvin Klein’s designer line has reopened accounts such as Saks Fifth Avenue and Bergdorf Goodman.
“We operate a large and successful licensing model, but with a designer business, it’s more about setting an image and creating a halo for the brand than making money, so it’s difficult for a licensee to justify the capital investments necessary to make the product as good as it should be,” said Murry.
Furthermore, Calvin Klein is already in almost every product classification that Murry thinks it should be, with the exception of some home categories that the company is exploring, including paint, lighting and indoor and outdoor furniture.
Instead of new licenses, additional growth will come from “intensification and growth within existing channels,” said Murry, who predicts growth across all regions, with the largest percentage change coming from emerging markets. Although Calvin Klein is projecting it will maintain its regional balance — approximately half ($2.9 billion in retail sales) in the U.S., with the remainder split between Asia ($778 million in retail sales) and Europe and the Middle East ($1.7 billion in retail sales) — through 2010, Murry expects the balance will skew toward Asia after that. His prediction is that growth will be strongest in Asia, then Europe, then the U.S. Regionally, the biggest players going forward are expected to be China, Russia and the Middle East.
Currently, Calvin Klein products across all three collections are sold in more than 420 full-price freestanding stores, plus thousands of points of sale in more than 100 countries. Retail expansion, particularly abroad, is key, and the company plans to have 700 stores by 2010.
By brand, Calvin Klein Collection plans to more than double its door count to 15 in 2010 from six last year. The bridge ck Calvin Klein, entirely abroad, had 58 stores last year and plans to hit 100 by 2010. Calvin Klein Jeans, which had only 54 stores in 2003, had 234 last year and has plans for 366 by 2010. Calvin Klein Underwear, which was at 26 stores in 2003, had 124 last year and aims for 200 in 2010.
Murry is not worried that the economy will stop the business’ rise, citing 23 percent growth in 2007 even as macroeconomic conditions started souring.
“So far, the economy hasn’t really affected our business, and my sense is we are gaining market share,” Murry said. “In these slowdowns, the strong get stronger and the weak get weaker.”
Murry sited a recent Nielsen survey in which international participants rated Calvin Klein as the brand they would buy if money were no option, trailing only Gucci.
Calvin Klein’s always-provocative marketing campaigns have kept the brand in the public’s eye. In the past 25 years, the company has spent $2.5 billion marketing the brand, and today Calvin Klein spends $250 million a year in advertising worldwide.
“Calvin Klein marketing has had a dramatic increase from 2003 to 2008,” said Chirico. “We’ve worked hard to create a very clear marketing campaign, and now each line has a very different consumer marketing direction. But the nice thing about it is the consumer still recognizes all three labels as Calvin Klein. It’s what everybody wanted from the beginning, but we brought a focus to that, and money. If you don’t have the marketing dollars to communicate to the consumer, it’s just internal strategy.
“Then we realized having Calvin Klein helped PVH become more marketing-savvy in our other businesses,” Chirico added. “We’ve more than quadrupled our [overall] marketing budget from 2003 to 2008. We’ve learned so much from being associated with the Calvin Klein brand about how to reach our consumers.”
Chirico said PVH worked hard to keep Calvin Klein’s culture in place and separate from the parent company. “We didn’t touch the design, advertising and public relations arm, and we tried to retain as much of the senior management as possible,” he said. “It’s unusual when you do an acquisition to have as many people stay as Calvin Klein has.
In 2003, when PVH acquired Calvin Klein, Chirico said the economic “environment was unfriendly, like it is today. The financial markets were under tremendous pressure, and there weren’t a lot of transactions going on.” But Chirico said it was the right move and that he would welcome a similar purchase today.
“The biggest lesson from Calvin Klein has been whatever acquisition we make, it’s not about the business, it’s about the brand,” said Chirico. “The most important thing is the brand has to have great consumer recognition; we’re less concerned about operations because we bring that to the table.”